KLA-Tencor Kills V-Bottom Chip Recovery Hopes (KLAC, AMAT, LRCX)

KLA-Tencor Corporation (NASDAQ: KLAC) is the second largest US-based semiconductor cap-ex stock by market cap, or at least out of the go-to universe we track with Applied Materials (NASDAQ: AMAT) ahead of it and Lam Research (NASDAQ: LRCX) behind it.  Last night, the company killed any hopes of a v-bottom recovery in orders for the sector revolving around capital expenditures in the semiconductor sector.  It also confirmed industry data from last week that further slowdowns were seen in orders.  The process control and yield management systems for semiconductor companies announced that it was further cutting 10% of its workforce.

The company said it is continuing in its efforts to control costs and to respond to depressed market conditions.  This round of cuts is in addition to a workforce reduction that was announced in November 2008. KLA is looking to eliminate quarterly non-GAAP operating expenses of $140-145 million by the end of calendar year 2009, adjusted from the company’s previously announced target of $165-170 million.

Despite prior cuts in operating costs, KLA said it must further cut operating expenses “in order to respond to the current demand environment.” The translation there is simple: semiconductor companies are not spending on more cap-ex. Other cost-cutting actions facilities consolidation (i.e. factory closings or lease terminations), additional forced time off (unpaid vacation) and a reduction in employee stock purchase plan benefits (lower benefits).

KLA-Tencor estimates charges of approximately $20 million to $30 million, including $18 to $22 million related to estimated severance costs.

Here is the sad thing… Analysts were already looking for a loss in this year (June-end).  They are now looking for losses next year.  It is possible that these job cuts will help to increase the bottom-line a year out after the charges have been absorbed.  But over the last 90-day period we have seen a drastic reduction in earnings expectations from analysts.  You can bet that the analysts take note this week with a recognition that companies never really announce another round of layoffs if they are expecting a rapid return of strong orders in a quarter or two.  If KLA-Tencor was expecting a sharp recovery it might furlough workers for a month or two, but that is not what KLA-Tencor signaled last night.

Shares closed down 6.5% Monday and have yet to offer any solid indications.  Its 52-week range is $14.81 to $47.07.

Jon C. Ogg
March 31, 2009