GS US SEMI EQUIPMENT SEMICON WEST
AND QUARTERLY PREVIEW: TAKE
PROFITS ON RALLIES
Summary: We expect semi equipment management tone to be bullish both at SEMICON
West (SW) and during earnings (which begins during SW). However, we do not believe
that managements will be able to provide meaningful substantive evidence to support their
bullish tone. We expect Q2 orders to be up 10-15% q-q and we do not believe guidance
for Q3 order growth will meet the Street's +5% to +10% q-q expectation. Street
expectations have risen considerably over the last several weeks (and the stocks have
traded up commensurately) and as a result we would be sellers of rallies as we continue to
believe that business has not picked up as much as expectations now call for. More
importantly, for intermediate-term investors we continue to believe that it is too late into
the fundamental cycle to be overweight the semi equipment stocks and investors
attempting to play the group for a late cycle trade are not being properly compensated
with an attractive risk/reward as stocks are trading at, rather than below, fair value.
EXPECT COMPANIES TO MAINTAIN A BULLISH TONE DURING SEMICON
WEST AND EARNINGS SEASON, BUT WE DO NOT BELIEVE THEY WILL
PROVIDE MEANINGFUL SUBSTANTIVE EVIDENCE TO SUPPORT THEIR
TONE. We generally expect Semi Equipment managements to maintain their bullish tone
both during meetings at SEMICON West and during earnings season, which begins in
conjunction with SEMICON West. While we expect managements to reiterate that the
industry is in the early stages of a recovery and to continue to be upbeat about business,
we do not believe that they will be able to offer meaningful substantive evidence to
support that contention (i.e. offer guidance for significant order growth).
TRADING STRATEGIES FOR SEMICON WEST:
NEW PRODUCT INTRODUCTIONS AT SEMICON WEST LIKELY TO BE
INCREMENTALLY MORE POSITIVE FOR APPLIED AND NOVELLUS. Recall that
SEMICON West is an industry- trade show sponsored by Semiconductor Equipment and
Materials International (SEMI), an industry trade association. SEMICON West takes
place the second week of July with the front-end manufacturing portion in San Francisco,
CA from July 12th to July 14th and the back-end manufacturing portion in San Jose, CA
from July 14th until July 16th. We generally expect new product introduction news flow
to be incrementally more positive for Applied and Novellus and to be incrementally more
negative for Lam, Axcelis, and Veeco Instruments. We would expect Applied to
highlight the introduction of its new high current ion implanter, which will compete
directly against Axcelis. We would also expect Applied to highlight its dielectric etch
offering as we believe that the company is making a concerted strategic effort against
Lam Research in the dielectric etch market not only with its tools, but also by focusing its
service capabilities against Lam. We expect KLA to emphasize its new atomic force
microscope (AF-LM 300), which will compete directly against Veeco. Finally, we expect
Novellus to exhibit an upbeat tone about its long-awaited re-engineered CMP tool. While
we do not know the specifics around what the company may say, we get the sense that
management is anxious to highlight their complete product suite.
POTENTIAL PAIR TRADING IDEAS HEADING INTO SEMICON WEST. We believe that
likely news flow coming out of SEMICON West creates several potential pair trading opportunities
for relative value investors (for investors more concerned about absolute returns, we recommend
selling on rallies into SEMICON West as we will detail below). We believe a long AMAT short
LRCX pair trade is an attractive idea given that as we indicated above we expect Applied to
heavily emphasize its dielectric etch product and service offerings. A second pair trade idea would
be to go long FORM and short ACLS. We believe FormFactor will have the opportunity to dispel
any misunderstandings about the negative impact of the delay of the DDRII transition on its
business during meetings at the trade show, which should help support the stock. Regarding
Axcelis, we believe that Applied highlighting its new single wafer high current ion implanter,
which seems to us to be directly aimed at Axcelis, may have a negative impact on the stock.
