** SFAM Research Notes *** I am not cheerleading SFAM. I spoke to Richard Faubert today and still have confidence in the company. But this is not necessarily an overnight success story although the business can turn real quick to the upside. Patience required. I think it represents good price appreciation potential over the next year and is priced a couple bucks above current book. I am posting these notes as I have mentioned SFAM here and do not want to leave people hanging if they happened to have bought some.
10:08am EDT 22-Jul-99 First Security Van Kasper (Susan Crossley 415-675-2717)
SFAM-Reports Kitchen Sink Qtr Following Merger;Reducing Estimates, Price Target
FIRST SECURITY VAN KASPER SUSAN CROSSLEY (415) 675-2717
EQUITY RESEARCH REPORT SEMICONDUCTOR EQUIPMENT
JULY 22, 1999
SPEEDFAM-IPEC, INC.
(SFAM - $15 1/16)
SpeedFam Reports Kitchen Sink Quarter Following Merger;
Reducing Estimates, Price Target; Strong Buy on Expected Weakness.
EPS* REVENUES* (MM)
Fiscal Year: 99/98 00/99 00/99
May 1998A 1999A Change 2000E Change 1999A 2000E Change
Q1 $0.36 ($0.25) NM ($0.52) NM Q1 $64.5 $45.7 -30%
Q2 $0.43 ($0.59) NM ($0.27) NM Q2 $47.8 $54.0 13%
Q3 $0.09 ($0.54) NM ($0.06) NM Q3 $51.5 $66.5 29%
Q4 ($1.56) ($3.42) NM $0.05 NM Q4 $48.6 $76.5 57%
Year ($0.67) ($4.81) NM ($0.80) NM Year $212.3 $242.7 14%
P/E NM NM NM Mkt Cap/Revs 2.1 1.8
52-Week Range: $21 3/4 - $8 7/8 Proj. 3-Year EPS Growth: 25%
Market Cap. (MM): $442 Dividend/Yield: Nil/Nil
Shares Out. (MM): 29.2 Book Value/Share: $8.45
Estimated Float (MM): 25.0 Current Year ROE: NM
Est. Insider Holdings: 12% Debt to Total Cap. (5/99): 47%
Est. Institutional Holdings: 60% Gross Margin (FY99): 14%
10-Day Average Volume: 197,700 EBITDA (FY99): -$149 MM
Next EPS Report: 9/99 Cash Flow Fr. Oper. (FY98): -$53 MM
*All numbers are pro forma combining IPEC June fiscal year quarters with SFAM
May fiscal periods.
Investment Conclusion: SpeedFam-IPEC was formed as a result of the April merger
of SpeedFam and Integrated Process Equipment Corp. The new firm is the
semiconductor equipment industry's largest pure play in CMP, which is the
fastest-growing segment of the equipment market. Yesterday, the company reported
a wider-than-expected loss in what was expected to be a kitchen sink quarter
following the merger and guided forward estimates down. The company also
announced that a new CFO, formerly of Novellus, will be starting immediately.
While we are lowering our estimates and our price target, we believe that
SpeedFam-IPEC suffered from classic post-merger difficulties during the quarter
and that new management is clearing the way for improving results hereafter.
Based on the company's leading position in copper CMP and on its appeal as a
takeout candidate, we would take significant weakness in the stock as a buying
opportunity. We are maintaining our Strong Buy rating with a revised price
target of $16, down from $23. At yesterday's price of more than $15, we would
not consider the shares attractive, but we anticipate a substantial pullback
today.
- Wider-than-expected loss in Q4. Yesterday afternoon, SpeedFam-IPEC reported
its first quarter as a combined company. The Street had been expecting the
company to throw in any possible charges during this quarter and to use
conservative accounting procedures to tighten its balance sheet. Our estimate
was for a per-share loss of $2.00 including one-time charges. In fact, the
company reported a loss of $3.42 per share, which included $1.84 in
merger-related and one-time integration costs and roughly $0.44 in reserves for
obsolete inventory, warranties, and doubtful receivables. Without the one-time
charges and reserves, the company's per-share loss would have been $1.14,
significantly wider than our projection of a loss of $0.46.
