GS US SEMI EQUIP WEEKLY: PREVIEWING
BUSY WEEK AHEAD IN SEMI EQUIPMENT
Summary: (1) We do not believe that investors should be long AMAT into its earnings
call, (2) Intel's 2005 capex may be higher partly because it is waiting to purchase new Arf
steppers until Nikon's next-gen tool is available in 2005, (3) Expect the book-to-bill ratio
to decline slightly to 1.09 in April, (4) Expect Credence to report upside to our order and
earnings estimates and to provide an update on the NPtest acquisition. Expect order
growth to decelerate in coming quarters, (5) We believe that the Advantest led
open-architecture non-memory test platform is gaining additional traction, (6) Axcelis,
Brooks, Mykrolis, and LTX hosting analyst meetings in Massachusetts next week - we
expect the meetings to focus on business and product positioning, (7) Correcting an error -
Novellus is the copper electroplating supplier to TI, and (8) News, events and price
performance.
WE DO NOT BELIEVE THAT INVESTORS SHOULD BE LONG AMAT INTO ITS
EARNINGS CALL. Applied Materials is reporting its April-quarter (FQ2/CQ1) results
on Tuesday evening after the market close. We published a more extensive preview note
last week, but we will provide some highlights here. We model revenues of $1.95 billion,
up 25% sequentially, with earnings per share of $0.19, in-line with the Street consensus
estimate. We believe Applied could report significant upside to Street revenue and
earnings estimates as our checks indicate that shipments tracked well ahead of plan
during the quarter. That said, we are not raising our estimates because we do not have a
strong sense of how gross margins tracked during the quarter and we would note that
management has indicated that it may not be able to achieve its previous gross margin
targets but will make up for the shortfall with expense controls that will be reflected in
the operating income line (see our full preview note for a breakdown of previous margin
targets). Regarding orders, we expect the company to report April-quarter orders of
$2.25 billion, up 34% sequentially. Recall that Applied guided its April- quarter orders up
30% sequentially on its last quarterly earnings call. We would expect Applied to guide
for significantly less robust July-quarter order growth of $2.4 billion (+7% sequentially).
While we expect that management will exhibit an extremely bullish tone on its earnings
call, we do not believe that the company will be able to offer any substantive evidence on
the key issue facing semi equipment investors today - the sustainability of the semi
equipment upturn. We believe management will likely characterize the CQ2 slowing
order growth and what we believe could be flat or slightly negative CQ3 orders as a
digestion phase within the context of the broader semi equipment cycle. However, we
believe that slowing orders over the next two quarters is in direct contrast to management
commentary (as recently as the last several weeks) that the industry is in the early stages
of the fundamental cycle. How can we be in the early stages of the cycle if we are already
at the digestion phase of the cycle? We therefore continue to believe that it is too late in
the fundamental cycle to be overweight the stock. Additionally, while many investors are
seeking to play the stock for a "bounce" trade, we believe this is a crowded trade and we
would wait for greater insight into a potential fundamental re-acceleration in the fourth
quarter before considering being more aggressive with the stock.
INTEL'S 2005 CAPEX MAY BE HIGHER PARTLY BECAUSE IT IS WAITING TO
PURCHASE NEW ARF STEPPERS UNTIL NIKON'S NEXT-GEN TOOL IS AVAILABLE IN
2005. Our checks indicate that Intel may be holding off purchasing new ARF tools from Nikon
until Nikon's new tool, the NSR-308, is available in volume which we expect will be sometime
around the June quarter of 2005. We believe Intel's reluctance to purchase new ARF tools until it
can procure Nikon's next generation tool may be one potential driver of Intel's artificially low
capex as a percentage of sales ratio in 2004 (with the primary driver being the efficiencies it has
gained by already having transitioned to 300mm manufacturing capacity). Note that using the
mid-point of Intel's capex guidance range of $3.8 billion in 2004 and a 2004 sales estimate of
approximately $32 billion, the company is spending about 12% of sales on capex vs. 13% in 2003,
20% in 2002, 27% in 2001, and 22% in 2000. Further, we believe that one possible driver of Intel's
potentially higher capex budget in 2005 may be the company's decision to purchase Nikon's next
generation ARF tool in mid-2005.
EXPECT THE BOOK-TO-BILL RATIO TO DECLINE SLIGHTLY TO 1.09 IN APRIL.
