Chip Gear Maker Lam Research Seeks To Etch Out A New Market
Monday July 10, 7:00 pm ET
James Detar
Chip gear maker Lam Research has done well focusing on key areas, but it says now is the time to expand into a new niche.
Lam (NASDAQ:LRCX - News) makes gear that etches designs onto silicon wafers. It's a tough market. Its main rivals are the world's two biggest gear makers, Applied Materials (NASDAQ:AMAT - News) and Tokyo Electron.
Lam Chief Executive Stephen Newberry says that while Applied and Tokyo Electron make many different products, Lam focuses on etch gear. He says because his company focuses on just etch gear and a couple of other markets, it's often first out with new products.
While seeking to keep its focus, Lam is branching into making gear for a related market called resist strip. This step removes materials on the wafer after etching.
Now might be a good time to expand. Analysts polled by Thomson First Call forecast Lam's quarterly earnings growth will range from 48% to 151% the next four quarters. Its shares are up about 26% this year.
Newberry recently spoke with IBD about his plans to keep Lam on the fast track.
IBD: How do chipmakers use your equipment?
Newberry: Lam is in the etching segment of what we call front-end manufacturing. Etch (etching designs into silicon wafers), along with lithography (chip pattern imprinting), are two of the most critical processes in the front end. Etch and lithography (quality) have a very important impact on semiconductor yield -- the number of good dies (chips) on each wafer.
IBD: How big is the etch market?
Newberry: About a $4 billion market today.
We also are getting into the adjacent strip market. This is where chipmakers strip post-etching residues from the wafer after etch has been accomplished.
We're now in the process of shipping beta units (strip machines) into the market. That's about an $800 million to $1 billion market.
IBD: Why enter that market?
Newberry: We have a vision of being a multiproduct company, which helps increase our relevance as a key problem solver. We want those additional markets to be very much adjacent to and, if possible, integrated with etch. We want to build on our core technology.
IBD: What's your overall market strategy?
Newberry: To take our position in the etch market to other markets that use similar technology, whether the strip market or others. And we'll probably pick up a couple of more points (market share) for our etch technology.
By going into etch and resist strip, we go from serving about 11% of the total market to 20% in the next three to five years.
IBD: How do you gain share while going up against larger rivals such as Applied Materials?
Newberry: One thing we've focused on is taking advantage of the fact that we're fundamentally an etch company. We take all of our capabilities -- including management and finances -- and we focus them on etch.
We apply a concerted set of multiple resources to be the best in etch. As a result, our market share grew from about 25% in 1999 to between 43% and 45% in 2006.
IBD: How are prospects for the chip equipment market in general?
Newberry: The industry is in a multiyear positive environment. But people are looking at short-term concerns, about whether there is alignment relative to demand and how much demand is going to be present in the second half of the year. They get worried about whether those things will get out of sync and create another downturn.
But what's occurring in the industry today that wasn't present before is that the industry is more efficient.
IBD: At the end of last quarter, Lam had $1.1 billion in cash. Do you have any plans for that?
Newberry: Our specific plan relative to that cash is that we're a little more than halfway through a board-authorized 750 million share stock repurchase plan. And we're committed to our growth strategy via R&D spending and product introductions.
While we haven't in the past used acquisitions to grow, we've never ruled that out. If the right opportunity came along, we want to be in a position where we could accomplish that.
IBD: You said earlier you expected to get 10 to 12 new orders in the first half of 2006. Did you?
Newberry: We haven't announced that. We're on track. I fully expect we did achieve those 10 or 12 wins.
IBD: You've talked about increasing research and development. What specific R&D investments are you undertaking?
Newberry: Guidance for the June quarter is about $500 million revenue, so we're at a $2 billion a year run rate. That allows us to continue to grow R&D, which is about $60 million a quarter.
(R&D spending) is dropping as a percentage of revenue because revenue is growing so much faster. That gives us a lot of flexibility. |
