GS US SEMI EQUIP WEEKLY: NVLS
MID-QUARTER UPDATE AND ST MICRO
MEETING TAKEAWAYS
Summary: (1) Novellus is hosting its mid-quarter update on Thursday night after the close.
We expect management to reiterate its upbeat tone on the semi equipment cycle but we do
not expect a change to original Q2 guidance. We expect the Street to focus on insight into
third-quarter order patterns and gross margins on the call. (2) Key takeaways from our
visit to France last week for the STMicro analyst meeting and fab tours including fab
vendor listings and updated plans for capacity expansion, (3) Infineon Richmond 300mm
fab ramp-up proceeding on schedule, (4) Our take on recent chatter surrounding Intel's
possible 65-nm equipment orders - we believe the trade press is a bit ahead of itself, and
(5) News, events and price performance.
EXPECT STREET TO FOCUS ON INSIGHT INTO THIRD-QUARTER POTENTIAL
ORDER GROWTH ON THE NOVELLUS MID-QUARTER UPDATE CALL. WE DO
NOT EXPECT A CHANGE TO ORIGINAL Q2 GUIDANCE. Novellus is hosting a
previously scheduled mid- quarter update call on Thursday after the market close. We
model June- quarter revenues of $320 million, up 22% sequentially, with earnings per
share of $0.22, versus the Street consensus earnings per share estimate of $0.21. We also
model net orders of $380 million, up 10% sequentially (recall that management provided
net order growth guidance of up 8% to 12% sequentially during its first-quarter earnings
call). We don't expect management to change their previous guidance for revenues or
orders. We would expect several issues to dominate investor focus during the mid-
quarter update. First, we believe that the Street will attempt to garner greater insight into
potential third-quarter order patterns as a few equipment companies (Axcelis and ASML)
have indicated the possibility of a decline in third-quarter orders. Second, recall that the
company's second- quarter revenue and earnings guidance implies a lack of significant
expansion in gross margins. We would expect investors to attempt to pin- point why gross
margin drop through is less than many would expect given the ramp in shipments over
the past few quarters.
KEY TAKEAWAYS FROM THE STMICRO FIELD TRIP IN FRANCE LAST WEEK.
We attended the STMicro analyst day on Tuesday and Crolles, France fab tours on
Wednesday in France last week. Below we review our key takeaways from the field trip
including (1) STM is spending a significant amount of capital ($2.2 billion) in 2004,
which is primarily being spent on 200mm and back- end manufacturing capacity, (2)
Management did not provide an official 2005 capex budget as it is still too early to gauge
the semiconductor market outlook for 2005 which will drive the company's capacity
requirements, but it did indicate that 2004 capex is close to a peak spending level for this
cycle, (3) Equipment move-in should begin in early 2005 for the company's new 300mm
Catania, Italy fab, and (4) We provide a partial list of semi equipment vendors whose
tools we observed during our tour of Crolles 1 and Crolles 2.
(1) STM IS CONTINUING TO BUILD-OUT ITS 200MM CAPACITY AND
UPGRADE ITS 150MM CAPACITY TO 200MM. Recall that in April, STM raised its
2004 capex budget to $2.2 billion (up about 80% year-over-year) from its initial budget
of $1.6 billion. About $1.4 billion of the $2.2 billion budget is being allocated to
front-end capacity and the remaining $800 million is being allocated to back-end capacity (STM
has back-end manufacturing facilities in Morocco, Malta, Malaysia, China, and Singapore). About
60% of 2004 capex will be for 0.13 micron and below capacity (STM's sites using 0.13 micron and
below capacity are Crolles, Catania, Singapore, Agrate R2, and Rousset).
With a 2004 capex budget of $2.2 billion, STM is clearly going to be among the biggest capital
spenders on wafer fab equipment in 2004, so what is all of the capex for? First, STM continues to
build-out its 8-inch (200mm) manufacturing capacity and upgrade some of its 6-inch (150mm) fabs
to 200mm facilities. We understand that the company is adding 200mm capacity at its Rousset
(France), Singapore, and Phoenix fabs and is upgrading its 150mm capacity to 200mm at its
Corrolton (US) and Agrate (Italy) fabs. Management estimates that its 200mm fabs are currently a
little over 60% saturated (a term the company uses to imply the amount of equipment that has been
installed in a fab versus its total planned tool capacity) and are expected to be more than 80%
saturated by the end of 2004. STM believes that its 200mm fab build-out and upgrade plan will
result in a 12% 200mm manufacturing cost reduction in 2004 (as measured by the cost per mask
level ratio). Second, the company is adding significant back-end capacity as indicated by the
approximately $800 million it intends to spend on the back-end in 2004, which is intended to yield
about 15% more capacity than was available in 2003. Recall that when STM increased its 2004
capex budget in April, the company indicated that a primary driver was the need for more
back-end capacity.
