GS US Semi and SPE weekly ? AMD and
Supercomm takeaways and foundry
datapoints
1) AMD?s analyst meeting was a deep dive on the company?s technology and
manufacturing strategy. No discussion of near-term business conditions, 2) Supercomm
trade show focused on numerous growth drivers in comms space but visibility remains
limited on timing, 3) Our checks suggest that leading edge capacity utilization at foundries
is not as tight as many believe and it is mainly the trailing edge .25 and .35 micron
capacity that is driving the significant increase in capacity utilization at the foundries. We
believe this means it?s less likely that foundries will order significant new capacity in
H2?05, 4) Clarifying confusion around the sale of TER?s PCB business last week, 5)
Front-end semi equipment shipments remain above trendline suggesting that shipments
will decline in H2?05 and that Street estimates are too high.
AMD ANALYST MEETING FOCUSED ON THE COMPANY'S TECHNOLOGY,
PRODUCT, AND MANUFACTURING STRATEGIES. We attended AMD's analyst
meeting in New York City on Friday. The analyst meeting was unique from the company's
traditional analyst meeting in that it was focused on AMD's technology, specifically in the
context of its product and manufacturing strategies. In regards to the current business
environment, the company didn't discuss the near-term environment or offer incremental
information on the proposed IPO of its Spansion flash memory business as some on the
Street had expected. Management did, however, highlight that it is sharpening its focus on
the core microprocessor (CPU) business with the spin-out of the Spansion unit. To that
end, a few common themes emerged regarding the company's technology and product
strategy in the microprocessor business that we will highlight below, including
dual/multi-core chips and the x86 architecture.
In regards to dual core, recall that dual core processors are intended to increase CPU
performance by allowing computers to simultaneously run multiple applications (one
application per core) with a minimal increase in power consumption. In general, the
company underscored that its chips were designed from the ground up to optimize
multiple processor cores as opposed to Intel's chips, which AMD management suggested
were not originally designed to optimize for multiple cores in a single CPU. AMD
management noted that its chips were designed based on a 64-bit and 32-bit "direct
connect" architecture, whereby there is direct access between the CPU and the memory,
the CPU and the I/O controller, and from one CPU to another CPU. AMD believes that
this architecture gives them an edge over Intel's front side bus design because of potential
bottlenecks.
The server market continues to be a strong focus for AMD with its dual core Opteron
server chip (introduced in April) continuing to gain traction. Management indicated that
the number of customer platforms utilizing the Opteron chip has grown to 25 and the
company recently added three new partners, Supermicro, Egenera, and NEC. On the
mobile side, the company highlighted that its Turion 64 dual-core CPU (introduced in
March) for the mobile computing segment is gaining traction with 40+ design-ins and 15+
models shipping to customers globally today. Management highlighted that customers
such as Acer and HP have introduced notebooks based on the Turion processor. While
AMD is primarily focused today in notebooks and servers, and has yet to introduce its
Athlon 64 X2 dual core chip for the desktop segment, the company did indicate that it believes that
its lowest desktop dual core chip outperforms Intel's highest dual-core model.
Regarding the x86 architecture instruction set, the company believes that it can be applied across
various embedded applications in products such as cell phones, wireless handheld devices, routers,
high-end servers, workstations, portable game consoles, etc. Management believes that the use of
the x86 architecture in different applications expands the company's addressable markets. AMD
stated that the embedded CPU market is estimated at $4.8 billion in 2005, of which communications
is expected to account for about $2.2 billion, data processing about $795 million,
military/automotive about $650 million, industrial about $650 million, and consumer $500 million.
AMD is addressing about $1.7 billion of this total embedded market in 2005.
On the issue of Intel's focus on a platform strategy, AMD commented that it views Intel's focus on
platforms as a double edged sword. On one hand, AMD believes that it allows the industry to cease
focusing solely on speed and disconnected technology and allows the industry to be more focused
on addressing comprehensive customer needs. On the other hand, management believes that the
platform approach that Intel is taking may be one way in which Intel is trying to shut down open
standards, while AMD believes that open standards drive innovation. AMD is also focused on
offering customers best of breed technologies by selecting the best individual components for the
final product.
