Semiconductor Equipment . . . The second day of the Merrill Lynch Hardware Heaven Technology conference in San Francisco can be summarized with the term cautious optimism. While essentially all of the companies reaffirmed their second quarter guidance, many appeared to be encouraged by customer comments that hinted of a second half rebound in business. The thought is that the high utilization at the 130nm node and the improving economics of 300mm production will drive another round of equipment orders by the end of the year.
KLA Tencor CFO John Kispert focused on the increasing opportunity for yield management as technology complexity increases. Reticle inspection equipment demand picked up last quarter as Chipmakers that make their own masks and merchant mask makers purchased new systems for advanced 130nm and 90nm development work. KLA is starting to see a spread into Chipmakers buying the new reticle systems for incoming and ongoing mask quality control. This should drive growth in this segment in the next few quarters. The company also noted particularly strong share gains in 2002 in Metrology for overlay, thin film measurement and CD measurement. Metrology has historically been KLA’s weaker share market so these increases are meaningful. The outlook is unchanged otherwise with guidance for the second quarter intact.
Lam Research CFO Mercedes Johnson presentation drilled into the topics of marketshare gains and financial model improvement. With over 50% of orders in dielectric etch in the last quarter and 57% of the market in dielectric etch in 2002, its clear the share gains came in this segment. The company is on track to hit its previous peak EPS at a revenue run rate 15-20% below the previous peak quarter. The focus on re-engineering the business and outsourcing support as well as manufacturing functions are key to this. The outlook for flat revenues, orders and earnings in 2nd quarter was reiterated.
Advanced Energy Chairman and CEO Doug Schatz explained the strategic realignment of AE toward servicing plasma based process – the company’s core competency. Applications in semiconductors, flat panel displays, data storage, medical devices, lasers, and glass, metal, fabric, optics and polymer coatings were discussed. With about 40% of AE’s business now outside of semiconductors, the company is increasingly capitalizing on diversifying its end markets.
Novellus President Peter Hanley showed a 90nm 10 layer metal device using copper and a combination of 3 different dielectrics including a spin on layer, low-k CVD layers using Novellus Coral and upper layers using FSG. The device was a high end computing chip by a Japanese manufacturer. Hanley noted that a
mixture of intermetal dielectrics will likely be used to reduce the problems of the soft low-k materials. This should make the move to 90nm more achievable. The company still feels SARS could impact orders for the second quarter but noted it is most likely temporary and may not change the outlook for the full year, just push some business into the second half.
Semiconductors . . . ESS Technology (digital entertainment chips) reported in-line results for the first quarter but forecast a weaker than anticipated performance in the second quarter. For the three months ended March 31, the company posted a loss before items of $1.6 million, or 4 cents per share, a comedown from its year-ago equivalent profit of $17.9 million, or 37 cents per share. Looking ahead, ESS sees a loss before items of 4 to 9 cents per share on revenue ranging from $33 million to $36 million in the second quarter. A survey of six analysts is currently looking for a loss of a penny per share in the period, on average.
Microsemi was upped to Buy from Neutral at UBS. The upgrade is based on firm's belief that military/aerospace prospects will improve across the balance of 2003, and that commercial IC opportunities offer upside potential to firm's estimates for then 2nd-half of yr and beyond. Stock currently trades at 1.5x sales, but thinks could trade to 2.4x as visibility for commercial product lines such as wireless PAs builds. Target goes to $16 from $12.
Marty Seyer, VP Server Business Segment at AMD presented at the ML Hardware Heaven
Conference yesterday. Marty spoke about the attractiveness of a 32/64-bit in one system in terms of costs, performance and flexibility. Marty offered the audience the results of several performance tests, which places AMD’s Opteron server microprocessor on top of Intel’s Xeon and on par with Intel’s Itanium. The company plans to ship Opteron 100 series in 2nd quarter, with Opteron 200 & 800 series available later this year. With Opteron pricing expected to center around the $250-$450 range, it offers enterprise customers an attractive value proposition. With the ability to handle legacy 32-bit applications and future 64-bit applications, AMD’s Opteron fills a niche in the server market. While, Xeon-based servers offer affordability and excellent performance, they are incapable of 64-bit computation, which scientific computing and high-end content creation often requires. At the same time, Intel Itanium-based systems
(64-bit) are relatively expensive and are not backward compatible with the majority of applications today (32-bit). Do not believe the road ahead will be easy, however. AMD has not been a major player in the enterprise and it will take time to convince IT managers to take the risk especially with mission critical applications. AMD will also need Window 2003 (AMD64 version) to be readily available before Opteron can ramp into volume. Expect AMD to ship only 170K Opteron systems in 2003 with the potential to ship 1.5M units in 2004. The Opteron’s high ASPs and margins should have a profound effect on earnings, however. For the whole year analysts are looking for a loss of $0.94 on revenue of $3.08 billion. 2004 forecast stands at $3.97 billion in revenues and profit of $0.34. There are too many ifs between now and profitability for AMD for us to support the name right now. Back-to-back successful execution on the Opteron and ClawHammer launches will be vital – AMD has no margin for error.
