GS US SEMI EQUIP WEEKLY: SEMICON AND EARNINGS DOMINATE BUSY WEEK AHEAD
Summary: (1) Expect managements to remain bullish during SEMICON West (SW) but
expect little tangible evidence of cycle sustainability or acknowledgement of recent
weakness upstream in the tech chain. We do not believe SW newsflow will sustain the
recent rally, (2) Novellus reporting pre-open Monday, expect a solid Q2 and guidance for
Q3 seq. order growth of 5-10%, (3) KLA likely to indicate that Q2 orders came in at the
high end of the guidance range at SW, (4) Significant amount spent on new fab
construction during Q2 supports the concept that the industry is adding significant
capacity in 2004, (5) Convertible debt - vanilla or co-co? (6) Semitool negative
preannouncement due to delays in customer sign-offs on new tools; we would not draw
any industry implications as the news is likely company-specific, but this is an issue we
will watch closely as delays in sign-offs could indicate that the upturn is entering its final
stages, and (7) News, events and price performance. We maintain a Neutral coverage
view.
EXPECT SEMI EQUIPMENT MANAGEMENTS TO REMAIN VERY BULLISH
DURING MEETINGS AT SEMICON WEST BUT WE EXPECT LITTLE TANGIBLE
EVIDENCE OF CYCLE SUSTAINABLILTY OR ACKNOWLEDGEMENT OF
RECENT WEAKNESS UPSTREAM IN THE TECHNOLOGY CHAIN. SEMICON
West (an industry trade show hosted by SEMI, an industry trade association) kicks off on
Monday with the front-end manufacturing portion in San Francisco, CA from Monday
through Wednesday and the back-end manufacturing portion in San Jose, CA from
Wednesday through Friday (we provide a full Semicon West and earnings calendar
below). While we generally expect the equipment companies to maintain their very
bullish tones during meetings at SEMICON West and to reiterate that the industry is in
the early stages of a fundamental upturn, we do not believe that managements will be able
to offer any substantive evidence to support that contention. We believe that during
Semicon and earnings, managements will generally guide to slight sequential order
growth without acknowledging recent softening upstream in the technology chain which
could be a precursor to weaker semi equipment fundamentals in the out-quarters.
We do not believe that such commentary should be enough to sustain the rally that the
stocks had coming into the show as semi equipment stocks outperformed a weak tech
tape two out of the last three weeks as momentum investors bought the stocks for a trade
into the show expecting positive newsflow. We continue to believe that this momentum
trade is crowded and investors are not being compensated for the risk of owning stocks
this late into the fundamental cycle. For those that continue to argue that the risk/reward
on the semi equipment stocks is attractive, we would point out the stock price action of
Semitool post its negative preannouncement last week. The stock was down about 25%
last week after guiding for a revenue and earnings shortfall. We discuss implications from
Semitool's miss below (we think implications are likely limited although worth
contemplating) but investors who believe that the beginning of the downturn is already
priced into the stocks should take note of SMTL last week.
Regarding major new product introductions at the Semicon West show, we 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.
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 Call at 7:30am PDT Dial-in: 706-679-0473
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
Other events:
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 earnings 6:00pm Call 7/21 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.
EXPECT NOVELLUS TO REPORT A SOLID Q2 AND TO GUIDE FOR Q3 ORDER
GROWTH OF 5%. Novellus is reporting 2Q earnings on Monday 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 that the Street believes that
business picked-up 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 limited evidence of a tangible significant uptick in business.
WE BELIEVE KLA-TENCOR WILL INDICATE THAT Q2 ORDERS CAME IN AT THE HIGH
END OF THE GUIDANCE RANGE DURING ITS ANALYST MEETING AT SEMICON
WEST. We expect KLA to provide an update to its Q2 order guidance during its analyst meeting
on Tuesday at SEMICON West, as has been the company's practice over the last few years. Recall
that KLA had originally guided for Q2 order growth of down 15% sequentially to up 10%
sequentially, indicating that where orders came in for the quarter depended upon the timing of a
few large customer projects (we believe those projects were from Samsung and TSMC). We
believe Q2 orders likely came in somewhere between up 5% and 10% sequentially, at the high end
of the range of expectations, as our checks indicate that both Samsung and TSMC placed
significant orders during the quarter. We would expect KLA to guide for a 5% sequential increase
in Q3 orders and we believe that the September-quarter may be the last quarter in which the
company provides guidance for orders.
THE SIGNIFICANT AMOUNT SPENT ON NEW FAB CONSTRUCTION DURING Q2
SUPPORTS THE CONCEPT THAT THE INDUSTRY IS INDEED ADDING SIGNIFICANT
CAPACITY. Last week, Strategic Marketing Associates (SMA) reported data indicating that the
dollar value and number of new fabs constructed globally during the second- quarter set an industry
record for quarterly new fab spending, which we believe supports our contention that the industry
is set to add a significant amount of capacity in 2004. The SMA indicated that $18 billion was
spent on the construction of new fabs during the second quarter with Japan (Elpida, Fujitsu,
Matsushita, NEC, etc.) leading the way in dollar size, followed by Korea (three fabs at Samsung),
the US (two fabs at Intel), Europe (two fabs for Infineon), China, and Taiwan (ProMos). The total
value of new fabs that have been constructed YTD is estimated by the SMA to be more than $25
billion and since Q4'03 the SMA estimates that the industry has spent $35 billion on new fabs.
