Last night, semiconductor capital equipment maker and speculative favorite KLA-Tencor(Nasdaq: KLAC) beat revenue and earnings expectations but disappointed on its outlook. CEO Kenneth Schroeder referred to the current environment as "one of the deepest downturns in the history of the semiconductor industry."

Revenues for the quarter of $334.9 million were down 17% from the year-ago quarter, with particular weakness in product sales (down 24%). Nevertheless, the company reported a modest profit of $29.2 million, or $0.15 per share. As a percentage of revenues, this figure translates to an 8.7% net profit margin, down from a 12.1% net margin in the year-ago quarter.

In discussing the status of current orders placed by customers for future shipment (a much-watched metric in the semi industry), the company noted that it has six months of shipment backlog, in line with historical levels. In addition, accounts receivable remain in good shape, having declined more than sales on a year-over-year basis, resulting in record-low days sales outstanding, according to management. Finally, the company finished the quarter with cash and marketable securities of $1.3 billion and no long-term debt.

On last night's conference call (read the timely transcript provided by the Fair Disclosure Financial Network), management made its case for semiconductor industry growth in 2003. As evidence, it offered published predictions of worldwide electronics production growth of "almost 10%" in 2003 after down years in 2001 and 2002.

This prediction is vital because the producers of electronics are the major customers of semiconductors. And when semiconductor demand is strong, so is demand for semiconductor capital equipment, which KLA-Tencor supplies. So based on this 10% growth assumption for electronics in '03, KLA's management went on to extrapolate upstream the following growth outlook:

Although forecasts vary among the analysts, the average forecast suggests that semiconductor sales will grow about 15% to 20% in 2003. How does this translate into semiconductor capital equipment? Well, the industry has historically under invested during downturns, leading to strong reinvestment in equipment in the upturn.

Of course, this prediction flies in the face of the reduced outlook for spending suggested last week by Intel(Nasdaq: INTC), the world's largest semiconductor company. To this (and probably with Intel specifically in mind), KLA management said the following last night:

While some key customers have made reductions in recent capex announcements, others have made increases. Overall, we believe, based on the studies that we have seen, that semiconductor capital equipment spending is still expected to increase about 10% in 2003.

But when will this growth kick in? Not until the second half of 2003. As stated last night:

I think with an increase in semiconductor revenue, equipment follows about six months after that. We believe that the industry is returning to -- or our customers are returning to more traditional growth rates in their business. They will respond in the second half of the year by increasing their equipment purchases [emphasis ours].

Investors are tired of getting burned with these second-half promises. And besides, with KLA-Tencor currently valued at 4.5 times sales, the stock already appears to incorporate a good deal of optimism. For context, consider that the semi equipment industry's seven-year average price-to-sales ratio is a much lower 2.7.

Given these optimistic prices combined with specious arguments for industry growth, Fools should beware the semiconductor capital equipment stocks.

At time of publication, Matt Richey was long puts on Intel and Semiconductor iShares (NYSE: IGW).