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To: Perspective who wrote (77664)	3/9/2001 2:27:45 AM
From: XBrit	Respond to of 436258

DPMI is interesting. I pulled the latest dead fish report to try to understand what's up. Apparently they're just "entering the sweet spot in the photomask cycle". Yeah right. I guess the assertion here is that photomasks are like EDA software... somewhat counter cyclical. Check CDN, SNPS, MENT charts for example. The argument with EDA is that companies push their design technology in bad times to try to get a competitive edge. Guess one could argue this for photomasks also, but I'm not sure I buy it... these guys aren't any different from NVLS or whoever really. Merchant mask houses used to be a pretty small segment. They have become much more important as the in-house facilities go away. My guess: the price is so high because this is a new segment and nobody has a clue how to value it in a major downturn. ========== CREDIT SUISSE FIRST BOSTON CORPORATION Equity Research Americas - 01/24/2001 BUY - SMALL CAP DuPont Photomasks, Inc. (DPMI) Solid 2Q Results - Visibility Extremely Strong As Customers Prepay for 0.18 micron Capacity. Summary 2Q(Sep) revenue and EPS of $106.8 million and $0.64 essentially in line with our estimates of $108.5 million and $0.61 - street consensus was $0.61. Margins were flat with 1Q as Singapore manufacturing ramp dampened the positive ASP effects. The key growth driver is accelerating - customers prepaying for capacity. DPMI is at the beginning of a strong growth cycle driven by the accelerating 0.18 micron design activity. Tight capacity at advanced nodes is highlighted by nearly $40 million in prepayments from customers wanting to secure mask capacity over the next 2 quarters. Maintaining F01 and Raising F02 Estimates. We continue to believe that DPMI's leverage to high-end photomasks will allow the company to nearly double the industry growth rate of 20-25% over the next two years. We are adjusting FY01 revenue and EPS estimates to $461 million and $3.02 from $465 million and $3.00. Additionally, we are increasing FY02 EPS to $4.65 from $4.60 on $615 million in revenues. Strongest Investment Thesis. Three key themes that should drive the stock. 1) Subwavelength processing placing more value added on the mask, 2) photomask cycle is in the very early stages with longer growth drivers than the semiconductor and SCE industries, and 3) DPMI is the best margin expansion story in our universe. Bottom line. DPMI growth prospects remain driven by the move to 0.18u volume processing which is resilient to the equipment cycle. Raising price target to $100 from $95, or 25X our $4.00 CY01 EPS estimate. Investment Summary DuPont Photomasks is a leading supplier of photomasks - the photo-negatives used to transfer circuit patterns onto wafers in the manufacture of semiconductors. DuPont Photomasks is rated Buy. DPMI is the market share leader in advanced masks with greater than 60% share. Three key themes (all accelerating) should drive the stock higher. 1) Subwavelength processing is placing more value added on the mask, 2) The photomask cycle is in the very early stages with longer growth drivers than the semiconductor and SCE industries, and 3) DPMI is the best margin expansion story in our universe. Increasing revenue from 0.18 micron and below process technologies are driving above industry revenue growth rates and expanding margins at DPMI. Our new price target of $100 is 25X times our CY01 EPS estimate of $4.00, 35% upside from current levels. 2Q Results. 2QFY01(Dec) Results. DPMI reported 2Q revenues and EPS of $106.8 million and $0.64, essentially in-line with our estimate of $108.5 million and $0.61, respectively - street consensus was $0.61. Revenues of $106.8 million were up 6.1% sequentially, but was short of our estimates as some low-end business went away. Key metric of 0.18 micron and below revenue was up 20% sequentially, versus our estimate of 15-17%. Gross margins of 35.4% were 10 basis points below our estimates flat over 1Q. Positive impact of mix shift was offset by depreciation at Singapore plant. Operating margins were 15.5% in the quarter - 20 basis points below our estimate, a combination of lower R&D and higher SG&A expenses. EPS of $0.64 benefited 3 cents from higher interest income on pre-payments. Advanced Technologies Improving the Mix Increasing mix of advanced technologies is driving revenue growth. Advanced process technologies are driving growth in leading edge masks. 