While the company's revenues of $48.6 million were essentially in-line with our
estimate, SG&A expense, R&D, and cost of goods sold were all higher than we had
expected, as the newly combined company worked to rationalize its workforce and
manufacturing procedures. Gross margin was also pressured by a product mix
leaning towards orbital (IPEC) systems. IPEC's relatively high degree of
vertical integration means that these machines have historically carried lower
gross margins than SpeedFam's Auriga CMP systems.
- Reducing estimates. Going forward, we believe that a headcount reduction of
roughly 25% over the past two quarters, R&D synergies, and greater outsourcing
in manufacturing should put the company on track to meet spending targets.
However, we are lowering our top-line projections, given the company's
book-to-bill ratio of 0.75:1 for the quarter. This ratio includes de-bookings
of systems out on evaluation, as the company moved to more conservative
accounting procedures. Without changes in accounting, the company indicated that
its book-to-bill would have been closer to 1:1 for the quarter. This number is
still below the industry average of 1.24:1 as of May. We attribute the
difference to merger-related distractions, to Applied Materials' market share
gains in oxide CMP, and to yield-related delays in the industry's transition to
copper interconnects. Our EPS estimate for the August quarter is now ($0.52),
compared to ($0.22) previously. For fiscal (May) 2000, we now look for ($0.80),
compared to our previous projection of break-even. These numbers are based on
a revised top-line estimate of just over $240 million, down from more than $280
million.
- New CFO. Prior to yesterday's conference call, SpeedFam's CFO Roger Marach
had announced his plans to retire. On Tuesday the company announced the hiring
of a new CFO, Michael Dodson, who was formerly Novellus' controller. While we
have no reason to lend credence to recent rumors of a Novellus takeover, we
consider SpeedFam-IPEC's links to the larger company a reassurance of
managerial quality going forward.
- Market focus. Management stated that the firm intends to focus on its CMP
(chemical-mechanical planarization) business, which should represent about 85%
of sales in 2000, and intends to take advantage of Auriga and AvantGaard parts
similarities to reduce costs. Their guidance on potential cost savings
indicates that SpeedFam-IPEC could eventually achieve operating margins of more
than 15%, exceeding either company's individual profitability. Although the two
companies' R&D projects overlapped considerably, their technologies and areas
of expertise have historically diverged. SpeedFam's specialty is
high-throughput, rotational technology for oxide CMP, while IPEC's expertise is
in high-flexibility, orbital technology for metal CMP. We believe that in
another year or two, SpeedFam-IPEC should bring to market unique platforms
combining rotational and orbital heads.
- Product strategies. The combined company holds a strong position in metal CMP
with a leading market share in tungsten planarization. They also have a large
installed base of oxide systems and expect to see repeat buys from this base in
early calendar 2000 as chipmakers expand capacity. We note, however, that
Applied Materials has taken a strong market lead in the oxide CMP segment for
0.25-micron devices. We believe that emerging CMP markets hold the most promise
for SpeedFam-IPEC. We expect to see SFAM aggressively attack the copper CMP
market with its Avant Gaard system and to pursue emerging dielectric markets
with its Auriga platform. These markets are for shallow trench isolation and
CMP for the low-k dielectrics expected to replace today's intermetallic layers.
- CMP market update. As an enabling technology for sub-0.25-micron production,
CMP should grow by perhaps 10% in 1999, outpacing our projection of a 5-10%
decline for the equipment industry as a whole. In 2000 we estimate that the
equipment industry should grow by 25%, while the CMP market should expand by as
much as 40%. As noted above, the company needs to develop new applications in
oxide CMP where Applied has a strong position. In metal CMP, we believe
SpeedFam-IPEC is off to a good start in winning market share as chipmakers
transition from aluminum to copper interconnects. The combined company already
has at least nine customers using its machines for copper work.