EXPECT EARNINGS REPORTS TO BE NO BETTER THAN RECENTLY HEIGHTENED
EXPECTATIONS:
WE EXPECT 2Q ORDERS TO INCREASE 10-15% SEQUENTIALLY. Earnings season kicks
off in conjunction with SEMICON West during the second week of July with reports from
Novellus and ASML. We believe that industry-wide orders will increase about 10%-15%
sequentially during the second-quarter (we provide our individual company order estimates for the
companies in our coverage universe in the "Individual Earnings Expectations" section below). Our
checks indicate that order growth during the second quarter was driven primarily by large projects
at Toshiba/Sony, Samsung, TSMC, SMIC and Siltera.
STREET EXPECTATIONS HAVE BEEN HEIGHTENED AND NOW CALL FOR Q3 ORDER
GUIDANCE OF +5 TO +10% SEQUENTIALLY. We had previously expected orders to be
approximately flat in Q3 (i.e. plus or minus 5% sequentially). However, recent heightened Street
expectations now call for Q3 sequential order growth of +5% to +10%. While we are skeptical that
visibility has improved to this extent during the last days of the quarter especially given what we
believe to be deteriorating leading indicators for semi equipment and weaker than expected data
points on the margin further upstream in the chain (i.e. checks that indicate that capacity utilization
of testers is declining and utilization rates at the foundries are likely to decline in Q3 and Q4), this
clearly is now the Street forecast as the stocks have traded up in expectation of stronger than
expected order guidance. We believe that key customers to watch for Q3 orders include Intel,
Toshiba, Chartered, Infineon, Powerchip, and ProMos.
TAKE PROFITS ON RALLIES IN THE STOCKS. We believe that business has not likely picked
up enough to match the pace of heightened Street expectations for Q3 order growth (as we wrote in
our recent weekly, our checks could neither confirm nor deny the supposed pick-up in business but
as we noted above we are skeptical of such a significant uptick). We also continue to believe that
the industry is in the later stages of the fundamental upturn and investors should therefore not be
overweight the stocks. While many investors are seeking to play the stocks for a second-half rally,
we would highlight that under our pure cyclical "Rule of Two" framework, there must be a
meaningful pick-up in fundamentals coupled with the stocks trading at a 20% discount to fair value
(most stocks are now trading essentially in- line with fair value) for investors to potentially earn a
meaningful enough return to take the risk of being overweight cyclical stocks during the later
stages of the cycle. Heightened Q3 expectations that are likely more robust than business coupled
with our belief that the industry is in the later stages of the cycle lead us to recommend that
investors take profits on rallies as we head into SEMICON West and earnings season.
SEMICON WEST AND EARNINGS CALENDAR:
Date Event Comment:
7/12-7/16 SEMICON West (SW) Front-end trade show in San Fran
Back-end trade show in San Jose
7/12 NVLS earnings Call at 5:30am PDT Dial-in: 913-981-5508
7/12 AMAT meeting at SW 7:30am-9:30am PDT
7/12 NVLS meeting at SW 10:30am-12:00pm PDT
7/12 VECO seminar at SW 1:00pm-5:00pm PDT
7/12 MKSI meeting at SW 3:00pm-4:00pm PDT
7/13 BRKS meeting at SW 8:00am-9:30am PDT
7/13 ASMI meeting at SW 8:30am-10:00am PDT
7/13 KLAC meeting at SW 9:30am-12:00pm PDT
7/13 TEL meeting at SW 3:30pm-4:30pm PDT
7/13 AEIS meeting at SW 4:00pm-5:00pm PDT
7/14 ASML earnings
7/15 CMOS meeting at SW 8:00am-11:00am PDT
7/15 KLIC reception at SW 3:00pm-5:00pm PDT
7/16 A meeting at SW 7:30am-10:00am PDT
7/19 SEMI US book-to-bill 6:00pm EDT
7/20 MKSI earnings Call at 5:00pm EDT Dial-in: 800-218-0204
7/20 FORM earnings Call at 4:30pm EDT Dial-in: 800-361-0912
7/20 TER after 6:00pm Call on 7/21 at 10:00am EDT Dial-in: 800-309-5939
7/21 ATMI earnings Call at 11:00am EDT Dial-in: 800-289-0544
7/21 AEIS earnings Call at 5:00pm EDT Dial-in: 888-713-4717
7/21 LRCX earnings Call at 5:00pm EDT Dial-in: 303-262-2193
7/28 ACLS earnings Call at 5:00pm EDT Dial-in: 800-262-1292
7/29 BRKS earnings Call at 9:00am EDT Dial-in: 719-867-0660
7/29 KLAC earnings Call at 5:00pm EDT
8/17 AMAT earnings Call at 4:30pm EDT
Source: Company information, www.streetevents.com, Goldman Sachs Research.