The company dedicated a significant portion of time to its manufacturing strategy during the analyst
meeting. Management highlighted its Automated Precision Manufacturing (APM) model, which is
intended to help the company rapidly transition to manufacturing new products, implement
technology transitions more quickly, and achieve mature yields quickly. APM consists of over 400
patented or patent-pending AMD technologies. The model is based on automated and synchronized
decision making, and networked and integrated tools throughout the fab.
Regarding the build-out of the company's 300mm fab, Fab 36, in Dresden, Germany, management
indicated that it ran first test wafer starts at the fab in March and the fab is on track for volume
production in 2006. Fab 36 is intended to run 65-nm chips but will initially have some 90-nm
capacity that is intended to be easily converted to 65-nm capacity. AMD aims to be fully
transitioned to 65-nm at Fab 36 by mid-2007. We understand from our checks that all of the
equipment needed for production scheduled out of Fab 36 has already been ordered and that
management believes it is getting more attractive terms from the equipment suppliers relative to
previous cycles both because AMD is a more prominent player in the semi industry and because of
the consolidation of the semi customer base which, in general, gives the larger capital spenders
more power over the equipment suppliers today relative to previous cycles. Fab 30 is the company's
200mm fab located adjacent to Fab 36 in Dresden. Fab 30 has been completely converted to 90-nm
capacity and the company is shipping dual core product from the fab today. Management reiterated
its goal to use Chartered Semi for foundry flexible manufacturing capacity in 2006. Given AMD's
joint technology alliance with IBM and IBM's use of Chartered, AMD is comfortable with
Chartered's ability to manufacture its products next year.
CLARIFYING CONFUSION AROUND TERADYNE'S SALE OF ITS SEMI TEST PCB
BUSINESS. Teradyne announced last week that it has sold its printed circuit board manufacturing
unit (based in North Reading, MA) to Fine Pitch, which is a business of Solectron. Teradyne's
printed circuit board group in North Reading manufactures PCBs that are used in Teradyne's semi
test products. We believe that there has been some confusion in the market regarding the sale of the
semi test PCB business. The semi test PCB business is not connected to Teradyne's Connection
Systems (TCS) business, where the company designs and manufactures backplanes, PCBs, and
connectors. Teradyne has not sold its TCS business. Rather, the company has been using Solectron
for the manufacturing of its testers and has completed the outsourcing of its tester manufacturing
with the sale of the business unit that makes the PCBs that are used inside the company's testers. We
believe that the sale involves the transfer of approximately 100 employees from Teradyne to
Solectron and is small in size.
THREE-MONTH ROLLING AVERAGE WORLDWIDE FRONT-END SEMI EQUIPMENT
SHIPMENTS CONTINUE TO TREND ABOVE NORMALIZED LEVELS, DESPITE HAVING
DECLINED SLIGHTLY MONTH-OVER-MONTH IN APRIL. BACK-END SHIPMENTS
INCREASED 5% MONTH-OVER-MONTH IN APRIL. Semiconductor Equipment and Materials
International (SEMI) released the April worldwide semi equipment shipment data last week. Recall
that we track how far semi equipment shipments are above/below their trendline. When shipments
are above their trendline, the industry is building excess capacity. When shipments dip below their
trendline, the industry is soaking up that excess capacity. In other words, the area below the curve
must roughly match the area above the curve over the course of a full cycle as the industry builds
excess capacity and then soaks up that excess capacity.
As Exhibit 1
shows, three month rolling average worldwide front-end semi equipment shipments declined 3%
month-over-month in April. Despite having declined slightly in the last two months, front-end
shipments continue to trend above normalized levels, thus implying that the excess capacity added
during the recent upturn remains to be worked down. We continue to expect front-end shipments to
decline more dramatically in H2'05, driven by significantly front-half loaded 2005 capex budgets.