- Earnings outlook and valuation. Many of the company's existing and potential
customers plan capacity additions at the end of this year and into 2000. Our
SFAM income statement model, which is attached, projects that the company's
revenues begin to accelerate in the next calendar year. We conservatively
estimate that SFAM could earn a $1.05 per share on revenues of roughly $400
million in fiscal 2001. On the basis of that estimate and on the company's
appeal as a takeout candidate, we have a 12-month price target of $16 for the
SFAM shares and rate the stock a Strong Buy.
Publicly traded companies mentioned in this report:
Applied Materials (AMAT/OTC-$72 11/16 Neutral)
First Security Van Kasper makes a market in the shares of Applied Materials and
SpeedFam-IPEC.
Additional information available upon request.
Investments made through First Security Van Kasper: (1) are not insured by the
FDIC; (2) are not deposits or other obligations of, or guaranteed by FSVK, First
Security Bank or any of its affiliates; (3) are not guaranteed by any Federal
governmental agency (excluding U.S. Government and federal agency securities);
(4) and are subject to investment risks, including possible loss of principal
amount invested.
The study on these pages is not a complete analysis of every material fact
regarding any company, industry or security. The opinions expressed herein
reflect the judgment of the author at this date and are subject to change
without notice. Facts have been obtained from sources considered reliable, but
are not guaranteed. First Security Van Kasper its directors and employees and
their families may have a position in the securities of the companies described
herein, and may make purchases or sales while this report is in circulation.
First Security Van Kasper 600 California Street Suite 1700 San Francisco CA
94108-2704 (800) 652-1747
First Call Corporation - all rights reserved. 617/345-2500
-> End of Note
10:06am EDT 22-Jul-99 Lehman Brothers (Edward C. White, Jr., CFA (212)526) SFAM
SpeedFam-IPEC Inc: Difficult Quarter; Weak Orders; Turnaround in FY2000
Ticker : SFAM Rank(Old): 1-Buy Rank(New): 1-Buy
Price : $15 1/2 52wk Range: $22-8.88 Price Target (Old): $42
Today's Date : 07/22/99 Price Target (New): $37
Fiscal Year : MAY
------------------------------------------------------------------------------
EPS 1998 1999 2000 2001
QTR. Actual Old New Old New Old New
1st: 0.36J -0.25J -0.25J -0.20E -0.20E - -E - -E
2nd: 0.20J -0.59J -0.59J -0.08E -0.08E - -E - -E
3rd: 0.09J -0.54J -0.54J 0.09E 0.09E - -E - -E
4th: -1.69J -0.52E -1.58J 0.19E 0.19E - -E - -E
------------------------------------------------------------------------------
Year:$ -1.04J $ -1.90E $ -2.98A $ 0.00E $ 0.00E $ - -E $ - -E
Street Est.: $ -1.71E $ -1.78E $ 0.01E $ -0.03E $ 1.43E $ 1.17E
------------------------------------------------------------------------------
Price (As of 7/21): $15 1/8 Revenue (2000): $300.0 Mil.
Return On Equity (00): 0.0 % Proj. 5yr EPS Grth: 30.0 %
Shares Outstanding: 29.2 Mil. Dividend Yield: Nil
Mkt Capitalization: 445.30 Mil. P/E 1999; 2000 : N/M; N/M
Current Book Value: $8.46 /sh Convertible: - -
Debt-to-Capital: 47.1 % Disclosure(s): C, A
------------------------------------------------------------------------------
* SpeedFam-IPEC reported a fiscal fourth-quarter loss of $1.58 per share,
before charges, much worse than our estimate of a $0.52 per share loss. An
increase in reserves and an unfavorable product mix hurt the gross margin.