INDIVIDUAL EARNINGS EXPECTATIONS:
NOVELLUS SYSTEMS (NVLS; IL/N) earnings expectations: Novellus will report June-quarter
earnings on July 12th before the market open. We model 2Q revenues of $335 million (up 27%
sequentially) and earnings per share of $0.27, versus the Street consensus earnings per share
estimate of $0.26. We also model 2Q net orders of $400 million (+15% sequentially) as the
company indicated during its mid-quarter update call that it could potentially report orders of up to
$400 million and given the supposed strong pick-up in business during the last few weeks of the
quarter the company should be able to reach that order level. The Street now expects Novellus to
guide orders up 5%-10% sequentially based on the expectation that the order outlook for Q3
improved in recent weeks (we are modeling Q3 orders of $420 million (+5% sequentially)). We
continue to question the Street's more bullish expectations, as we have found very little evidence of
a tangible significant uptick in business. We also expect the company to highlight its CMP
product, which may finally be positioned to begin to compete against Applied Materials in the
fast-growing CMP segment.
Recent developments: On April 19, Novellus named two new members to its board of directors.
The incoming members are Neil Bonke, former chairman and chief executive officer of
Electroglas, and Dr. Youssef El-Mansy, retired vice president and director of logic technology
development at Intel. On May 11, FSI International signed a cooperative agreement with Novellus
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. On May 27, Novellus hosted a previously scheduled mid-quarter update call during
which it left its Q2 order guidance essentially unchanged (the mid-point of the guidance range
increased to +11% sequentially from +10% sequentially), raised its revenue guidance to $325
million to $335 million from $305 million to $325 million, raised its shipment guidance to $360
million to $370 million from $340 million to $360 million, and raised its EPS guidance to $0.25 to
$0.27 from earlier guidance for EPS of $0.18 to $0.20. On June 2, Novellus announced the
acquisition of Peter Wolters AG. Peter Wolters' lapping and grinding technology will be merged
with Novellus' SpeedFam industrial business. The combined product lines will be marketed under
the Peter Wolters name. The acquisition is expected to close in the beginning of Q3 2004. No
financial details were provided. On June 21, Novellus introduced Xceda, a 300mm chemical
mechanical planarization (CMP) platform intended for use in 65-nm and smaller devices.
Company profile: Novellus Systems is a leading provider of chemical vapor deposition (CVD)
systems that deposit either conducting (metal) or insulating (dielectric) layers that form the circuit
pathways of a chip. We estimate that CVD makes up 65% of Novellus' total revenues, with the
remainder coming from the PVD business obtained in June 1997 as part of the $145 million cash
acquisition of Varian's 450-employee Thin Film Systems unit (8%), electroplating for dual
damascene copper interconnect (5%), and the photoresist strip business (gained from the
acquisition of GaSonics) (10%). Novellus acquired Speedfam-IPEC in December 2002, thus
adding CMP to its product portfolio. Founded in 1984, public in 1988 and headquartered in San
Jose, California, Novellus employs about 3,000 individuals (including temporary employees)
worldwide.
MKS INSTRUMENTS (MKSI; IL/N) earnings expectations: MKS Instruments is reporting
June-quarter earnings on July 20th after the market close. We model revenues of $150 million (up
13% sequentially) and earnings per share of $0.40, versus the Street consensus earnings per share
estimate of $0.39. Our checks nearing the end of the quarter with subcomponent suppliers
indicated that the business outlook remains relatively unchanged from the beginning of the quarter.