STM is also focused on relocating its 150mm capacity from higher-cost regions like the US and
Europe to the lower-cost region of Singapore. While the relocation of 150mm capacity does not
result in incremental wafer fab equipment spending, as the company is generally just shipping its
tools from the US and Europe to Asia, this strategy does indicate a regional shift in the company's
wafers out to Asia and an expected 150mm manufacturing cost reduction of about 20% (again, as
measured by the cost per mask level ratio). Management expects the percent of the company's
wafers out in Europe to decrease to about 47% in 2004 from about 60% in 2002. In the US, the
percent of the company's wafers out is also expected to decrease to 11% in 2004 from 13% in 2002
while the percent of the company's wafers out in Asia is expected to increase to 42% in 2004 from
28% in 2002. STM's 6-inch fab in Singapore is expected to ramp to 4,000 wafers out per day by
the end of Q1'05 from about 2,500 wafers out per day in Q1'04 as the company shifts more 150mm
capacity to the facility.
(2) NO 2005 CAPEX GUIDANCE YET BUT 2004 CAPEX AT APPROXIMATE PEAK
LEVELS. Management indicated that it has not yet determined a capex budget for 2005, which
will be driven mostly by the semiconductor market outlook in 2005 and beyond and the company's
anticipated capacity needs to support that outlook (STM is estimating 30% semiconductor revenue
growth in 2004 and 14% growth in 2005). Management did indicate during informal presentations
that despite its expectation of about 20% to 25% growth in industry-wide capex in 2005 (which we
view as an aggressive estimate), it believes that its 2004 capex of $2.2 billion is at an approximate
peak spending level for this cycle.
(3) 300MM CATANIA FAB EXPECTED TO BEGIN TO TAKE TOOL DELIVERIES IN
EARLY 2005. Recall that STM built a 300mm fab shell in Catania, Italy, which is also called
"M6." The Catania fab is not yet equipped with processing tools as STM continues to build the
clean-room space for the fab which should be completed in late 2004, but the company has
installed an AMHS system in the fab (an AMHS system is an automated overhead wafer transport
system that typically needs to be installed in a fab before other semi equipment can be installed).
Management indicated that it has already placed purchase orders for wafer fab equipment for
Catania and it expects to begin to take tool deliveries after December 2004 (after the clean room
space is completed) as the fab is expected to be in production in mid-2005. STM continues to seek
a partner for the 300mm fab project and if the company succeeds in locating a viable partner over
the next several months, this would potentially speed up STM's equipment and production plan for
Catania.
Importantly, management indicated that Catania will be equipped similarly to Crolles 2, the
company's first 300mm fab (we provide more information on Crolles 2 below). STM gained a solid
working knowledge of the process tools being utilized at Crolles 2, which it plans to leverage in
ramping production at Catania. We provide an overview below of the major equipment companies
whose tools we observed being used for different processes during our tour of Crolles 2, which we
believe is a reasonable proxy for those equipment suppliers that are likely providing tools for
Catania.
(4) EQUIPMENT SUPPPLIERS TO CROLLES FABS. As we noted above, we attended a tour of
STM's two fabs in Crolles, France, Crolles 1 and Crolles 2. Crolles 1 is a 200mm R&D and
production line facility and Crolles 2 is a 300mm fab also focused on R&D with pilot line
production capacity.
The Crolles 2 fab is a joint-venture project between STM, Philips, and Freescale (previously
Motorola SPS). The CMOS processes developed at Crolles 2 are compatible with TSMC processes
(note that STM is aiming to outsource more than 10% of its capacity needs by the end of 2004 and
its current largest foundry partner is UMC followed by Chartered). STM has already achieved 120-
nanometer qualification at Crolles 2 and is working on first prototypes at the 90-nanometer node.
On the R&D side, Crolles 2 is currently developing 65-nanometer devices and first 45-nanometer
devices are expected to be available by the end of 2004. Below we provide a partial list of the
equipment we observed during our tour of Crolles 1 and 2. This list is not meant to be exhaustive
given that we were only able to tour portions of the fabs.