In contrast to the front-end, worldwide back-end semi equipment shipments increased 5%
month-over-month in April. We do believe that the worst of the severe declines in back-end orders
and shipments is behind the industry because the back-end is below its historical trendline. That
said, we don't believe that fundamentals are set to meaningfully improve in the near-term as
customer utilization rates are still too low to drive a significant uptick. In addition to our cyclical
concerns, we continue to believe that the back-end industry is facing severe secular margin pressure
due to a hyper-competitive environment, which is leading to significant margin erosion. Only
industry consolidation (either platform or company) would likely change our secular views on the
back-end.
ENTEGRIS REPORTING ITS CQ2 EARNINGS ON THURSDAY MORNING. WE EXPECT
MANAGEMENT TO FOCUS ON THE COMPANY'S MERGER WITH MYKROLIS. Entegris is
reporting its CQ2 earnings on Thursday before the market open. We are modeling CQ2 revenues of
$88 million (up 3% sequentially) with earnings per share of $0.07, in-line with the Street consensus
estimate. Recall that management's CQ2 revenue guidance called for a slight sequential increase in
sales. In terms of CQ3, we are modeling a slight sequential decline in sales as semi equipment
shipments (recall that about 40% of the company's business is driven by capex with several product
lines tied to semi equipment shipment levels) are likely to decline in H2'05 driven by front half
loaded semi capex budgets (including budgets for Intel, TSMC, Samsung, Powerchip, AMD, SMIC,
STMicro, Freescale, Texas Instruments, etc.). We would note that we are currently Not Rated on
ENTG. (Goldman Sachs & Co., and or one of its affiliates, is acting as financial advisor to Entegris
Inc. in the proposed merger with Mykrolis Corp. Goldman Sachs & Co., and or one of its affiliates,
will receive a fee for its financial advisor role).
Recall that Entegris had recently entered into a merger agreement with Mykrolis, which is expected
to close in CQ3'05. We would expect management to provide the Street with an update on the
merger progress during its conference call on Thursday. During an analyst meeting hosted by
Mykrolis in May, the company discussed in detail its merger with Entegris. Specifically, Mykrolis
management reiterated that the merger with Entegris will be a merger of equals with Mykrolis
shareholders receiving 1.39 shares of Enregris for each Mykrolis share. The company will be
headquartered in Chaska, MN. Gideon Argov will be the CEO of the combined entity (under the
name of Entegris), Jim Dauwalter will be the non-Executive Chairman, and John Villas will assume
the role of CFO of the combined company. Management articulated that the strategy behind the
merger is to mold the combined entity into a complete materials management company by
leveraging Mykrolis' strength in liquid and gas filtration and purification and Entegris strength in
wafer handling, disk substrates, and media handling. Additionally, the business model will be more
geographically diverse, with Entegis having a meaningful presence in North America and Europe,
while Mykrolis has a meaningful presence in Asia. Tokyo Electron will be the company's largest
customer at 7% of sales. While there had been some discussions in the market regarding another
potential acquirer for Mykrolis, management was very explicit in stating that Mykrolis had not been
approached by any other company with a merger or an acquisition proposal. Mykrolis also indicated
that it expects to exceed the $15 million in cost synergies originally articulated as a result of the
merger. (Goldman Sachs & Co., and or one of its affiliates, is acting as financial advisor to Entegris
Inc. in the proposed merger with Mykrolis Corp. Goldman Sachs & Co., and or one of its affiliates,
will receive a fee for its financial advisor role.)
RECENT DATA POINT FROM ATI SUGGESTS LEADING EDGE FOUNDRY CAPACITY
MAY BE LOOSENING; REMAIN CAUTIOUS ON EQUIPMENT STOCKS. A recent data point
that surfaced following ATI's negative preannouncement last Monday suggests that leading edge
foundry capacity at TSMC may not be as tight as some believe. ATI attributed some of its market
share loss at the high end of the desktop discrete graphics market to the fact that it was
supply-constrained for most of its May quarter. However, the company suggested that its supply
constraints were alleviated toward quarter-end as it was able to quadruple its shipments from TSMC
of high-end graphics processors on a quarter-over-quarter basis. We believe this bottleneck got
alleviated on the 110/130nm node at TSMC as a result of additional capacity allocation, rather than
a significant yield improvement. Our subsequent checks suggested that this could be partly due to
Nvidia's wafer shipments declining in April/May from March levels. Regardless of the source of the
additional capacity, our overall conclusion remains that foundry orders are unlikely to save the day
for the semiconductor equipment companies in H2'05 as our checks suggest that the main driver of
increasing utilization at TSMC is an increase in trailing edge utilization rates for .25 and .35 micron
capacity which will not likely drive the company to order additional capacity as soon as the market
currently expects. We believe the above datapoint supports this conclusion.
