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Chipmaker spending cuts hurt equipment supplier Disco

Japanese group faces 14% decline in nine-month profit

The slowdown in the smartphone market has weighed on Disco's earnings.

TOKYO -- Chipmaking equipment manufacturer Disco will take a hit to earnings as the Asian semiconductor makers that buy its machines reduce capital spending in line with falling memory prices.

Tokyo-based Disco's group operating profit looks set to drop 14% on the year to around 34.5 billion yen ($308 million) for the nine months through Dec. 31, while sales are on track to fall 5% to around 120 billion yen.

While demand for chips remains strong as data use soars, the semiconductor industry is turning bearish on capacity investments. South Korea's Samsung Electronics, the world's largest maker of NAND flash memory, is considering a short-term reduction in chip-related spending, while Taiwan Semiconductor Manufacturing Co., the top contract chipmaker, lowered its capital spending budget in July.

Disco's machines for dicing and grinding silicon wafers are not selling well amid these investment cutbacks.

Investors are punishing equipment supplier's shares. At the close of trading Tuesday in Tokyo, Disco's stock price was down 28% this year. Japanese industry leader Tokyo Electron had tumbled 29%.

Smartphone-related business is also slumping. Growth in demand for phones has slowed as consumers wait longer to replace their devices, seeing few new features. Disco has not logged the big gains in equipment sales to Chinese smartphone makers that it saw last year.

Blades and other replacement parts are a silver lining. Unlike complex machines, they can be mass-produced at low cost. With high operating rates, chip fabrication plants in South Korea and North America continue to buy Disco parts in large quantities.

For the six months ended in September, Disco looks set to report a 20% fall in operating profit to 23 billion yen, compared with a projected 26% decline. Sales to South Korean and American chipmakers were higher than expected.

Sales likely dropped 8% to 80 billion yen, less than the forecast 9% decline. Disco based its initial full-year earnings guidance on an assumed exchange rate of 100 yen to the dollar, and a weaker Japanese currency boosted the results. Half-year results are due out on Oct. 30.

For the last three months of 2018, operating profit is expected to stay roughly flat from the preceding quarter.

Prices of some NAND flash memory chips have fallen about 40% from the peak of the industry's so-called supercycle in 2017. DRAM prices are also softening.

As chipmakers introduced new technology to innovate last year, growth in production yield slowed, leading to supply shortages. Those problems have been overcome this year, creating an oversupply that has pushed prices down.

"The business environment in semiconductors has worsened since three months ago," said Shinji Asai at Sumitomo Mitsui Asset Management in Tokyo, adding that the correction looks likely to last into 2019.

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