GS
June 30, 2003
Summary: (1) Pieces continue to fall into place for second half fundamental recovery, (2)
Business at Entegris appears to be steadily improving, and (3) News, Events and Price
Performance.
Pieces continue to fall into place for second half fundamental recovery. Our channel
checks last week provided additional confirmation that fundamentals are poised to
improve in H2'03. Checks with several equipment suppliers and customers confirmed that
Samsung intends to begin placing orders for the second phase of its 300mm fab,
potentially as early as July but almost certainly sometime during CQ3. If the first orders
from Samsung indeed come in July, this could allow the equipment companies better
visibility when they provide guidance on their earnings calls in July.
Recall that we have been highlighting our base case expectation for sequential order
growth for CQ3 and CQ4 of 10%-15% sequentially. We ascribe about a 60% chance to
our base case assumption, a 20%-25% chance of at least one quarter having better than
10%-15% sequential growth and a 15%- 20% chance that orders fall below our base case
expectation. While we feel comfortable with our assumptions based on our conversations
with the customers who are likely to drive the growth, we are just as confident that the
equipment companies will be more conservative in their guidance on their earnings calls
in July as last year's headfake rally is still fresh in all managements' minds. We would
expect guidance for 5%-10% sequential growth for most of the equipment companies for
CQ3. We would then expect the companies to get more aggressive with their expectations
as we move through Q3 and the expected orders fall into place.
We continue to believe that investors should be aggressively positioned in the semi
equipment stocks heading into the Semicon West trade show that begins on July 13th. We
expect that the equipment companies will come out of the trade show with slightly better
visibility on CQ3 after meeting with their customers during the show.
Business at Entegris appears to be steadily improving. We had Entegris on the road last
week marketing in Boston and Connecticut. We believe that the company's business
continues to gradually improve although management remains conservative heading into
the summer months given the headfake in improving fundamentals that occurred last
summer. We believe this conservatism is reflected in flat guidance for the August quarter.
Below we highlight some takeaways from our meetings: (1) The company noted that CQ3
(ending August) flat revenues will be driven by sequential growth in the company's
200mm, wafer shipper, OEM, and services (cleaning tools) businesses, which will be
offset by sequential declines in the 300mm business (we believe that Infineon's 300mm
ramp in CQ2 drove 300mm sales strength and will come off of the books in CQ3) and
data storage (data storage sales were strong in CQ2 driven by form factor and process
changes at customers, and are expected to slow in CQ3). (2) Recall that Entegris filed a
shelf registration with the SEC in early June for the sale of up to 25 million shares of
stock (up to 15.5 million shares coming from the company, and up to 9.5 million shares
coming from shareholders, including WCB holdings and the company's employee stock
option plan). We believe that management intends to use the net proceeds from the
potential sale of stock for acquisitions, particularly in the life sciences and fuel cell areas,
but also potentially for a merger of equals. Entegris maintains the goal of reaching $700
million in annual revenues by the end of 2007, with about $150 million coming from new
markets (i.e. fuel cell and life sciences). In order for the company to attain this revenue level, it
intends to act as a consolidator in the materials management space. (3) Entegris' OEM businesses
are still at depressed levels but there are some signs that those businesses are slowly improving, (4)
The company intends to introduce a new product in the tape and reel segment over the next several
quarters, which may prove to be a disruptive technology, (5) We would expect gross margins to
continue to improve from current levels driven by the company's newly acquired dominant market
share (about 80%) in the wafer/reticle carrier business. Management is targeting 50% gross margins
at $80 million in sales, and (6) Regionally, the company notes that business in Asia Pacific, China,
and Japan continue to improve, with strength in Europe driven by one DRAM customer last quarter
(we believe Infineon), while business in North America remains flat.
News, Events and Price Performance
Last week
Monday 23 June (1) Electro Scientific Industries elected Richard Faubert to the company's board of
directors. Faubert serves as a director of Radisys and is on the North American Advisory Board of
Semiconductor Equipment and Materials (SEMI). Faubert has also served as President, CEO and a
member of the board of SpeedFam-IPEC and Executive Vice President of Novellus. (2) Zygo
Corporation appointed Samuel Fuller to its board of directors. Fuller is presently Vice President of
research and development at Analog Devices. Fuller has also held positions at Digital Equipment
Corporation and Carnegie Mellon University.