During the 1999-2000 cycle, the SMA estimates that the industry spent $58 billion on new fabs.
While the semiconductor industry has not yet spent as much on new fab capacity as it did during
the 2000 cycle, if the industry were to spend a similar amount on fab capacity in Q3 and Q4 as it
spent in Q2, by the end of 2004 there would be over $70 billion spent on new fabs this cycle -
significantly above the 2000 level. We believe the data underscore the notion that the
semiconductor industry is indeed adding significant capacity. We believe these shells will begin to
be filled by the approximately 70% projected increase in semi equipment shipments in 2004 (we
offered detail on our analysis of equipment shipments in last week's piece - please contact us if you
would like the analysis). Recall that semi equipment shipments increased 40% sequentially in Q1
and we believe those shipments will create a substantial amount of incremental manufacturing
capacity in H2'04 as they are installed and begin to yield. We believe that it is important for
investors to not lose sight of the industry supply situation as we enter the seasonally stronger
second-half, and we continue to emphasize that we believe that the supply that is coming online in
H2'04 will likely outpace the pick-up in seasonal demand and prevent the tightness in the supply
chain that many momentum investors expect to drive substantial sequential increases in semi
equipment orders in H2'04.
CONVERTIBLE DEBT - VANILLA OR CO-CO? ACCORDING TO FASB, THERE MAY NOT
BE MUCH OF A DIFFERENCE...In the world of convertible debt there are at least 2 types of
convertible instruments: straight convertible securities (commonly referred to as "vanilla"
convertibles) and contingently convertible securities (commonly referred to as "co-co's"). Both are
debt issues that can be converted to equity but there is a major difference concerning the treatment
of the equity sharecount for vanilla converts vs. co-co converts. With straight vanilla convertibles,
the shares ultimately available for conversion are immediately included in the fully diluted
sharecount upon issuance of the debt. With co-co's, the associated shares are not included in the
fully diluted sharecount at issuance; rather there is a contingency feature that must be met before
the co-co related shares are included. While this contingency may take different forms, a common
contingency is that the stock must reach a market trigger price (which generally exceeds the
conversion strike price) before the shares associated with the convertible offering are included in
the fully diluted sharecount.
The FASB recently announced plans to propose a change in the accounting for co-co's that will
likely increase sharecount dilution for many companies that have issued these securities. Under
FASB's proposed changes, the shares associated with the co-co converts will be reflected in the
fully diluted share count, regardless of the level of the company's share price, as long as the issue
is dilutive.
The major implication of this proposal would be that share dilution would lower EPS. Under the
rules of the proposal, prior year's earnings would also need to be restated. For investors who use
P/E valuations, this could be especially critical. If P/E's were to remain constant, a decreased EPS
from share count dilution could have a deflating effect on share price. We stress that this proposal
is an accounting change only and would not affect the underlying cash flows of the affected
companies. Although it is too early to tell whether the accounting change will ultimately occur, we
feel that it is important for investors to understand the potential impact of this change. A formal
proposal will likely be issued in the next few weeks and a final rule could be issued before the end
of the year and implemented shortly thereafter.
Regarding the companies in our coverage universe, our initial checks indicate that of the
companies in our space that have outstanding convertible debt offerings, none of them appear to
have any contingent conversion features attached to the convertible debt. We are still gathering
information and if we discover that any of our companies are directly affected by this proposal we
will return with a more detailed analysis of the issues, including a break-down of the various
accounting treatments for these instruments.
SEMITOOL NEGATIVE PREANNOUNCEMENT DUE TO DELAYS IN CUSTOMER
SIGN-OFFS ON NEW TOOLS; WE WOULD NOT DRAW ANY DEFINITIVE
CONCLUSIONS AS THE PREANNOUNCEMENT IS LIKELY COMPANY-SPECIFIC, BUT
THIS IS AN ISSUE WE WILL WATCH CLOSELY AS DELAYS IN SIGN-OFFS COULD
INDICATE THAT THE UPTURN IS ENTERING ITS FINAL STAGES. Last week Semitool, a
supplier of wafer surface preparation and electrochemical deposition (ECD) tools, negatively
preannounced its June-quarter results. The company indicated that lower than e
xpected Q2 sales ($26 million vs. original guidance of $33 to $36 million) were driven by delays in
final sign-offs on four of the company's new tools. While the negative preannouncement is likely
company-specific (in relation to new products), we believe the announcement could potentially
have more significant ramifications, as in previous cycles customers not accepting tools as quickly
as originally expected has typically been a sign of the industry approaching the later stages of the
upturn. While we would not draw any definitive conclusions from the negative preannouncement,
we would note that this is an issue we will be watching closely as we move through the next
several quarters.
