GS US Semi Equipment Weekly - Lack of
fundamental visibility continues
Summary: (1) Q4 orders appear to be in-line with guidance but checks reveal limited
visibility into Q1'05, with orders highly dependent on DRAM, (2) Forward looking
indicators in semi equipment continue to deteriorate, (3) DRAM prices continue to
decline; we expect DRAM orders to be the next likely area of weakness for the semi
equipment companies, (4) Intel analyst meeting last week provided little incremental color
on the company's likely capital spending plan in 2005, but one interesting tidbit of data is
that the company's new dual core chips may not occupy as much real estate on a wafer as
originally expected, (5) Entegris (reporting Thursday night) is likely to highlight a less
robust business environment as wafer starts and capital spending continue to be weak. (6)
We expect the November Book-to- Bill (also Thursday night) to remain flat m-o-m at 0.96
on a 5% m-o-m decline in orders and 5% month-over- month decline in shipments, and (7)
News, events, and price performance.
Q4 ORDERS APPEAR TO BE IN-LINE WITH GUIDANCE BUT CHECKS REVEAL
LIMITED VISIBILITY INTO Q1'05 WITH ORDERS HIGHLY DEPENDENT ON
DRAM. Our global checks last week with several semi equipment companies and
subcomponent suppliers seem to indicate that Q4 orders are shaping up in-line with
original expectations, as the small amount of cancellations/pushouts are being offset by a
similarly small amount of pull-ins from DRAM customers. The contacts with which we
spoke also indicated that there is currently no visibility into Q1'05. Those companies that
have always tended to be very bullish are indicating that Q1'05 will likely be flat from Q4
levels while those companies that have historically tended to be more bearish are
indicating that Q1'05 will likely be down about 10% sequentially from Q4 levels. Our
take is that Q1'05 (as we highlight in greater detail below) is going to be very dependent
on orders from the DRAM customers. Given our belief that DRAM prices will continue
to decline meaningfully and drive less aggressive spending in the DRAM segment, we
believe that orders will be down sequentially in Q1. Furthermore, as we highlight below,
we believe that the forward looking indicators for the semi equipment industry continue
to decline, so we would expect business to continue to deteriorate in turn in the coming
months.
FORWARD LOOKING INDICATORS IN SEMI EQUIPMENT CONTINUE TO
DETERIORATE. We believe that the Street tends to get very wrapped up in noise and
near-term news events, particularly toward year-end, but we would highlight that the
forward looking indicators for the semi equipment industry continue to deteriorate, which
should help investors navigate the sea of choppy newsflow. As we highlighted in our note
out following our bus tour in Boston last Wednesday, forward looking indicators like the
back-end fundamental environment, light pulse data, and DRAM pricing continue to
deteriorate. Regarding deteriorating back-end fundamentals, our checks in Taiwan last
week indicated that utilization rates on back-end testers at the packaging and test houses
declined again in the fourth quarter which is consistent with recent industry commentary
that wirebonder utilization rates have also ticked down. We are believers and the data
certainly support the notion that the back-end is a good leading indicator for the
front-end, so we believe that continued deterioration in back-end fundamentals is an
important gauge of where business conditions for the front-end are headed. Our checks last week
also indicated that light pulse data, which are tracked by Cymer and considered a good proxy for
tool utilization rates, declined again in the month of November after falling off significantly in the
month of October. Our checks are supported by the fact that Cymer lowered its Q4 guidance last
week, citing a softening in business conditions in recent weeks. We provide greater detail below,
but we also note that DRAM prices have continued to decline substantially with DRAM makers,
in our opinion, likely to curb their appetite for aggressive capacity additions in 2005.
DRAM PRICES CONTINUE TO DECLINE; WE EXPECT DRAM ORDERS TO BE THE
NEXT LIKELY AREA OF WEAKNESS FOR THE SEMI EQUIPMENT COMPANIES. DRAM
spot prices have declined at a faster than expected rate, falling more than 20% off of their recent
peaks (achieved in October) to approximately $3.80. DRAM contract prices for the first half of
December declined by 3.5% to about $4.40 after declining 1.9% in the second-half of November.
Given the gap between current spot prices and contract prices, we believe that contract prices will
continue to be under pressure. Further, we would expect DRAM prices in general to remain under
pressure in 2005 as the industry continues to add significant supply that will very likely outpace
demand.
DRAM orders remained a substantial part of semi equipment order books in CQ3 and are likely to
remain a significant part of CQ4 order books as well. For example, DRAM orders represented 23%
of Applied's CQ3 systems orders and management indicated on its quarterly earnings call that
DRAM would remain strong in CQ4. Memory orders (including flash) accounted for 57% of Lam
Research's CQ3 orders. KLA also indicated that DRAM would be 50% of business in CQ4. We
continue to believe that excessive DRAM orders in H2'04 will lead to excess DRAM capacity in
H1'05 and, in turn, lower orders to the equipment companies from the DRAM makers.