* Orders declined 37% sequentially, and the book-to-bill ratio was 0.75.
Although the company is doing well in Taiwan and South Korea, its Japanese
business is weak.
* A great deal of restructuring work has been done, and this has reduced the
permanent cost structure. The company has reached its long-term SG&A and R&D
expense rates, and will focus on the gross margin.
* Most important, we think the company is making the changes needed to build
its market presence in the copper and advanced film CMP (chemical
manufacturing polishing). We think the benefit if this will be evident in
fiscal 2001 and beyond.
* The results of the fiscal fourthy quarter were disappointing, but we think
that they represent the bottom. We recommend the shares, but are reducing
our price target to $37 from $42 per share to factor in a higher discount
rate on the peak share value.
------------------------------------------------------------------------------
The Apples-to-Apples Comparison. The operating loss figure of $1.58 per
share excludes restructuring charges. However, it does not exclude a number
of items that should not recur, but which accounting rules do not classify as
"nonrecurring items". As a result, the reported gross margin for the quarter
was -6.9%, but this does not mean that the company's cost to build a CMP tool
is less than the selling price!
The cost-of-goods-sold line included $8-$10 million of increases in warranty
reserves (an item that should not recur in fiscal 2000), and about $9 million
in other "cleanup costs", which were probably one-time items. Without all of
this, the gross margin would have been close to 30% in the quarter.
If we now take out $3.5 million in warranty reserve increases that were
classified in other cost categories, we get to a net loss of $0.81 per share,
rather than the $1.58 loss the company reported. We suspect that even this
number may not reflect the results that would have been reported had there
not been all the activity around the restructuring, but we think it gives
some hint as to the business run rate in the fourth quarter, as it might be
compared to future quarters.
Costs Have Been Cut. SpeedFam-IPEC has undertaken dramatic restructuring
activity, including the closing of IPEC's manufacturing organization, the
discontinuance of an IPEC wafer-equipment product line, a reduction in work
force, and others. This will help to reduce the ongoing cost structure in
future quarters. This is one important factor behind the company's
projection that it can achieve break-even results in fiscal 2000.
The other important factor for the achievement of break-even is a meaningful
improvement in the gross profit margin, even from our recalculated level of
30%. While product mix can help in this regard, nothing works as well as
higher revenue volume. The company has confidence that it can achieve Street
estimates for revenues in the first quarter of fiscal 2000 (we are using a
$55 million estimate). The company may have to use part of its backlog in
order to ship that much (i.e., the book-to-bill ratio may be slightly below
1.00 for the quarter). But as it stands now, that level of revenue volume
appears to be achievable.
How the Company Plans to Grow Its Revenue Base. It is important to remember
that, even with the recent market share losses, SpeedFam-IPEC has a good
customer base that can drive its revenue momentum in the future. It is
difficult to predict precisely when its customers will begin to order more
substantial amounts of equipment. However, the product family has some
important technological and productivity advantages that appeal to a solid
core of today's chip manufacturers, and SpeedFam-IPEC is working to build
upon that core.
There are a number of important CMP evaluations that are in the works, and
SpeedFam-IPEC's degree of success in these will determine the level of
business it can achieve in fiscal 2000. At the present time, the company is
estimating revenue growth to $300 million, a level that would support break-
even bottom-line results.
BUSINESS DESCRIPTION: SpeedFam International is a leading manufacturer of
advanced generation chemical manufacturing polishing systems (CMP) used in
semiconductor manufacturing.
------------------------------------------------------------------------------
Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities.
This document is for information purposes only. We do not represent that this
information is complete or accurate. All opinions are subject to change. The
securities mentioned may not be eligible for sale in some states or
countries. This document has been prepared by Lehman Brothers Inc., Members
SIPC, on behalf of Lehman Brothers International (Europe), which is regulated
by the SFA.
