CSFB comments on Advanced Reticle Symposium
The SCE Data Deposition highlights relevant data points in the semi cap equipment industry and their potential impact on companies in our space.
ARS 2003 profiles mask industry challenges. The Advanced Reticle Symposium was held in San Jose on June 24th, with about 500 attendees primarily from the merchant mask companies, EDA design vendors, and chip companies. The event profiled technical and economic opportunities and challenges in semiconductor design and mask manufacturing.
Economic issues weigh on photomask vendors. A central theme from the presentations and industry panel was to focus on the economic challenges the mask companies are facing in making the transition to 0.13 micron. Key challenges include:
1. Capital intensity increasing: According to a leading mask merchant, a 0.13 micron facility requires $104m capital spending versus $22m capital spending at 0.35 micron. As a result of higher intensity, depreciation/revenue for the two merchant mask companies has trended upward, averaging 28% in C03 versus 16% average from 1997 to 2002.
2. Migration to leading edge modest. A combination of higher design and mask costs (<$1m design costs at 0.35 versus $5m design costs at 0.13), greater uncertainty in end market demand, and chip yields still in the 50-60% range are limiting new designs moving into tape-out at 0.13 micron beyond the Tier-1 vendors. We believe 0.13 micron activity at both US mask companies continues to track to only modest growth, leading to continued under-utilization of leading edge lines.
3. Mask companies offering more value, but receiving lower margins. At the trailing edge, mask companies focused on cost, cycle time, and reliability. At 0.13 micron, mask companies manufacturing complexity is increasing significantly, adding more substrate etching, advanced resist processing, dry etching, phase-shifting technology and advanced mask inspection. Despite the increased value created by mask companies, gross margins across the lithography plane have not shifted in this direction. In C1Q03, mask gross margins averaged 14% at the mask companies versus 45% at the metrology vendors and 71% at the EDA companies. Since 4Q00, mask margins have fallen the furthest, down 2190bp versus 1180 bp for the metrology companies and a 210bp improvement for the EDA software companies. Stronger leading edge tape-outs will be needed
to restore pricing and gross margins for the mask suppliers.
Near-term units tracking to plan; F04 street expectations bullish. We believe photomask companies are tracking to the mid-point of guidance for C2Q03, although short lead-times could result in revenue swinging to the low-end of the range in the last couple weeks of the quarter if a few leading edge masks ($750K per mask-set push out). We expect continued modest q/q revenue growth at the mask suppliers, with flattish mask units and modestly improving ASP’s as mix slowly shifts to the leading edge. We believe street expectations for 20% y/y growth at the merchant mask companies in F04 will require execution on new outsourcing deals and an acceleration in 0.13 micron tapeout activity, a trend which has been slow and could remain muted given sluggish end demand growth and less compelling economics at 0.13 micron. |