We believe that declining DRAM prices will likely drive a slowdown in new tool orders from the
DRAM customers, thus making the now significant DRAM portion of the semi equipment
companies' order books likely to be the next area of weakness. Those DRAM makers that rely on
strong ASPs to fund capital spending will likely be forced to cut back on their capital investments.
While we have not yet seen any official push-outs or cancellations of projects from DRAM
customers, we have begun to see what we believe to be the first signs of customers seeking to
spend less aggressively on additional capacity. As we highlighted in our weekly out last week,
Infineon has recently indicated that it is likely to scale back its initial investment in its new 300mm
facility in Richmond, Virginia. We expect to hear more news of DRAM customers beginning to
slowdown their investments in new capacity over the coming months as DRAM prices are likely to
continue to erode.
INTEL ANALYST MEETING LAST WEEK PROVIDED LITTLE INCREMENTAL COLOR
ON THE COMPANY'S LIKELY CAPITAL SPENDING PLAN IN 2005, BUT ONE
INTERESTING TIDBIT OF DATA IS THAT THE COMPANY'S NEW CHIPS MAY NOT
OCCUPY AS MUCH REAL ESTATE ON A WAFER AS ORIGINALLY EXPECTED. We
attended the Intel analyst meeting in New York City last week and while we did not pick up any
incremental data around the company's likely capital spending plan in 2005 at the meeting, we did
garner some insight on the die sizes of the company's new chips. Intel's new 90-nm dual core
processor is smaller than the original 90-nm dual core processor and the company's new 65-nm
dual core processor is only slightly larger than the 90- nm single core processor. The bull case on
Intel's capex has been that the company's larger dual core chips are likely to soak up more real
estate on the wafer, thus driving up capital spending as the company would theoretically need to
cycle more wafers through its fabs and thus purchase more equipment in order to achieve its
intended chip unit output. While we don't want to make a mountain out of a molehill and we don't
think that a lot has changed regarding the impact of the company's new die sizes on its capacity
needs, we believe that the smaller than expected die sizes imply that the bull argument has been at
least somewhat overblown.
To that end, we believe that Intel has sent mixed signals to the Street regarding its 2005 capital
spending plans. During the company's recent mid- quarter update, the CFO indicated that capex
would be significant in 2005 thus implying that spending would likely increase meaningfully
year-over- year. We learned this week, however, that the company is commenting that there will be
a fair amount of tool re-use on 65-nm, which would imply that the company wouldn't need to
spend as much capital as originally suggested. We continue to believe that the mid-point of Intel's
capex range will be up decently in 2005 (we are modeling 2005 capex of $4.4 billion, up
approximately 16% from 2004 capex of $3.8 billion), as Intel has typically been a counter cyclical
capital spender and the company is coming off of a historic low in terms of capex as a percentage
of revenues (11% in 2004 vs. an average over the past ten years of 16%). Our global bottom-up
capex model for the industry remains at about -10% y- o-y.
ENTEGRIS IS LIKELY TO HIGHLIGHT A LESS ROBUST BUSINESS ENVIRONMENT AS
WAFER STARTS AND CAPITAL SPENDING CONTINUE
TO BE WEAK. Entegris is reporting CQ4 earnings Thursday before the market open. We are
modeling CQ4 revenues of $85 million (down 15% sequentially) with earnings per share of $0.06
vs. the Street consensus estimate of $0.07. We expect the company to highlight continued
weakness in overall business conditions, driven by declining wafer starts and continued decreases
in capital spending.
Recall that approximately 60% of Entegris' business is tied to wafer starts, which we believe will
continue to be weak over the next few quarters as the industry works through the excess IC unit
inventory that it built in the supply chain during the recent upturn. ATMI, which has a wafer start
driven business model, guided for a 7% to 10% decline in wafer starts in its Q4 so we would
expect Entegris to see similar weakness. We would also expect the company to guide cautiously for
CQ1'05 as we would expect wafer starts to continue to decline as the industry works through
inventories and particularly given that CQ1 is a seasonally slower quarter for wafer starts.
The remaining 40% of Entegris' business is driven by capital spending, with several product lines
closely correlated with semi equipment tool shipments. To that end, our trendline work continues to
demonstrate that front end semi equipment shipments remain well above their normalized levels,
which means that the industry has built excess manufacturing capacity. We believe that shipments
must decline below the trendline for another few quarters to correct for that excess capacity, which
will clearly have a negative impact on Entegris' business.
While we believe that ENTG might represent a more defensive small-cap play for investors who
must maintain some exposure to the group as the downturn progresses, we would wait for more
wafer start reductions before being more aggressive with the stock.