First Call Corporation - all rights reserved. 617/345-2500
-> End of Note
08:48am EDT 22-Jul-99 Southwest Securities (Cody Acree 214-859-9448) SFAM
WITH MERGER COMPLETE, SFAM PREPARES FOR CHIP INDUSTRY RECOVERY
SpeedFam-IPEC (SFAM - Nasdaq)
Rating: BUY
Last Close (7/21/99): $15 1/8
Cody
Acree
(214) 859-9448
FY(05/31) 1Q 2Q 3Q 4Q FY P/E
FY99A ($0.25) ($0.59) ($0.54) ($3.42)* ($4.80) N/M
FY00E ($0.24) ($0.09) $0.09 $0.23 ($0.01) N/M
FY01E $0.23 $0.27 $0.32 $0.38 $1.20 12.6x
*Includes Merger and Restructuring Related Charges
Projected 3-Yr. EPS Growth 35%
With Merger Complete, SFAM Prepares For Chip Industry Recovery
While the company announced fourth quarter 1999 operating results that were
significantly below the Street consensus, we believe SFAM's top-line performance
and general forward guidance basically matched our expectations. SFAM's fourth
quarter revenue came in at $48.6 million, down 5.7% from the previous period
and down 25.3% from last year. Given the magnitude of the one-time integration
and restructuring expenses, the company's gross and operating margins were
negative and resulted in a loss from operations of $1.58 per share and a loss of
$3.42 per share including the charge. Although the level of this loss is
large, we believe the general consensus of the Street is in-line with our view
that the fourth quarter is basically a period that has been used to completely
clean up the company's balance sheet and place SFAM in a positive position going
forward. Given the fact that the fourth quarter is the first period of the
combined SpeedFam-IPEC entity and that with this merger has come the placement
of a new CEO and many key management posts, we believe the company has emerged
from this restructuring as substantially different from the previous
organization.
The company's sales of $48.6 million have yet to mark a significant upturn in
the level of CMP demand, however, given our projections for $53 million, SFAM
only fell shy of our revenue estimate by approximately two CMP tools. The only
major items that we believe were significantly different from our expectations
were the company's backlog and book-to-bill number. Given the general tone of
improving health and demand of the broader semiconductor industry, we had
anticipated to begin to see a growing strength in order activity. While we
believe that improving orders are likely over the next few months, SFAM's
backlog is currently approximately flat with the prior period at $55.7 million.
Changes in the method of accounting for evaluation shipments and a last minute
order push-out also resulted in a book-to-bill ratio of 0.75. During the
period, the company's backlog and book-to-bill ratio were negatively impacted by
several items. First, the backlog of the thin-film and industrial segments was
reduced by approximately $3 million in order pushouts. We believe both silicon
wafer and media markets are likely to continue to be soft for the next few
quarters as each of these areas is currently facing lingering levels of excess
production capacity. Our projections are for these markets to begin to show
improvement in the 12 to 18 month timeframe. Second, in the final days of the
quarter, a Korean CMP customer pushed out approximately $8.5 million in orders.
We believe these delays are representative of the fact that while the
semiconductor industry is beginning to feel the benefits of a sustained
recovery, that this growth is still in the early stages and that chip
manufacturers remain hesitant regarding aggressive capacity expansion programs.
Third, SFAM adopted a more conservative method of accounting for its bookings
by removing from its booking volume those tools which are considered evaluation
units. If adjusting for these unusual occurrences, SFAM's fourth quarter
book-to-bill ratio would have exceeded 1. Finally, on July 19th, SFAM announced
the appointment of Ellis Ponton as Vice President of CMP Customer Operations.
Mr. Ponton was brought in as part of the company's newly refined emphasis on
improving the effectiveness of their sales operations and their customer
support. We believe that there was likely a period just preceding Mr. Ponton's
arrival when less focus was placed on the sales effort, and this lack of
diligence by the outgoing personnel likely contributed to the company's lighter
bookings level. Going forward, we anticipate Mr. Ponton's significant level of
industry experience to work to motivate SFAM's selling effort and reverse the
current bookings trend.
