KLA-Tencor's Guidance Sinking Shares - TheStreet

Updated from Oct. 22

Shares of

KLA-Tencor

(KLAC) - Get Report

fell sharply a day after the company said orders in its fiscal first quarter came up short and guidance fell short of analyst projections on both the top and bottom line.

In midmorning trading the stock shed $4.72 or 8.1% to $53.33. The company reported sales and earnings slightly above Wall Street expectations, though both remain well below last year's levels.

"It wasn't that great of a quarter," summed up Timothy Arcuri of Deutsche Bank Wednesday. "They had guided orders of 5% and they ended up flat. That's not the end of the world, but people have been hoping for some type of improvement before the end of the year that would get their orders and revenues up more in line with the industry." He has a hold on the stock; his firm hasn't done banking for KLA.

On the call, analysts peppered management with questions about why its outlook and results have been relatively less sunny than some of its peers. But Arcuri said such negative comparisons aren't necessarily on target, given that KLA did better than many others in its industry in 2002.

KLA's products tend to remain in demand even in down times since its equipment helps semiconductor makers maintain high yields, effectively increasing their manufacturing efficiency and thus lowering costs.

"We've always felt this is a very good company but this is one you'd probably want to own in a downturn," said Arcuri. "They tend to do relatively better in downturns and at times lag in upturns."

After the close KLA reported revenue of $318 million, down 15% from last year's levels.

Net income was down 28% to $36.8 million, or 18 cents a share.

Wall Street was looking for sales of $316.6 million and EPS of 17 cents.

On the conference call, KLA management forecast December quarter orders to rise 5%, with revenues in the range of $320 million to $325 million, well below analyst forecasts for $350 million.

Earnings are projected to be 18 cents to 19 cents, below Wall Street expectations for 23 cents.

In the company's earnings statement, CEO Ken Schroeder said that "cautious sentiment still predominates among several of our customers" though he also noted, "some chipmakers

are taking the first step to expanding their capacity."

"The general economy is certainly looking much more positive than in previous calls," he explained on the call, noting that U.S. GDP is expected to increase from an estimated 2.5% this year to 3.8% next year, with the global economy showing similar growth. "That translates into demand for semis, which are forecast to grow roughly 10% in 2003 and 19% in 2004. That's improving our customers' profitability, cash flow and view of the future."

But on a related note, he acknowledged on the conference call that net bookings fell slightly short of KLA's hopes because two big orders couldn't be closed in time for the September quarter.

When one analyst expressed surprise that December guidance wasn't higher, since those orders would presumably fall within that quarter, Schroeder said KLA wants to be careful given that semiconductor customers are still somewhat leery of investing in pricey equipment.

"I think probably some

customers will wait until after Christmas to make sure business continues in this positive fashion," he said. "Though there's a swell of optimism, it's really going to be the first quarter before we see that swell of optimism turning into the growth the analysts are talking about, which is 20% growth in cap-ex for 2004."

In response to another question, Schroeder added that he thinks the 20% growth estimate for 2004 sounds reasonable. "I think 20% feels good based on qualitative input from customers talking about their cap- ex and what they're doing. I think people are feeling pretty good about the economy and making plans to take advantage of this upturn in the economy," he said.