Crolles 1 (200mm):
Process Vendor
Steppers ASML
Track TEL and legacy Silicon Valley Group
Metal etch Lam Research
CVD Applied Materials
Medium current implant Varian Semi
Low energy Applied Materials
Crolles 2 (300mm):
Steppers ASML
FOUPS Entegris
CVD Applied Materials
Tungsten Novellus
PVD Applied Materials
Etch Lam Research
High current implant Axcelis
Medium current implant Varian Semi
High energy Applied Materials
Metrology KLA-Tencor (primary supplier)
Hitachi
Applied Materials
RTP Applied Materials
Source: Goldman Sachs Research, STMicro.
In addition to the key takeaways we discussed above, we note that STMicro provided greater detail
on its low-k roadmap. The company is using an FSG solution at 130-nanometers but believes that it
will be able to use a low-k material (with a k-value of about 2.7) at the 90-nanometer device node
down to 65-nanometers. The company suspects that 2.3 to 2.5 k-value solutions will not be ready
for a first generation of 65-nanometer devices, but will potentially be available for a second
generation of 65-nanometer devices. For low-k, STM uses both Trikon and Applied Materials.
Additionally, we believe that the company is in the early stages of considering a fab investment in
China, where STM believes it maintains a strong market share position. We understand that the
company would potentially build a 300mm fab shell that it would equip with 200mm tools, thereby
allowing it to upgrade the installed capacity to 300mm in the future. We do not expect that this fab
will be announced in the near-term, but rather that it is simply under consideration.
INFINEON RICHMOND 300MM FAB RAMP-UP PROCEEDING ON SCHEDULE. We
Goldman Sachs Global Investment Research 3
Analyst Comment May 23, 2004
attended an Infineon presentation on DDR2 (double data rate DRAM) last week in New York. The
official purpose of the presentation was to provide a tutorial on DDR2 DRAM technology, but the
company also provided a brief business overview, including an update on the ramp-up of its
300mm DRAM fab in Richmond, VA. Recall that the company's 300mm Richmond fab is actually
an expansion of its existing 200mm operations in Richmond. The 300mm fab will produce high
performance/high density DRAM chips initially using 110-nm technology and eventually
transitioning to 90-nm.
The project is divided into 2 phases, with each phase having a planned capacity of 25K wafer starts
per month (WSPM). Phase 1 will cost approximately $1 billion and is scheduled for equipment
move-in starting in early 2005, with the company expecting the fab to have 25k WSPM in capacity
by mid-2006. The company stated that most of the equipment orders for Phase 1 have already been
placed. While Phase 2 also has a planned capacity of 25k WSPM, market conditions will ultimately
determine how much capacity is added and when it is added for the second phase. Management
stated that the Richmond build-out will not have an impact on the company's existing
manufacturing relationships with its foundry partners, SMIC and Winbond. Additionally,
management noted that the Inotera ramp is also proceeding according to plan, with equipment
move-in presently on-going and a 10K WSPM capacity targeted for the end of 2004.
OUR TAKE ON RECENT CHATTER SURROUNDING INTEL'S POSSIBLE 65-NM
EQUIPMENT ORDERS. There has recently been quite a bit of chatter in some semiconductor
industry trade journals about Intel placing substantial orders for 65-nm tools. In particular, one
recent report stated that Intel is placing orders for 65-nm dielectric etch tools and that Lam
Research had been selected as the vendor for the order, effectively displacing Intel's incumbent
dielectric etch supplier, Tokyo Electron (TEL). Our checks indicate that not only have the
dielectric etch orders not yet been placed, but TEL may eventually receive exclusive orders for
R&D dielectric etch tools at Intel when those orders are actually placed. We believe that it is
possible that once Intel reaches actual production levels at 65-nm that the company may also
purchase Lam tools for certain applications, as it is becoming increasingly popular for chipmakers
to utilize dual tool sources for many applications. That said, in our estimation it appears that the
industry press may have gotten a bit ahead of itself in reporting Intel order patterns at 65-nm.
News, Events and Price Performance Last week
Monday 17 May (1) Applied Materials introduced its Applied Endura ALPS Ni PVD system gate
silicide technology. (2) ATMI announced that Cynthia Shereda has joined the company as
Vice-President and Chief Legal Officer. Most recently, Shereda was with General Electric. (3)
Entegris and Carbon Nanotechnologies announced a joint agreement to develop polymer products.
