Lam mentioned as a promising pick:
Chip-equipment firms with new tech to fare best
By Duncan Martell
SAN FRANCISCO, Aug 27 (Reuters) - Okay, so most of the chips are down, but not all of them.
While the semiconductor industry is poised to post a record decline in revenue this year and the chip equipment sector has suffered as well, those companies that have the equipment to make circuits for a new generation of electronics products are still posting sales gains, albeit at a reduced level.
Chip makers have been hit by weakening demand for personal computers and cellular handsets, as well as a sharp slowdown in the flood of spending in telecommunications gear.
That means companies such as Intel Corp. (NasdaqNM:INTC - news), National Semiconductor Corp. (NYSE:NSM - news), LSI Logic Corp. (NYSE:LSI - news) and others are cutting jobs, closing plants either permanently or temporarily and taking other cost-cutting measures.
But as chip demand slumps, the industry is also in the middle of a shift to newer technology -- a cycle that happens every few years and requires chipmakers to spend billions of dollars to get the latest equipment.
This time, it's the move to smaller line widths on chips, where some dimensions are 0.13 microns wide (a human hair, by comparison, is about 100 microns across), larger, dinner-plate-sized silicon wafers and a continuing roll-out of chips using copper interconnections rather than aluminum.
``No one is spending money on capacity (to produce a greater number of existing products) anymore,'' said Merrill Lynch chip-equipment analyst Brett Hodess. ``They're only spending on new technology.''
FASTER, CHEAPER CHIPS
The ``new thing'' is to make more powerful chips more cheaply, the same elusive goal that the industry is always chasing.
But Intel won't see the cost of making its Pentium 4 microprocessor really come down until it moves to 0.13 micron process technology early next year.
The smaller line widths allow for more transistors to be put on a single chip while the larger silicon wafers mean more chips can be gotten out of a single wafer. Copper is a better conductor than aluminum, also helping to boost performance.
Applied Materials Inc.'s (NasdaqNM:AMAT - news) Chairman and Chief Executive James Morgan said as much in May, when the world's biggest chip-equipment maker reported fiscal second-quarter results. While Applied saw sales and profits drop, it's continued to spend aggressively to develop the latest products so it's best prepared when demand returns.
``Our customers are really under pressure to invest for the next round of technology,'' Morgan told Reuters then in an interview.
He said much the same thing again on Aug. 14, when the company reported fiscal third-quarter results. ``I've never seen a time when there's been such a depth and breadth of technology purchases by our customers in the pilot line stage,'' Morgan told Reuters. ``This should really benefit us.''
SPECIAL LOW-K
In addition to Applied, whose equipment spans 75 percent of the chipmaking process, KLA-Tencor Corp. (NasdaqNM:KLAC - news) and Novellus Systems Inc. (NasdaqNM:NVLS - news) also are well prepared with the latest in chipmaking equipment, analysts said.
``Those companies are highly leveraged toward those new technologies,'' such as copper, so-called low-k dielectric, Hodess said, who upgraded those three companies, among others, earlier in the week. ``Both are necessary as you start to move to 0.13 micron and down below.''
In a nutshell, the lower k is, the lower the capacitance, which is good. Capacitance is a measurement of things that slow down signals, degrades them, couples one signal onto another signal line and burns power for no good reason.
When moving to smaller geometries, the capacitance gets larger relative to the size of certain parts of the chip, so it will influence circuit behavior more in a 0.13 micron chip than in a 0.18 micron chip.
Chip-equipment makers, and investors, will embrace whatever demand is out there, as the chip industry is forecast by some to contract, in revenue, by as much as 29 percent this year.
JUNE GLOOM
This year's June decline in worldwide chip sales of 8.8 percent from May is the worst-ever decline for a June over the past 17 years, and The previous worst June was in 1996, which was down 5.6 percent from May.
The dismal sales figures prompted Credit Suisse First Boston analyst Charlie Glavin to revise again his sales forecast for 2001 chip sales. He now expects them to fall 29 percent from last year, more than his previous estimate for a 25 percent decline.
``The rapid acceleration of new semiconductor technology could lead to a technology product cycle in 2002,'' wrote Lehman Brothers analyst Edmund White in a recent report. ``Next year will see the commercialization of 0.13 micron processing technology.''
``The move to copper processing is an important theme at Novellus (and one which could help it increase its share of the wafer processing equipment market), but more broadly the company is focusing its activities on being a strong fine linewidth technology enabler,'' White wrote.
Lam Research Corp.(NasdaqNM:LRCX - news), another chip-equipment maker, is also poised to do better, one analyst said.
``Lam is in way better shape with more new products than they were in the last downturn,'' said Bear Stearns analyst Robert Maire.
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