We would expect MKS to maintain a bullish tone given the high level of current business activity,
however, we do believe that shipment growth for MKS' OEM customers (i.e. AMAT et all) will
start to moderate over the coming quarters. One topic that we will be listening for on the call is
how much MKS emphasizes its non-semiconductor businesses, which we expect will be important
in mitigating the cyclicality of the semiconductor business during the next downturn.
Company profile: MKS Instruments is a leading developer, manufacturer and supplier of
instruments and components used to measure, control and analyze gases in semiconductor
manufacturing and similar industrial manufacturing processes. Products include Baratron pressure
measurement devices, Mass- Flo gas flow controllers, Orion process monitors and residual gas
analysis (RGA) systems, and the HPS family of vacuum gauges, vacuum valves and components.
In addition to supplying to the semiconductor market (70% of 2002 revenues), the products are
used in processes to manufacture a diverse range of products including flat panel displays, solar
cells, gas lasers, fiber optic cables, diamond thin films and coatings for food packaging. Founded
in 1961, public in March,1999 and headquartered in Andover, Massachusetts. MKS employs 2,384
worldwide.
FORMFACTOR (FORM; OP/N) earnings expectations. FormFactor is reporting June- quarter
earnings on July 20th after the market close. We model 2Q2004 revenues of $41 million (up 11%
sequentially) with earnings per share of $0.16, versus the Street consensus earnings per share
estimate of $0.15. We also estimate 1Q orders of $50 million, flat sequentially. We expect
FormFactor to report another solid quarter with some upside possible to our estimates. We believe
that strength in the company's business during the quarter was driven by the 512MB density
transition, the 0.11 micron linewidth shrink, and the 300mm technology transition in the DRAM
market. While many investors continue to highlight concerns around the timing of the DDRII
transition, we would note that management has suggested for several quarters that the DDRII
transition would not become a significant business driver for the company until late 2004/early
2005. Further, recall that customers need to order DDRII capable probe cards ahead of the actual
transition. We would therefore not expect the DDRII transition to have prevented the company
from hitting its estimates as some investors have suggested during the quarter.
Company profile: FormFactor is a supplier of advanced wafer probe cards based in Livermore,
California. The company's wafer probe cards test the electrical functionality of chips on a wafer
before they are singulated or cut into individual die. Formfactor supplies its advanced wafer probe
cards primarily to memory customers (with the majority of sales coming from DRAM makers) as
well as makers of logic chips. VLSI Research estimates that the wafer probe test market, which is
comprised of wafer probe test systems and wafer probe cards, will grow to $2.4 billion in 2004,
from a 2001 estimated market size of $1.4 billion. Incorporated in 1993, the company introduced
its first wafer probe card utilizing its MicroSpring interconnect technology in 1995, and began to
trade publicly in June 2003. FormFactor employs about 400 employees worldwide (including
temporary employees).
TERADYNE (TER; U/N) earnings expectations. Teradyne is reporting June- quarter earnings on
July 20th after the market close, with its earnings call being held the following morning. We
forecast 2Q revenues of $515 million (up 20% sequentially) with earnings per share of $0.37,
in-line with the Street consensus earnings per sh
are estimate. While Teradyne does not officially provide order guidance, we model June-quarter
gross orders of $580 million (up 5% sequentially), consistent with recently heightened Street
expectations. While we believe business activity remains high, we also note that our recent checks
suggest that capacity utilization of Teradyne's testers at its customer sites declined rather
meaningfully in May. While we have yet to see the June data, another month-over-month decline
in June would not portend well for the out-quarter order outlook. Further, our checks with some of
the packaging and test house customers at the end of the quarter indicated that a significant amount
of tester capacity will come online in H2'04 from orders made in early 2004. One of the packaging
and test house customers even commented that it expects tester pricing to decline in H2'04 due to
the incremental capacity coming online. We believe that recent weakness at Amkor underscores the
risk to declining orders to the packaging and test houses in H2'04. That said, we believe that the
outlook at the IDM customers is stronger with utilization rates higher and a significant drop-off in
H2'04 orders less likely. We believe the key for Teradyne's stock in H2'04 will be whether or not
the strength from IDMs can offset what looks to be potential weakness at the packaging and test
houses given the significant incremental capacity being brought on at those customers.