0.18 micron and below accounted for over 25% of revenues - up slightly from 1Q levels of 23%, but expected to accelerate in 3Q as designs are released with an improving 0.18 micron yield curve and loosening capacity situation. Geographically, North America continues to be strong at the leading edge 0.18 micron with accelerating requirements for advanced masks, while Europe was ahead of expectations in the quarter. Additionally, DPMI is continuing to develop advanced process technology with Micronic, an advanced laser write tool vendor, to supplement its current vendor Etec. We expect DPMI to take delivery of Micronic's most advanced Sigma tool for mask writing at the 0.10 micron node during the quarter. Prepaying for Mask Capacity - It's Tight Out There Customers pre-paying - possibly a first. For the first time in recent memory customers have approached DPMI and prepaid to reserve capacity as far out as the June quarter. This is unprecedented and it a strong validation of our thesis that 0.18 micron design activity is accelerating and demand for advanced photomasks continues to outpace supply - both giving us confidence in our F01 and F02 estimates. DPMI's cash balance increased nearly $40 million to $92 million during the quarter, primarily as a result of customer prepayments. Leading Edge Capacity To Meet Leading Edge Demand Increasing leading edge capacity. During 2000, DPMI added 12 advanced manufacturing lines (0.25, 0.18 micron and below) worldwide to address strong demand at leading edge process nodes. Additionally, the company continues to add PSM capability in all four regions of the world. We believe that through aggressive capacity expansion and industry leading process technology, that DPMI will continue to dominate the 0.25 micron and below mask segment with greater than 60% market share in the merchant market. However, we note that market share at 0.25 micron and below will be increasingly centered at the 0.18 micron and below nodes (a positive given the 2X ASP jump on 0.18 micron masks from 0.25 micron). Capital expenditures in FY01 will be approximately $150 million - implying the company will spend $80-90 million in 2H01. Capacity is currently in place to meet FY01 growth - and with the Singapore ramp having occurred in 2Q, a significant margin step up in 3Q should occur. FY01 capex plans are intended to meet FY02 growth and are centered on equipment capable at 0.13 micron and below. We believe that current capacity ramp at DPMI is sufficient to support our FY01 and FY02 growth projections of 40% and 34% respectively. Still The Best Margin Expansion Story In Our Universe Look for strong margin growth as DPMI enters the sweet spot in the photomask cycle. Gross margins of 35.4% were flat against 1Q gross margins as the ramp in Singapore dampened argin expansion in the quarter. Margin expansion is being driven by an increasing percentage of revenue for advanced technology masks - including phase-shift masks (PSM) and optical proximity correction (OPC) at 0.18 micron and below process technologies. DPMI instituted an across the board (all technologies) price increase on June 15th. We believe the impact of the price increase will be have a greater impact in 3QF01(Mar) and will be fully pushed through in 4QF01(Jun). Price increases resulted in less pushback that anticipated at higher technology nodes and should drive further gross margin expansion over the next two quarters. We are still anticipating that FY01 revenue growth will be driven 75% by increased ASPs and 25% by unit volume increases - which held to form in 2Q(Dec). We anticipate strong margin growth in FY01 and FY02 with gross and operating margins expanding to 37.4% and 18.0% in FY01, and 40.7% and 21.7% in FY02 respectively - up from 35.4% and 15.5% as reported in 2QFY01(Dec). We believe that DPMI could approach 42%+ gross margins in 2HFY02 - with each point of margins worth 6-7 cents to quarterly EPS. Maintaining F01, Raising F02 Estimates. Estimates for F01 and F02. The photomask industry is expected to grow at a 20-25% CAGR over the next 2-3 years. We believe that DPMI can significantly outgrow the industry with 40% revenue growth in FY01 and 33% in FY02. We have adjusted 3QF01 and 4QF01 estimates to reflect a more stable ramp - representing 11-12% quarterly sequential growth over the next two quarters. We believe that 3QF01 could provide a positive surprise in the seasonally strong March quarter. FY01 revenue and EPS estimates are adjusted to $461 million and $3.02 from $465 million and $3.00. Additionally, we are increasing FY02 EPS to $4.65 from $4.60 on $615 million in revenues. Our new CY01 EPS estimate is $4.00. Conclusion and Valuation DPMI is not on the semiconductor capacity cycle. DPMI's above industry prospects are tied to the 0.18 micron transition - currently less than 10% of overall wafer processing is at this advanced geometry - but it is growing quickly. The photomask cycle is typically 6-8 quarters behind the semiconductor cycle and the company is now entering the sweetspot of the current cycle. Higher ASPs and margins at 0.18 should allow DPMI to significantly outgrow any slowdown in the front-end equipment segment and to nearly double the 20-25% growth rate of the photomask industry. Additionally, with increasing value added in the mask process, we anticipate further pricing power to advanced photomask suppliers such as DPMI. Our conviction in DPMI's above industry revenue growth, strong margin expansion, and resilience to front-end processing equipment slowdowns all help to reiterate our positive stance on DPMI's near and long term prospects - our favorite small cap pick. Our $100 price target is 25X our CY01 EPS estimate of $4.00.