During the period the company shipped 19 CMP systems, consisting of 5 Aurigas
and 14 AvantGaard tools. This heavier weighting toward the AvantGaard systems
contributed to the company's margin pressure as the previous IPEC tools
generally carried lower average selling prices than either tools from SFAM or
Applied Materials (NASDAQ: AMAT) and consequently earned lower gross margins.
Going forward, we believe the technical strengths of the AvantGaard platform
will continue to make it an extremely attractive tool, however, we believe SFAM
is focusing on improving the products margin contribution by reducing production
costs and possibly beginning to price the tool more in-line with its industry
peers.
With the integration and restructuring of the two companies SFAM has reduced its
cash burn rate to $4 to $6 million per quarter. Our expectations are that cash
flow turns positive within the next two periods and therefore we do not view
the company's liquidity position as a significant detriment.
Going forward, we believe the company is well positioned to benefit from what we
see as the inevitable recovery of the CMP market. With the strong technical
capabilities of the company's orbital and rotational platforms, we believe SFAM
is in a leadership position for both copper and 300mm processes. We believe
these are likely to be the main drivers of the CMP market for the foreseeable
future. In our opinion, SFAM is currently showing well in the ongoing
competition for the copper business of both Intel and IBM, however, the
anticipated CMP provider decisions have been apparently pushed out for several
months. We believe the announcements may not be released before the end of the
calendar year. As for 300mm, we believe SFAM is the only CMP provider that
currently offers a production ready system. With the recent resurgence in
activity toward 300mm production we believe SFAM will likely take an early
leadership role that should translate into significant sales over the next
several quarters.
Given some additional details of the restructuring gained from recent management
discussions, we are modifying our FY00 quarterly projections, but not
dramatically altering our total year forecast. Our 00Q1 estimates are moving
from a loss of $0.19 to a loss of $0.24, Q2 from ($0.06) to ($0.09), Q3 from a
$0.06 gain to $0.09, and Q4 from $0.21 to $0.23. FY00 estimates are then
changing from $0.02 to ($0.01).
In summary, we believe SFAM has used the fourth quarter as an opportunity to
start from a clean slate and to enhance its competitive position. We believe
the CMP market is beginning to show signs of recovery and that SFAM is on track
to meet the Street estimates for FY00 and return to profitability within two
quarters. We believe SFAM's tool set leads the industry in throughput and
capability and that this asset base combined with a restructured sales and
marketing effort and the addition of the fixed abrasive platform should position
the company to be the leading beneficiary of an improving market. Accordingly,
we reiterate our BUY rating and our 12- to 18-month target price of $30.
###
We initiated coverage of SpeedFam on December 22, 1997. The initial and
subsequent reports are available upon request.
Southwest Securities, Inc. makes a market in the securities of this company and
may have a long or short position in these securities.
Southwest Securities Inc. is not responsible for the marketability or price
performance of these securities. The information contained herein has been
obtained from sources which we believe to be reliable, but we do not guarantee
its accuracy or completeness. The opinions expressed herein reflect the
judgment of the author at this date and are subject to change without notice.
Southwest Securities and its officers, directors, shareholders, employees and
affiliates and members of their families may make investments in a company or
securities mentioned herein before, after or concurrently with the publication
of this report. Southwest Securities Inc. may from time to time perform or seek
to perform investment banking or other services for any company, person or
entities mentioned herein. Member NYSE and SIPC.
Additional information on the securities discussed herein is available upon
request.
Copyright 1999 Southwest Securities, Inc. All rights reserved.
First Call Corporation - all rights reserved. 617/345-2500
-> End of Note
08:41am EDT 22-Jul-99 Salomon Smith Barney (BEDEKAR 1-415-951-1727) SFAM |