Joe McDonough, CFO of Analog Devices presented at ML Hardware Heaven Conference in San Francisco yesterday. Joe offered an overview of ADI’s businesses, but could not comment on business in the April quarter since the company is reporting on May 14th. ADI’s business is split roughly 78% analog and 22% DSP. The company is the largest supplier of data converters and amplifiers worldwide with approximately 40% market share in each. In the DSP market, ADI’s Blackfin (16-bit fixed-point) and TigerSHARC (32-bit floating-point) supply tens of thousands of customers in the horizontal DSP market. ADI DSPs are found in hi-fi systems, communications systems, automobile engine control and telematics, STB and other consumer electronics. In the handset market, ADI now offers a complete chipset based on its Blackfin DSP and Othello RF solutions. With two very illustrative charts, Joe demonstrated just how diverse ADI is. The company’s top 10 customers represent 15% of sales, top 1,000 customers represent 50% of sales and it would take 60,000 customers to represent 100% of sales. ADI is equally diversified from a product perspective as the top 25 products account for only 15% of sales with another 2,000 products comprising the remaining 85% of sales. Analysts are reiterating our $491 million revenue, up 5% QoQ and $0.18 EPS forecast for Analog Devices’ April quarter. In our opinion, ADI’s management has done a great job of managing the company through the downturn of the last two years, but the stock fully reflects prospects for growth. At $33.12, ADI is trading at 33x 2004 EPS estimate of $1.00.
Anand Chandrasekher, VP, GM, Mobile Platforms Group at Intel Corp presented at ML Hardware Heaven Conference in San Francisco earlier today. The company addressed several drivers of notebook computing and explained the benefits of its Centrino platform. Intel echoed the words of Dell Computer who also presented at our conference by saying that the company believes there are approximately 200 million PC systems in the market that will be gradually replaced. This is because the costs of maintaining machines 3-years and older are greater than the costs of purchasing and installing new systems. Buy into this argument given that hardware costs represent approximately one-third of total IT spending, while services accounted for the other two-thirds. There is strong reason to believe that many of these upgrades will come in the form of notebook computers. Multiple studies show notebook computers increase worker productivity. Intel’s Centrino notebook platform is a bundled solution consisting of the low-power but high
performance Pentium-M notebook processor, Intel’s 855 and 852 core-logic chipsets and Intel Pro/Wireless WLAN chipset. We believe Intel’s branding and package solution reduces many interoperability and security concerns new users may have about wireless computing. Indeed, demand for Centrino parts have been very strong – estimate unit shipments should increase from 300K units in 1st quarter to 1.6 million units in 2nd quarter. At 90nm, Dothan, the next generation Pentium- M will offer even greater speeds and power advantages. We expect Dothan to ramp into volume by 4th quarter of this year. Intel is trading at 29x 2003E GAAP EPS of $0.64 and 21x 2004E GAAP EPS of $0.86. Despite missteps in flash, Intel remains the dominant microprocessor and flash manufacturer with increasing performance advantages in both markets. The company's competitive positioning is improving, while valuation is reasonable if not yet attractive.
Boxmakers . . . Duane Zitzner, EVP of the Personal Systems Group, presented at Merrill Lynch’s Hardware Heaven Conference. Also, there was a distributor panel of Ingram Micro, Tech Data, CDW, and Bell Micro. HP is in its quiet period for 2nd quarter results, so Mr. Zitzner’s remarks were limited. Still, we got the sense that PC business is soft. Europe and Asia- Pacific appear to be holding up while the U.S. is weak. 2nd quarter revenue forecast for PSG of $4.7 billion, -12% Year/Year and –1% Quarter/Quarter, is at risk. Ingram and Tech Data, who do about 30% of their business with HP, echoed the view of decent results in Europe but poor sales in the U.S. Ingram expects a weaker than normal 2nd quarter and sees no signs of pickup. Tech Data, which just finished its quarter as did HP, said the U.S. is its concern and that there could further risk to the downside. Bell Micro, where storage is 70% of sales, saw a poor February, good March, and soft April. HP’s direct sales are 47% in the U.S. going to 50-60%. Distributors have a good handle on end-user corporate demand. They conclude that (1) U.S. business stinks, (2) the problem is more pricing than volume (partly explaining component strength vs. OEM weakness), and (3) inventory is up a bit but not a big problem. Conclusion for HP is that a PC revenue miss is likely but inventories aren’t out of control. Mr. Zitzner is taking $1 billion out of PSG’s cost structure this year. He said PSG was profitable last quarter under the old classification and his goal is an operating margin of 2-3%. He thinks HP has narrowed Dell’s 15 point cost advantage. It sounds like HP will price to the market. Next Tuesday HP will unveil a new enterprise computing strategy. We’ve pointed out that HP is strategically squeezed between IBM and Dell and needs differentiation. CEO Carly Fiorina has turned up the PR recently and said the company needs to better explain its positioning. Expect adaptive infrastructure, partnering, services, and Itanium to be emphasized as differentiators. Analysts some revenue risk but probably not earnings risk to 2nd quarter. Printers should do well (Canon had a strong quarter), but PCs and Enterprise Systems could be soft. The stock is inexpensive yet likely stuck in a trading range.
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