News, Events and Price Performance
Last week
Tuesday 6 July (1) Mattson Technology announced that its 300mm RTP tool was selected by a
logic manufacturer in northern Japan. (2) Varian Semiconductor received orders for its single wafer
4 Goldman Sachs Global Investment Research
July 11, 2004 Analyst Comment
VIISta 80HP high current ion implanter from a North American semiconductor manufacturer. (3)
International Sematech announced the formation of the immersion Technology Center (iTC), an
R&D consortium to develop and promote 193-nm immersion lithography.
Wednesday 7 July (1) Semitool negatively preannounced its fiscal Q3 results indicating that final
sign-offs on four of the company's new tools had been delayed. Semitool now anticipates that
revenues will be approximately $26 million, down from the company's previous forecast of $33
million to $36 million. Earnings per share for the quarter are expected to range from a loss of
between $0.05 and $0.06 per share, compared to the previous forecast of earnings between $0.02
and $0.05 per share. (2) Axcelis Technologies was awarded a patent from the United States Patent
and Trademark Office for its Ultra high current, low energy ion implanter. The new patent
completes Axcelis' intellectual property portfolio for the Ultra platform. (3) Advanced Energy
Industries will debut two products during SEMICON West, the Ovation very-high frequency power
delivery system and the Litmas RPS Remote plasma source for advanced thin-film processes. (4)
MKS Instruments introduced TOOLweb, an integrated hardware and software solution for
enabling Advanced Process Control and e-diagnostics.
Thursday 8 July (1) Applied Materials introduced the Applied Producer HARP (high aspect ratio
process) system, a CVD technology for 65nm and below devices. (2) Asyst Technologies launched
the Asyst EIB (Equipment Information Bridge), a software technology that provides real-time
access to active streams of distributed equipment information. (3) Tegal Corporation announced
the addition of Edward Chan to the position of President, Tegal Asia-Pacific, and Birger Gneuss to
the position of Vice President & General Manager, Tegal Europe. Chan has held positions at
Mattson and Applied Materials and Gneuss has held positions at Lam, Mattson, and Tegal. (4)
ADE Corporation announced the release of FabVision, a yield and quality data management system
for semiconductor silicon wafer manufacturers. (5) Axcelis Technologies introduced the second
generation of its Ultra ion implantation family, an upgradeable suite of 200mm and 300mm high
current, low energy implant systems.
Friday 9 July (1) ATMI announced that several chip manufacturers in the US and Asia have begun
qualifying "SDS(R)3," the 3rd generation of ATMI's SDS products. Additionally, ATMI
announced plans for an investment in its first high volume production facility for SDS3
manufacturing in the second half of 2004 to support the production ramp. (2) Teradyne announced
that King Yuan Electronics purchased multiple FLEX test systems for multi-site wafer probing.
This week's calendar:
Please see first section of the weekly for more a detailed SEMICON West and earnings calendar.
Monday 12 July: (1) SEMICON West trade show (front-end manufacturing portion) in San
Francisco, CA. (2) Novellus Systems (NVLS-$31: IL/N) reporting earnings. GS $0.27; Street
$0.26.
Tuesday 13 July: (1) SEMICON West trade show (front-end manufacturing portion) in San
Francisco, CA.
Wednesday 14 July: (1) SEMICON West trade show (front-end manufacturing portion) in San
Francisco, CA. Back-end manufacturing portion begins in San Jose, CA. (2) ASM Lithography
(ASML-$17; Gehl) reporting earnings.
Thursday 15 July: (1) SEMICON West trade show (back-end manufacturing portion) in San Jose,
CA.
Friday 16 July: (1) SEMICON West trade show (back-end manufacturing portion) in San Jose, CA.
GS Universe Price Performance 7/9/04 Price performance
Ticker Company Name Rtg Close Week MTD QTD YTD Y-Y
Semiconductor Capital Equipment
AEIS Advanced Energy IL/N 14 -7% -11% -11% -46% -21%
AMAT Applied Materials IL/N 19 1% -5% -5% -17% 6%
ATMI ATMI Inc. IL/N 24 -5% -11% -11% 5% -11%
ACLS Axcelis Technologies IL/N 11 -3% -11% -11% 8% 52%
BRKS Brooks Automation IL/N 18 -3% -11% -11% -24% 16%
CMOS Credence Systems U/N 12 -13% -14% -14% -9% 25%
ENTG Entegris IL/N 10 -4% -12% -12% -21% -27%
FORM FormFactor OP/N 20 0% -9% -9% 3% 8%
KLAC KLA-Tencor OP/N 46 -1% -7% -7% -21% -6%
LRCX Lam Research IL/N 25 2% -7% -7% -23% 17%
MKSI MKS Instruments IL/N 20 -5% -12% -12% -31% -1%
NVLS Novellus Systems IL/N 31 4% -1% -1% -26% -19%
TER Teradyne Inc. U/N 21 -1% -9% -9% -18% 7%
Mean -- -- -3% -9% -9% -17% 4%
Median -- -- -3% -11% -11% -21% 6%
Source: Factset.
I, Jim Covello, hereby certify that all of the views expressed in this report accurately reflect my
personal views about the subject company or compani |