Semiconductor Equipment and Materials International (SEMI) is releasing the US equipment
manufacturers' book-to-bill on Thursday at 6pm eastern. We are estimating a slight decline in the
book-to-bill ratio to 1.09 in April (the ratio was 1.10 in March), on 4% m-m growth in orders and
5% m-m growth in shipments (a greater rise in the denominator than the numerator will lead to a
decline in the overall ratio). We are modeling three-month rolling average overall orders of $1,375
million (+4% month-over-month) and overall shipments of $1,260 million (+5%
month-over-month). We estimate front-end shipments of $980 million (+5% month-over-month)
and front-end orders of $1,050 million (+4% month-over-month), yielding an estimated front-end
book- to-bill ratio of 1.07. We estimate back-end shipments of $280 million (+5%
month-over-month) and back-end orders of $325 million (+4% month-over- month), yielding a
back-end book-to-bill ratio of 1.16. We continue to emphasize that the book-to-bill is a backward
looking and unaudited metric and should therefore not be a significant trading event for the stocks.
EXPECT CREDENCE TO REPORT UPSIDE TO OUR ORDER AND EARNINGS ESTIMATES
AND TO PROVIDE AN UPDATE ON THE NPTEST ACQUISITION. Credence Systems is
reporting earnings on Wednesday after the market close. We model April-quarter sales of $90
million (+32% sequentially) with earnings per share (including the amortization of goodwill) of
$0.02, in-line with the Street consensus estimate. We would expect the company to report upside to
both our earnings and our order estimate, consistent with Teradyne's strong report in March. We
believe management will maintain a bullish tone on the earnings call but we believe that
indications for orders in the July-quarter will likely call for a deceleration in growth following 55%
sequential growth in the January quarter and what we expect will be about 30% sequential growth
in the April quarter. We would also expect the company to provide an update on its acquisition of
NPTest, which is scheduled to close in June. While the report is likely to be solid, we continue to
believe that the back-end cycle is entering its later stages and that existing ATE suppliers face
continued pressure from new substitute technologies (more below) and we therefore would
continue to be underweight the stock.
WE BELIEVE THAT THE ADVANTEST LED OPEN-ARCHITECTURE NON-MEMORY
TEST PLATFORM IS GAINING SOME TRACTION. We believe that Advantest is gaining
continued traction with its non-memory open architecture tester, the T2000. Recall that Advantest
first announced the formation of an independently run company called the Semiconductor Test
Consortium (STC) at Semicon West in 2002. The sole purpose of the STC is to develop an open
architecture platform to test System-on-a-chip (SOC) applications. The STC's membership is
currently comprised of about 25 companies and 11 professors, including Advantest, Advanced
Energy, Tokyo Electron, Inovys, Analog Devices, Fujitsu, Philips, Renesas, Intel, Motorola,
Toshiba, etc. The difference between the STC and a traditional tester company (i.e. Teradyne,
Credence, and LTX) is that the testers built by the STC all include a mainframe (called OpenStar)
supplied by Advantest and then any member of the consortium can offer off-the-shelf modules to
modify a given tester based on customer requirements for price, performance, etc. Advantest's
T2000 is the first commercial tester produced by the STC and is targeted at high-end logic devices.
We believe that the T2000 is gaining traction as we understand that the company has added a few
additional customers (we believe Motorola, Fujitsu, and Renesas) in addition to the original
customer of the T2000, Intel. Further, Advantest shipped around 15 T2000 units in FY2003 and is
expected to ship around 100 T2000 units in FY2004. We continue to believe that the
open-architecture platform is a disruptive technology in the back-end segment as one need not
believe that it will replace all legacy testers to believe that it serves as a deflationary pressure given
that IDMs and test hous
es can leverage the threat of migrating applications to STC platforms to achieve pricing
concessions from their existing test suppliers.
AXCELIS, BROOKS, MYKROLIS, AND LTX HOSTING ANALYST MEETINGS IN
MASSACHUSETTS NEXT WEEK - WE EXPECT THE MEETINGS TO FOCUS ON
BUSINESS AND PRODUCT POSITIONING BUT WE WILL ATTEMPT TO GARNER
GREATER INSIGHT INTO THE SUSTAINABILITY OF THE UPTURN. Axcelis Technologies,
Brooks Automation, Mykrolis, and LTX Corporation are hosting analyst meetings next Wednesday
and Thursday in Massachusetts. We would generally expect each company to focus its analyst
meeting on broader business issues such as market and product positioning particularly given that
each company has already reported first calendar quarter earnings results. While we therefore
expect the meetings to generally focus on the big picture, we will be paying careful attention to
any insights we can garner into the sustainability of the current upturn and the direction/magnitude
of third-quarter order growth.