Recent developments: On April 27, Teradyne received Microchip Technology's 2003 Supplier of
the Year Award. Teradyne supplies Microchip's operations in Arizona and Thailand with J750 and
FLEX test systems for microcontroller and RF device test. On May 18, Teradyne announced that
T-Com, the fixed- line division of Deutsche Telekom, placed an order for Teradyne's LDU 100
(Loop Diagnostic Unit). On June 15, Teradyne's Connection Systems Division announced the
availability of its Design Guidelines for High Performance Circuits. The new HPC guidelines are
intended to provide design criteria that will promote reliability while helping to lower costs and
cycle times for printed circuit boards fabricated at Teradyne.
Company profile: Teradyne was the first merchant automatic test equipment (ATE) supplier to the
electronics industry. ATE equipment checks the electrical continuity, functionality and
performance of each chip before it is shipped. Teradyne's semi test equipment (53% of 2003
revenues) is further subdivided into two types: (1) Mixed-signal encompasses both "traditional"
linear (analog) device testers, as well as mixed signal (analog and digital) testers, which are
growing rapidly with telecom, cellular, LANs, and modems; and (2) Logic testers are used to verify
the functionality of microprocessors and microcontrollers. Teradyne also supplies circuit board test
equipment to commercial and military customers, telephone line test equipment, as well as
backplanes and connectors. Founded in 1960, headquartered in Boston, Massachusetts, Teradyne
employs 7,170 worldwide.
ATMI (ATMI; IL/N) earnings expectations: ATMI is reporting earnings on the morning of July
21st. We model June-quarter revenues of $60 million (+7% sequentially) with earnings per share of
$0.17, in-line with the Street consensus estimate. Recall that ATMI is divesting its Technology
business, which accounts for about 30% of sales and is driven by capital expenditures. During the
quarter ATMI announced that it has divested three of its Technology segment businesses. The
company has indicated that by the end of 2004 it will have divested all six of its Technology
segment businesses and it has now divested four in total, so the company appears to be ahead of its
divestiture plan. We believe that ATMI's business tracked according to plan during the quarter, and
the outlook for H2'04 is good although perhaps not as robust as the company had expected it would
be earlier in the year. While the outlook for wafer-starts in the US remains firm, our checks
suggest that there may be some incremental concern around an inventory-driven correction in
Taiwan during H2'04. We believe that it is premature to make this call now, but it is something to
watch closely as we move through the third quarter.
Recent developments: On May 6, ATMI sold its life safety sensors business to City Technology,
part of the First Technologies Group of companies, for $11 million. On May 17, ATMI announced
that Cynthia Shereda has joined the company as Vice-President and Chief Legal Officer. Most
recently, Shereda was with General Electric. On May 24, ATMI announced that ATMI Treatment
Systems, its environmental abatement equipment business, signed an exclusive agreement with
Metron Technology to handle product sales, service, and support throughout Europe. On June 29,
ATMI entered into a definitive agreement to sell its specialty silicon epitaxial services business
located in Mesa, Arizona, to International Rectifier Corporation, subject to customary closing
conditions. Specific terms of the cash deal were not disclosed. On July 1, ATMI sold its semi
fabrication plant parts cleaning services business (called "Fab Services") to Materials Support
Resources. ATMI expects to recognize a gain slightly above book value.
Company profile: ATMI provides semiconductor materials and delivery technologies products
targeting fast-growing areas such as ion implant, CVD, DUV and FPD photoresist. Products
include chemical delivery systems, source reagents, Safe Delivery Source (SDS) gas delivery
systems, and NOWPack high-purity delivery systems. It is rapidly emerging as a "one-stop shop"
for semiconductor production materials management, with leading market share in six of nine
served markets. ATMI's customers are essentially all major semiconductor producers; 6% of
revenues come from Intel, and the top five customers are 15% of revenues. Founded in 1986 as
Advanced Technology Materials Incorporated, public in 1993 and headquartered in Danbury,
Connecticut. |
