Investor's Business Daily
Chipmaker Varian Increases Market Share
Tuesday January 16, 7:00 pm ET
Kevin Harlin
Its products are as big as a two-car garage, yet it enables powerful electronics that fit in the palm of a hand.
Varian Semiconductor Equipment (vsea.) makes ion implanters, massive $3 million pieces of equipment that let silicon conduct electricity, making possible the chips that are the brains of cell phones, computers and just about everything else electronic.
Chipmaking is a cyclical business, and ion implantation is a highly specialized and competitive $1.3 billion piece of it. Varian, of Gloucester, Mass., has weathered storms and has taken over market share from competitors.
This month, it announced that a U.S. chipmaker will switch to its implanters as part of a major manufacturing expansion, meaning an additional $50 million in orders over the next several years, Varian says.
"The Varian story in a nutshell is we're going to continue to take market share, and I think we'll continue to be a very profitable company," said Robert Halliday, the company's executive vice president and chief financial officer.
Varian didn't identify its customer, but some industry watchers say it's Advanced Micro Devices (amd.), which earlier this year announced a $2.5 billion upgrade of its chip fabrication plant in Dresden, Germany.
Machinery for ion implantation comes in three types. High-current implanters lay down swaths of ions on chips close to the surface. Medium-current implanters go deeper. High-energy implanters place the ions -- mere nanometers wide -- deepest into the silicon.
Medium Current
Varian has been the top producer of medium-current ion implanters, well ahead of No. 2 Nissin Electric. In 2005, Varian became the top supplier of high-current implanters, edging out Sumitomo Eaton Nova and Axcelis Technologies (acls.), says Gartner Dataquest Research.
That made it the top ion-implanter supplier overall, though it's still a distant third in the high-energy implanter arena, behind Axcelis and Sumitomo.
Varian says its market share is still growing, climbing from 30% overall in 2004 to 44% in 2006.
Halliday says Varian will compete more aggressively in the high-energy-ion-implanter segment in 2008. In December it announced a new-generation device for that line.
In the meantime, it's consolidating its gains in other product lines.
The unnamed U.S. chipmaker picked Varian to provide the medium- and high-current ion implanters after testing Varian's units against rivals' devices, Varian says.
Pacific Crest analyst Mark Bachman says there are opportunities to win more market share by supplying other big memory- and logic- chip makers.
"They were already a leader in medium-current implantation, and they're positioned to be the leader in overall implantation here as we move forward," Bachman said. "They're at the market at the right time with the right tools."
Chip fab is a cyclical business. Equipment makers such as Varian have been caught in those ups and downs before.
The ion-implantation market was worth $1.7 billion in 2000, according to Gartner data. Two years later, it had fallen to $644.7 million. Over that period, Varian's sales went from $688 million to $335 million.
The market rebounded to almost $1.3 billion in calendar 2006, says Dean Freeman, Gartner's research vice president. He projects that the market will grow 6% this year and 14.4% the following year before dipping 16% in 2009.
Freeman doesn't see Varian losing its control over the market for medium-current ion implantation.
At the high-energy end of the business, he thinks Varian will find it difficult to knock off the entrenched Axcelis and Sumitomo.
In the high-current-ion-implantation market, Varian will have to fight to keep its top spot. "That's really where the battleground is, and that's really where most of the growth is," Freeman said.
Varian was well ahead of the competition in rolling out single-wafer implanters -- which are more precise than previous systems that implanted entire batches, but with higher error rates, A.G. Edwards' Gavin Duffy noted in a December report.
Duffy figures that chipmakers have spent millions to evaluate competitors' products before going with Varian's. So he thinks it will be difficult for other equipment makers to lure those customers back.
That should allow Varian to hold on to its market share gains and increase its margins, he notes.
Earnings Surge
Varian ended its fiscal year in September with earnings of $1.49 per share on sales of $731 million, up from 98 cents, and $601 million in sales the year before. The 58 cents per share it posted in the fourth quarter was up 142% from a year ago, and 2% higher than analysts surveyed by Thomson Financial expected.
The analysts' consensus is for $2.29 per share in fiscal 2007.
Pacific Crest's Bachman also expects to see rising margins as the company expands and holds on to market share.
He wants to see Varian invest some of its $550 million in cash and securities that it had at the end of the quarter into a business that complements its ion-implanting products, as he says others have done.
Halliday says the company is considering options and moving cautiously. He says Varian won't make acquisitions or dive into a new product line unless it makes sense.
In the meantime, it's aggressively buying back shares, repurchasing about $40 million to $50 million worth each month. It had already bought $139.3 million worth of shares in a $200 million program, before upping it in December to $300 million.
"We want to execute cleanly on anything that we do," Halliday said.
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