Tuesday 24 June (1) Advanced Energy named Donsung (Robert) Kim as President of Advanced
Energy Korea. Kim has previously served as President and CEO of Lam Research Korea and
Executive Managing Director of Samsung Electronics. (2) Teradyne Connection Systems and
Molex introduced VHDM RAM, an 8-row version of Teradyne's right-angle male connector. (3)
Asyst Technologies introduced software products GWEIB and GWconX300+, which are designed
to assist in the implementation of next generation Semiconductor Equipment and Materials
International EDA standards. (4) Mattson Technology won a follow- on order for its Aspen ICP
Strip system. The system is scheduled to ship by the end of the second quarter in 2003 and will be
installed in the customer's facility in Japan. (5) FEI Company announced that it is seeking
shareholder approval to increase its authorized common shares to 70 million from 45 million. The
company said it believes the additional authorized shares would give it flexibility to issue common
stock for general purposes, which may include acquisitions or the establishment of strategic
relationships with other companies. (6) Varian Semiconductor introduced the Productivity Plus
upgrade for its E220 and E500 medium current ion implanters for 150mm and 200mm wafer
processing.
Wednesday 25 June (1) DuPont Photomasks stated that Peter Kirlin resigned as Chairman and
CEO. The Company also announced that the board of directors has elected Marshall Turner as
Chairman and CEO. Turner has served on the board of DuPont Photomasks, and previously served
as DuPont Photomasks' interim Chairman and Chief Executive from June 1999 through May 2000.
Turner will hold both posts on a permanent basis. DuPont also stated that revenue FQ4 '03, which
ends June 30th, is currently tracking to the low end of the range of previous guidance, or $80
million. (2) Applied Materials introduced its Reflexion LK CMP system, to be used with low-k and
ultra low k dielectric materials for 65nm and below copper chip designs. (3) Ultratech developed a
laser thermal processing technology that allows manufacturers to scale down to the 20nm
technology node. (4) Mykrolis signed a distribution agreement with Levitronix, a manufacturer of
pump products. The agreement allows Mykrolis to market Levitronix bearingless centrifugal
pumps, and to incorporate the pumps into Mykrolis subsystems. Mykrolis will incorporate the pump
into fluid delivery and filtration systems used for (CMP), wet etch and clean, and photochemical
fluid delivery. (5) Robotic Vision announced that on June 18, 2003 it received a Nasdaq Staff
Determination letter indicating that RVSI fails to comply with the minimum stockholders' equity
requirement for continued Nasdaq listing and therefore is subject to delisting from the Nasdaq
SmallCap Market. RVSI noted that it is requesting a hearing before a Nasdaq Listing Qualificat
ions Panel to review the Staff Determination; the company expects the hearing to be held in late
July/early August, and a decision to be made shortly thereafter. (6) Lam Research announced that
the 2300 Exelan dielectric etch system has capabilities for front- and backend sub-65-nm
applications, including front-end HARC and SAC etch and backend in-situ low k dual damascene
etch.
Thursday 26 June (1) Entegris announced that NT International secured orders for its Integrated
Flow Controller totaling over $1 million. The orders have already been delivered.
GS Universe Price Performance 6/27/03 Price performance
Ticker Company Name Rtg Close Week MTD QTD YTD Y-Y
Semiconductor Capital Equipment
AEIS Advanced Energy IL 15 1% 8% 69% 14% -35%
AMAT Applied Materials OP 16 2% 3% 27% 23% -20%
ATMI ATMI Inc. IL 25 2% 2% 32% 37% 10%
ACLS Axcelis Technologies IL 6 -4% 3% 29% 8% -49%
CMOS Credence Systems U 8 -4% 3% 22% -11% -55%
ENTG Entegris IL 13 -4% 5% 31% 27% -4%
KLAC KLA-Tencor IL 46 -2% 0% 29% 31% 3%
LRCX Lam Research IL 18 4% 4% 62% 71% 1%
MKSI MKS Instruments IL 18 -1% -7% 45% 10% -11%
NVLS Novellus Systems IL 36 -1% 4% 32% 28% 4%
TER Teradyne Inc. U 17 -3% 1% 49% 33% -30%
Mean -- -- -1% 2% 39% 25% -17%
Median -- -- -1% 3% 32% 27% -11%
Source: Factset.
I, Jim Covello, hereby.. |