SUPERCOMM WRAP-UP - HIGHLIGHTS FOR AGERE, ANALOG DEVICES, INTEL,
PMC-SIERRA, XILINX. We attended the Supercomm trade show last week, which focuses on the
telecom industry. We attended meetings and booth tours with Agere, Analog Devices, Intel,
PMC-Sierra, and Xilinx as well as other semiconductor and communications equipment vendors.
From our conversations, we believe vendors are generally encouraged as near-term business trends
appear to be relatively stable to improving. However, we believe visibility remains very limited and
optimism continues to be driven by hopefulness rather than hard orders.
AGERE (IL/N): TELECOM BUSINESS STABILIZING; NETWORK SERVICE CONVERGENCE
DRIVES OPPORTUNITIES. We met with Carlos Garcia (vice president, marketing, Telecom
Division) and Sujal Shah (Director, Investor Relations). We remain encouraged about Agere's
opportunities for its telecom business given a recent stabilizing in business trends and a return to
profitability and design win momentum, in particular related to network processors. Visibility
remains limited as equipment program ramps and carriers' new service rollouts have yet to ramp; we
continue to be optimistic about potential contribution given high margin profile and leverage
potential of the business. Agere has revitalized its efforts in DSP, targeting emerging gateway
opportunities with StarCore DSP. The company believes opportunities are being created by
discontinuities in the market driven by the convergence of services and cost pressures, which are
weighing on carriers. Agere believes the DSP silicon opportunity related to gateways could
approach $300 million in the '07/'08 timeframe, though clearly visibility on the ramp of new
technologies is always challenging. Also, Agere expects to leverage network processor and link
layer capabilities related to gateway opportunities.
ANALOG DEVICES (IL/N): TARGETING WIDE RANGE OF BROADBAND
OPPORTUNITIES. We toured Analog Devices' booth, which was focused on analog, DSP, and
FUSIV communications/network processor opportunities. The company's latest solutions and
reference platforms
for ADSL2/2+, IP set-top box, wireless basestation software defined radios (based on ADI's
TigerSHARC DSP), videophone, and VoIP. We believe the company is making good traction in
these areas, in particular in Asia, driven by signal processing and system expertise.
INTEL (OP/N): OPTIMISM RELATED TO NPU AND ATCA TRACTION. We met with Doug
Davis (VP, Intel Communications Group; GM, Infrastructure Processor Division) and Anthony
Ambrose (General Manger, Intel Communications Group; Marketing and Platform Programs). The
focus of our discussions was on the progress of the network processor business and ATCA. Both
network processors and ATCA introduced new paradigms to the telecom market and have had
somewhat extended gestation periods as equipment manufacturers and carriers worked through
software and integration issues. That said, progress has been encouraging and design wins are
believed to be accelerating. Also Intel continued to invest in the market through the downturn and
expects innovation will drive its competitive advantage going forward. Intel has made significant
investments (technology and eco-system development) in ATCA, which is building traction in the
market. The first wave of interest for ATCA was related to wireless infrastructure (in particular
RNC) with next round focused on IP multimedia service (IMS). While equipment vendors and
service providers are at different stages related to ATCA, Intel expects first volume production will
likely begin within next 12 months as there are field trials currently, which are believed to be
progressing well. Currently, Intel's approach to ATCA is via board/blades (the bulk of Intel's 95
ATCA design wins), chassis (means to get eco-system started; the company expects to re-evaluate
participation in the chassis business over time), and silicon (focus on network processors).
PMC-SIERRA (IL/N): BUILDING PRESENCE IN WIRELESS INFRASTRUCTURE AND VOIP.
