Falling memory prices and the delay of Microsoft's ( MSFT) Vista operating system will dent spending on chipmaking equipment this year, according to a pair of reports from Wall Street financial firms released Friday.

The reports add more uncertainty to an industry in which slowing PC sales and changing business practices among semiconductor manufacturers have clouded long-term visibility.

"The strong euphoria that existed in late January and early February has disappeared," Moors & Cabot analyst Shekhar Pramanick wrote in a note to investors.

With prices for NAND flash chips rapidly falling, Pramanick said that many memory chipmakers may push back their spending on manufacturing equipment.

He pointed to Hynix Semiconductor as a prime example, citing the company's recent decision to delay the start of production at a chip-manufacturing facility in China by about three months.

"While the company is blaming longer than expected construction for the delay, it is important to note that this announcement comes just days after Hynix stated that it expected NAND flash prices to drop 25% in 1Q06, vs. previous expectations of a 20% drop," wrote Pramanick

Though NAND flash memory chips have been one of the semiconductor industry's strongest segments, Pramanick said a lack of major demand drivers in the first half of the year, combined with the delay of Vista, means that "the risk of memory capex cuts in 2H06 is significantly higher than in 2005."

The companies most exposed to a slowdown in memory spending are Novellus ( NVLS) and LAM Research ( LRCX), said Pramanick.

But Pramanick, whose company does not have investing relationships with any of the stocks mentioned, said that none of the big semiconductor equipment companies is immune to the effects of potential reductions in capital spending.

Shares of Novellus were up 1%, or 25 cents, at $24.57 in trading Friday. LAM Research shares were up 2.3%, or 98 cents, at $43.61.

Meanwhile, UBS analyst Stephen Chin trimmed his chip-equipment sales growth estimate from 10% to 9% for 2006. But he upped his 2007 growth estimate from 12% to 14% on Intel's ( INTC) plan to build leading-edge chipmaking facilities and Micron Technology's ( MU) flash-memory projects kicking into high gear.

The wildcard remains the foundries -- the third-party chip manufacturers -- that have yet to show signs of increasing their equipment orders this year, said Chin.

Projections regarding the state of the semiconductor-equipment industry have been mixed in recent weeks. Earlier this month, a couple of industry reports suggested that capital spending on chip equipment would be better than expected in 2006.

But Kulicke & Soffa Industries' ( KLIC) subsequent midquarter update spooked investors after the firm said it expects sales in the June quarter to be down sequentially.

American Technology Research analyst Bill Ong says the changing nature of the industry has made it more difficult to gauge the long-term business outlook for chip-equipment makers.

Instead of the huge equipment orders chipmakers once placed, which led to pronounced boom-and-bust cycles, many chipmakers today order equipment on an as-needed basis.

These shortened-order lead times make the chip-equipment industry much less cyclical than in the past, but also harder to read.

"With short lead times you do lack that visibility, because no one is willing to make a commitment much further out," says Ong.

According to Ong, the weak market for PCs, combined with the Vista delay, could keep spending on chip equipment in check in the near term.

But he cited ongoing strength in other markets, particularly cell phone handsets.

"That's generally why the stocks have pretty much been range-bound," says Ong. "We're seeing some near-term seasonal weakness versus longer-term growth opportunities."

The best guide for judging the state of the chip-equipment business will come in April, when the semiconductor capital equipment companies deliver their financial results.

"That will set the stage on how we should start looking at the second half," Ong said.

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