CORRECTING AN ERROR - NOVELLUS IS THE COPPER ELECTROPLATING SUPPLIER
TO TI. We wrote in our note out last week from the Texas Instruments analyst meeting that
Applied Materials was the copper electroplating supplier to Texas Instruments' 300mm fab, DMOS
6, which is incorrect as Novellus is the supplier to DMOS 6 for copper electroplating. We
apologize for any confusion this mistake caused.
News, Events and Price Performance
Last week
Monday 10 May (1) Mykrolis Corporation announced the newest additions to its QuickChange
product line, the QuickChange ATM 0.03(mu)m and 0.05(mu)m cartridge filters, which are
designed specifically for aqueous-based chemicals used in wet-etch applications. (2) KLA-Tencor
was ranked the fifth best provider of workforce development initiatives in the US in Training
Magazine's 2004 Top 100 award.
Tuesday 11 May (1) FSI International signed a cooperative agreement with Novellus Systems to
join the Damascus Alliance, a group of semiconductor equipment companies that collaborate on
copper dual damascene process integration for advanced device manufacturing. FSI will install its
fully automated 300mm ZETA Spray Cleaning System in the Novellus Customer Integration
Center in July.
Wednesday 12 May (1) DuPont Photomasks has begun commercial production at its advanced
photomask production facility in Dresden, Germany. The new facility will be used for the
production of advanced photomasks for semiconductor devices with design rules of 65-nanometers
and below.
Thursday 13 May (1) LTX Corporation (LTXX-$9.61; NC) reported $0.07; Street $0.07. (2)
NPTest announced that Fulcrum Microsystems selected its SABER to provide test development
solutions for its PivotPoint product, which is targeting high-performance applications in the
networking and storage markets.
Friday 14 May (1) Agilent Technologies shipped its 800th 93000 System-on-a- Chip Series tester.
This week's calendar:
Tuesday 18 May: (1) Applied Materials (AMAT-$18.54; IL/N) reporting earnings. GS $0.19;
Street $0.19. (2) STMicro analyst meeting in Paris, France.
Wednesday 19 May: (1) Credence Systems (CMOS-$11.22; U/N) reporting earnings. GS $0.02;
Street $0.02. (2) Mykrolis analyst meeting in Billerica, MA. (3) LTX Corporation analyst meeting
in Westwood, MA. (4) STMicro analyst meeting in Paris, France.
Thursday 20 May: (1) Axcelis Technologies analyst meeting in Beverly, MA. (2) Brooks
Automation analyst meeting in Chelmsford, MA. (3) SEMI US equipment manufacturers' April
book-to-bill ratio. GS estimate 1.09.
GS Universe Price Performance 5/14/04 Price performance
Ticker Company Name Rtg Close Week MTD QTD YTD Y-Y
Semiconductor Capital Equipment
AEIS Advanced Energy IL/N 13 -7% -3% -41% -51% 18%
AMAT Applied Materials IL/N 19 -1% 1% -13% -17% 24%
ATMI ATMI Inc. IL/N 24 -3% 10% -11% 4% 11%
ACLS Axcelis Technologies IL/N 11 -4% 1% -7% 3% 112%
BRKS Brooks Automation IL/N 17 -3% -1% -22% -30% 63%
CMOS Credence Systems U/N 11 -6% 1% -1% -15% 36%
ENTG Entegris IL/N 11 0% 6% -11% -16% -9%
FORM FormFactor OP/N 19 6% 10% -4% -2% N.A.
KLAC KLA-Tencor OP/N 44 2% 5% -17% -25% 5%
LRCX Lam Research IL/N 22 -1% -1% -14% -32% 32%
MKSI MKS Instruments IL/N 20 -1% 2% -20% -33% 14%
NVLS Novellus Systems IL/N 29 -1% 0% -10% -31% -1%
TER Teradyne Inc. U/N 21 -2% 2% -16% -19% 47%
Mean -- -- -2% 3% -14% -20% 29%
Median -- -- -1% 1% -13% -19% 21%
Source: Factset.
I, Jim Covello, hereby certify that all of the views |