We toured PMC-Sierra's booth with Dave Climie (Director, Investor Relations). The company
showcased VoIP router on a chip and wireless infrastructure solutions, which continue to expand
TAM opportunities. Our understanding is that PMC-Sierra is focused on engagements/qualifications
for its VoIP solutions with carriers with product momentum in Korea and China. On the wireless
infrastructure side, PMC-Sierra demonstrated CPRI (Common Public Radio Interface) reference
design based on the company's QuadPHY 10GX 10-gig Ethernet SERDES and CPRI framing
solution, which is currently supported via FPGA, but we expect will be migrated to highly
integrated silicon solution over time. We believe PMC-Sierra has lead customer engagement for
CPRI solution, leveraging relationship established with PALADIN Digital Correction Signal
Processor. PMC-Sierra also announced a strategic marketing relationship and equity investment in
privately-held Wintegra, a fabless network processor vendor; our view is that the relationship pairs
complementary technologies, enabling PMC-Sierra to develop better understanding of the data path,
which will be key over time as vendors such as Intel and Raza Microelectronics have introduced
devices that service processing of both control and data path.
XILINX (IL/N): OPPORTUNITIES RELATED TO EMBEDDED SERDES AND POWERPC
CAPABILITIES. We toured Xilinx's booth, which was focused on high-density FPGAs (in
particular Virtex-II Pro and Virtex-4) and Rocket I/O multi-gigabit transceiver capabilities,
including solutions for ATCA (communications infrastructure; telecom and wireless), OBSAI
(wireless infrastructure), PCI-Express (I/O interface), and 10-gig XAUI (backplane interface, optical
networking). Xilinx remains encouraged regarding prospects for FPGAs with embedded PowerPC,
which are featured in Virtex-II Pro and Virtex-4 FX. We believe customer adoption of embedded
processor capabilities has been relatively mixed to date. However, usage models continue to
develop in a broad range of applications and are expected to accelerate over the coming years.
Embedded PowerPC cores are unique to Xilinx in the FPGA market, though peers (as well as
Xilinx) offer soft processors to address certain level of processing. We believe Xilinx is
experiencing good traction related to ATCA driven by high-speed SERDES capabilities as well as
pull related to reference designs with Intel. ATCA remains an emerging technology standard, which
is beginning to see interest in a broad range of markets including wireless infrastructure (principally
related to server and RNC, rather than Node B due to size and cost challenges), gigabit-ethernet
PON, and semiconductor ATE. While some customers are believed to have moved to production,
industry ramp is expected to begin more broadly next year.
WE EXPECT THE MAY BOOK TO BILL TO REMAIN FLAT FROM APRIL ON A 3% M-O-M
DECLINE IN ORDERS AND A 3% M-O-M DECLINE IN SHIPMENTS. Semiconductor
Equipment and Materials International (SEMI) is reporting the May US equipment manufacturers'
book-to-bill data on Thursday night. We estimate a total book-to-bill ratio of 0.80 on three-month
Goldman Sachs Global Investment Research 5
Analyst Comment June 13, 2005
rolling average overall orders of $975 million (-3 % m-o-m) and overall shipments of $1,215
million (-3 % m-o-m). We estimate front-end shipments of $1,060 million (-3 % m-o-m) and
front-end orders of $820 million (-3% m-o-m), yielding an estimated front-end book-to-bill ratio of
0.77. We estimate back-end shipments of $155 million (flat m-o-m) and back-end orders of $155
million (flat % m-o-m), yielding a back-end book-to-bill ratio of 1.00. We continue to emphasize
that the book-to-bill should not be a significant trading event for the stocks as it is an unaudited and
backward looking metric.
WEEKLY MEMORY MONITOR. NAND flash memory spot prices as well as retail prices
continued to decline further this week, with retail prices declining approximately 3% m-o-m and
NAND flash spot prices declining approximately 14% m-o-m. We continue to monitor NAND spot
prices closely as we believe that further price declines in NAND flash are likely going forward,
particularly in light of the significant capacity that has been allocated to NAND from DRAM in
recent months. |