WE EXPECT THE NOVEMBER BOOK-TO-BILL TO REMAIN FLAT M-O-M AT 0.96 ON A
5% M- O-M DECLINE IN ORDERS AND 5% MONTH-OVER-MONTH DECLINE IN
SHIPMENTS. Semiconductor Equipment and Materials International (SEMI) is reporting the
November US equipment manufacturers' book-to-bill data on Thursday night. We are expecting
the book-to-bill ratio to remain flat month-over-month in November at 0.96 on a 5% m-o-m decline
in orders and a 5% m-o-m decline in shipments. We are modeling three-month rolling average
overall orders of $1,320 million (-5% month-over- month) and overall shipments of $1,375 million
(-5% month-over-month). We estimate front-end shipments of $1,175 million (-5%
month-over-month) and front- end orders of $1,190 million (-5% month-over-month), yielding an
estimated front-end book-to-bill ratio of 1.01. We estimate back-end shipments of $200 million
(-4% month-over-month) and back-end orders of $130 million (-6% month- over-month), yielding a
back- end book-to-bill ratio of 0.65. We continue to emphasize that the book-to- bill is an
unaudited and backward looking metric that should not be a significant trading event for the stocks.
News, Events and Price Performance
Last week
Monday 6 December (1) Entegris announced that one of its Japanese competitors in the wafer
carrier market has agreed to a letter-of-intent to license a portion of Entegris' patent portfolio for its
wafer carrier and shipper products. The agreement involves licensing Entegris' 300mm wafer
carrier technology typically utilized in FOUP and FOSB applications.
Tuesday 7 December (1) Brooks Software announced the availability of its manufacturing RFID
solution for aerospace and defense, automotive, medical devices and other discrete manufacturing
industries. (2) Akrion sold a single wafer cleaning system to a customer in Asia. The tool will be
used for back-end- of-line post etch/ash cleaning for 130nm and 90nm device technology.
Wednesday 8 December (1) Teradyne announced that King Yuan Electronics (a Taiwanese test
house) has purchased several Handler Interface Board Changers for use on their installed base of
FLEX test systems. (2) Cymer revised its Q4 2004 revenue and gross margin guidance. Q4
revenues are expected to decline 12% to 13% sequentially vs. previous guidance for a 10% decline.
Gross margins are expected to be in the range of 34% to 36% vs. previous guidance of 37% to
39%. (3) Robotic Vision Systems has been selected by Battelle Memorial Institute as a participant
in Battelle's recently awarded GSA LOGWORLD contract. As a subcontractor, RVSI will provide
Unique Identification support to U.S. Department of Defense agencies and services. (4) Brooks
Software has joined EPCglobal US in an effort to provide support for the adoption of the
EPCglobal Network and participate in the EPCglobal community's creation of industry standards
for electronic product code technology.
Thursday 9 December (1) LTX Corporation announced that RF Micro Devices is using LTX's
Fusion CX test system for volume production testing of numerous RFMD semiconductor solutions.
(2) Asyst Technologies announced a worldwide workforce reduction associated with the
restructuring of its ATI operations. The company expects to incur one-time cash severance and
termination charges of approximately $2 million in its FQ3 2004 quarter as a result of the
restructuring effort. The workforce reduction is expected to provide annual expense savings of
approximately $8 - $9 million.
This week's calendar:
Monday 13 December: (1) Agilent Technologies Analyst Day in New York, NY.
Thursday 16 December: (1) Entegris (ENTG-$9.80; IL/C) reporting. GS $0.06; Street $0.07. (2)
(1) Semi Equipment and Materials International (SEMI) US Equipment manufacturer's
book-to-bill. GS estimate 0.96.
GS Universe Price Performance 12/10/04 Price performance Ticker Company Name Rtg Close
Week MTD QTD YTD Y-Y Semiconductor Capital Equipment AEIS Advanced Energy Industries
U/C 8 -8% -7% -14% -69% -66% AMAT Applied Materials U/C 17 -5% 2% 3% - 24% -21%
ATMI ATMI Inc. IL/C 24 -4% 3% 16% 2% 17% ACLS Axcelis Technologies IL/C 8 -3% 6% -6%
-25% -18% BRKS Brooks Automation IL/C 17 -3% 14% 23% -27% -11% CMOS Credence
Systems U/C 9 -7% 17% 24% -32% -22% ENTG Entegris IL/C 10 -6% 0% 17% -24% -16%
FORM FormFactor OP/C 26 -10% 7% 33% 30% 31% KLAC KLA-Tencor OP/C 46 -6% 2% 11%
-21% -14% LRCX Lam Research IL/C 28 -4% 8% 28% -13% -6% MKSI MKS Instruments IL/C
17 -7% 1% 12% -41% -28% NVLS Novellus Systems IL/C 28 -5% 3% 4% -34% -30% TER
Teradyne Inc. U/C 17 -10% -2% 24% -35% -27% Mean -- -- -6% 4% 14% -24% -16% Median --
-- -6% 3% 16% -25% -18% 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 companies a |
