Investors playing the child's game of guessing "which one of these doesn't look like the others" may have seen the profit warning from KLA-Tencor coming, but the company made it official on Monday evening. KLA-Tencor joined the chorus of companies singing the semiconductor blues, warning that its fiscal third-quarter revenue and profits would come in below previous expectations.

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By Paul Larson (TMF Parlay)
March 20, 2001

There was more bad news from the semiconductor market to report today. After Monday's closing bell, KLA-Tencor (Nasdaq: KLAC) announced that due to deteriorating fundamentals in the semiconductor industry, it would miss its profit and revenue estimates for its third fiscal quarter that ends March 31. With this news, KLA-Tencor joins a long list of semiconductor giants that have lowered forward guidance and chopped previous profit estimates. (For more on the sector, visit our Computer Hardware: InDepth page.)

The last real financial guidance KLA-Tencor gave was during an earnings conference on Jan 17. At that time, the company said it expected sales between $570 and $580 million, and earnings per share of roughly $0.58. With yesterday's warning, the company said that total revenue would be 8% to 10% below its previous guidance, or roughly in the range of $515 to $535 million.

There was no specific earnings guidance in the warning, but the company did state that its earnings per share would come in well below the $0.58 it previously pointed toward. Reading the industry's tea leaves, many analysts had been expecting some sort of slowdown at KLA-Tencor since the mean EPS estimate before the warning had already been ratcheted down to $0.52. How much further the earnings estimates will be reduced after today's news remains to be seen.

After a string of bad news from KLA-Tencor's peers such as Applied Materials (Nasdaq: AMAT), investors in KLA-Tencor also seemed to have already expected and priced in some bad news from the company. In early trading, KLA's stock fell less than 5%.

KLA-Tencor did not directly mention layoffs with its profit warning, but the company did say it will "continue to take the necessary steps to reduce our expense structure in other areas (outside R&D) to reflect lower anticipated revenue." Reading between the lines, layoffs in the manufacturing portion of KLA-Tencor also look like they may be coming down the pike.

Just last week, Applied Materials itself offered a "voluntary separation package" to 1,000 of its employees in order to cut expenses. As the brakes continue to be applied to the entire semiconductor industry, companies are struggling to keep their costs in line with their revenue-generating capacity. (Rule Maker writer Richard McCaffery looked at Applied Materials in January.)

It remains anyone's guess when the notoriously cyclical semiconductor industry will rebound. Nevertheless, today's news from KLA-Tencor shows that the industry slowdown, for the moment, is alive and well.

Paul Larson used to watch CHIPs as a kid, but he doesn't own any chip stocks. You can see Paul's complete stock holdings online. The Motley Fool is investors writing for investors.

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