CNI's carbon nanotubes will be incorporated into Entegris' products. (4) Keithley Instruments
announced its regular quarterly cash dividend of $0.0375 per common share. The dividend is
payable June 30, 2004, to shareholders of record at the close of business on June 16, 2004. (5)
Amkor announced an agreement to acquire IBM's semiconductor assembly and test services.
Amkor will acquire manufacturing facilities and test operations. The arrangement also includes
supply and cross-licensing agreements. The transaction is valued at approximately $145 million.
Tuesday 18 May (1) Advanced Energy announced that an equipment supplier to the media/data
storage industry has selected AE's Pinnacle dual-output DC power supply for its magnetic disk
sputtering system. (2) Electro Scientific Industries announced that Elpida has selected ESI's 9825
yield enhancement system for production of DRAM devices. (3) Teradyne announced that T-Com,
the fixed-line division of Deutsche Telekom, has placed an order for Teradyne's LDU 100 (Loop
Diagnostic Unit). (4) Entegris announced it has completed the acquisition of the precision parts
cleaning business of SNEF located in Montpellier, France. The precision parts cleaning business
of SNEF recorded last twelve-month annual sales of approximately US $2 million. All the assets of
SNEF were purchased on a cash basis. The facility at Montpellier will become the Entegris
European Service Center, servicing European customers. All personnel from SNEF, Montpellier
have been hired by Entegris. (5) Applied Materials (AMAT-$18; IL/N) reported EPS of $0.22; GS
$0.19; Street $0.19. Please see our 5/19 note for additional details. (6) Photronics (PLAB-$16; NC)
reported $0.17; Street $0.14.
Wednesday 19 May (1) Applied Materials announced that it has shipped more than 750 Applied
Producer CVD (chemical vapor deposition) systems. (2) Credence (CMOS-$12; U/N) reported
EPS of $0.06; GS $0.02; Street $0.02. Please see our 5/20 note for additional details.
Thursday 20 May (1) At its analyst meeting, Axcelis Technologies reiterated its guidance for the
second fiscal quarter. The company expects net revenues to be between $147 million and $152
million with earnings per share expected to be between $0.23 and $0.2. Please see our 5/20 note for
additional details. (2) Semiconductor Equipment and Materials International (SEMI) released the
April US equipment manufacturers' book-to-bill ratio of 1.14; GS 1.09; Street 1.10. Please see our
5/20 note for additional details. (3) Lam Research announced selection by Infineon Technologies
as 2003 Front-end Supplier of the Year. Suppliers are judged for overall performance on five
criteria: purchasing, quality, logistics, technology, and business management. (4) Brooks
Automation (Canada) gave notice to holders of its exchangeable shares that it has established a
date for the automatic redemption of all of the outstanding Brooks Canada exchangeable shares.
The effective date of the purchase will be July 23, 2004.
This week's calendar:
Thursday 27 May: (1) Novellus Systems (NVLS-$29; IL/N) hosting a previously scheduled
mid-quarter update call. GS EPS estimate of $0.22; Street $0.21.
GS Universe Price Performance 5/21/04 Price performance
Ticker Company Name Rtg Close Week MTD QTD YTD Y-Y
Semiconductor Capital Equipment
AEIS Advanced Energy IL/N 14 7% 3% -37% -47% 40%
AMAT Applied Materials IL/N 18 -1% 1% -14% -18% 35%
ATMI ATMI Inc. IL/N 24 -1% 9% -12% 3% 21%
ACLS Axcelis Technologies IL/N 11 4% 5% -4% 7% 140%
BRKS Brooks Automation IL/N 18 7% 6% -17% -26% 78%
CMOS Credence Systems U/N 12 10% 12% 9% -6% 57%
ENTG Entegris IL/N 11 0% 7% -11% -15% 6%
FORM FormFactor OP/N 19 -3% 7% -7% -5% N.A.
KLAC KLA-Tencor OP/N 45 2% 7% -15% -24% 13%
LRCX Lam Research IL/N 23 3% 2% -12% -30% 48%
MKSI MKS Instruments IL/N 21 5% 7% -15% -29% 30%
NVLS Novellus Systems IL/N 29 1% 1% -9% -30% 5%
TER Teradyne Inc. U/N 21 1% 2% -15% -18% 44%
Mean -- -- 3% 5% -12% -18% 43%
Median -- -- 2% 6% -12% -18% 37%
Source: Factset.
I, Jim Covello, hereby certify that all of the views expressed in this report accurately reflect... |
