* SSB on NVLS and AMAT and Copper **
AMAT; Impressive Copper Arsenal Introduced
Salomon Smith Barney
Friday, April 09, 1999
--SUMMARY:--Applied Materials--Semiconductor Equipment
Expect copper electroplating to be a fierce battle with a 50/50 split
between Applied and Novellus.
AMAT displayed its entire copper arsenal in NY yesterday, consisting of
Millennia ECP, Mirra Cu CMP, and Endura Barrier & Seed.
Expect Millennia beta exit in 6 months and 10-15 shipments in 1999.
Copper experience illustrates AMAT's ability to focus and ultimately
deliver the right product. Key reason for our 1H stance.
50/50 split with Applied is not a negative for Novellus' shares.
--EARNINGS:-----------------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 10/98 EPS $0.52A $0.37A $0.17A $0.07A $1.14A
Previous 10/99 EPS $0.11A $0.24E $0.28E $0.35E $0.98E
Current 10/99 EPS $0.11A $0.24E $0.28E $0.35E $0.98E
Previous 10/00 EPS $0.42E $0.46E $0.52E $0.63E $2.02E
Current 10/00 EPS $0.42E $0.46E $0.52E $0.63E $2.02E
Previous 10/01 EPS $N/A $N/A $N/A $N/A $N/A
Current 10/01 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes: EPS are fully diluted.
--FUNDAMENTALS:-------------------------------------------------------------
Current Rank........:1-H Price 04/08/99......:$65.12
Prior Rank..........: Target Price........:$76.00
P/E 10/99...........:66.4X 52 Wk Price Range...:68.68 - 22.37
P/E 10/00...........:32.2X Proj. 5yr EPS Grth..:25.0%
Return on Equity 98.:19.70% BookValue...........:$N/A
LT Debt-to-Capital..:11.91% Dividend............:$N/A
Revenue 1999........:$4850.00 mil Yield...............:N/A%
Shares Outstanding..:378.00 mil Convertible.........:No
Mkt. Capitalization.:$24615.36 mil Hedge Clause(s).....:
Comments............:
--OPINION:------------------------------------------------------------------
Copper Is An Emerging Market
Copper interconnects provide advantages over aluminum such as: 40% lower
resistance than aluminum which enables faster speeds and lower power
consumption and better electromigration capabilities which leads to
better reliability. Copper is a growing market and Applied expects an
electroplating market size of $63 million (our estimate is $125 million)
in 1999. How fast the market will grow in 2000 is still in question as
1999 is characterized by strong seeding demand and for the market to grow
during 2000, one would need pilot line production.
AMAT Launches Millennia Copper Electroplating Product
Applied launched its long awaited Millennia copper electroplating product
yesterday in New York. We were impressed with the technological features
embodied in the product such as closed loop electrolyte control, separate
wet and dry handling sections, and 3 dual cell modules for copper
electroplating. The tool is based on the Producer robot architecture
which has proven to provide high throughput in production and is
200/300mm compatible which provides customers with added flexibility.
However, we suspect the competition can provide the same without much
effort. The Millennia offers a high throughput of 70 wafers an hour,
greater than 1% wafer to wafer repeatability, and less than 2% wafer in
wafer uniformity. These specifications are very competitive with the
other offerings in the market and, as a result, we expect it to be a
fierce battle and hence our estimate for a 50/50 split between Applied
and Novellus.
AMAT Also Launches Complete Process Integration Solutions
Along with the new electroplating product, Applied also highlighted its
entire arsenal of copper products. This impressive display included the
new Millennia copper electroplating product, Endura Barrier and Seed, and
Mirra Cu CMP products. With a 90% plus market share in barrier/seed and
50-60% share in CMP, the electroplating product completes Applied's
copper lineup. We believe the ability to provide a complete solution is a
major advantage for Applied over its competitors given that it can
potentially guarantee process integration and results. With all the
integration issues involved with new technologies such as copper and low
k dielectrics, Applied's EPIC center allows customers to experiment with
different process configurations to ensure better results and is the only
one of its kind.
Gutsy Move To Ship Tool But Do Not Expect Major Setbacks
Typically, equipment suppliers do not begin volume shipments to customers
until they have exited beta testing. However, due to the fact that
Novellus beat Applied to the market in introducing its electroplating
tool, we believe that Applied has decided to go against conventional
wisdom and ship its tool in volume quantities despite the fact that the
tool will not exit beta for another 6 months. We expect shipments of 1-2
tools each month starting in April, which implies 10-15 unit shipments
during 1999. Although this is a gutsy move, we do not expect any major
setbacks. While it is inevitable that some issues will arise with a
completely new tool, we have a high degree of confidence that Applied
will be able to retrofit any tools in the field and quickly rectify any
problems. The mainframe and the handler have been used on other Applied
systems and hence we do not expect any major problems. More importantly,
the Endura engineering team (which designed the bulletproof PVD system)
is responsible for the project, which we believe is a major positive.
Expect a 50/50 split with Novellus
We expect a fierce battle in the copper electroplating market and believe
Applied will ultimately capture a 50% share of the market in 1999. While
Novellus was the first to market and is currently in the lead, there were
several issues that prevented it from creating an impregnable position:
1) Novellus' tool did not offer closed loop control and hence was not
completely ready, 2) the copper infrastructure (technologies such as CMP)
was not entirely in place for semiconductor companies to ramp production,
and 3) the lack of demand for semiconductors with copper metallization.
This is resulting in a long gestation period between copper introduction
and volume production, which has allowed Applied time to prepare its own
offering.
50/50 Split Should Not Be Viewed As A Negative For Novellus
Although Novellus is currently ahead in the copper electroplating race, a
50/50 split should not be construed as a negative for Novellus. While
copper cannibalizes tungsten and aluminum deposition, a 50% market share
position in copper is a positive for Novellus, who currently has a 35%
market share in tungsten and a 6-8% market share in aluminum. Novellus is
trading at a significant discount to Applied (3.6x calendar 2000 sales
per share vs. 4.7x for Applied and 23x calendar 2000 EPS vs 29x for
Applied) and our concerns about the copper ramp have already come to the
surface.
This Speaks To Applied's Execution Skills
Applied has done a commendable job in getting its copper electroplating
tool ready in a short period of time. Applied had previously denied the
significance of copper but reevaluated its stance last year. We believe
the introduction of its copper tool in a span of 8 months demonstrates
the company's ability to compete despite being behind in the game. We
reiterate our Buy (1H, High Risk) rating and price target of $76, or 5.5x
our calendar 2000 sales per share of $13.8.
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