GS US SEMI EQUIP WEEKLY: `THE MATH MATTERS TO US NOW`
Summary: (1) "The math matters to us now." This comment from a semi equip
management team implying that semi equipment stocks are now destined to trade at the
present value of a realistic stream of free cash flows instead of peak earnings and
sequential order hype is the most insightful comment we have heard in some time, (2)
TSMC and UMC reporting this week. Expect backward-looking capex increase from
TSMC with declining utilization rates for Q3'04 (albeit from high levels) from both. UMC
H2'04 orders/2005 capex likely to be weaker than TSMC on unfavorable customer
exposure, (3) Ultratech highlights shortfall in revenues due to a shipment push-out from a
customer; we believe this data point coupled with two other such revenue misses from
ROBV and SMTL are signs of the industry approaching the later stages of the upturn, (4)
KLA, BRKS, and ACLS are all reporting this week. Expect KLA to be typically
conservative with its order guidance, and (5) News, Events and Price Performance. Our
coverage view is Neutral.
"THE MATH MATTERS TO US NOW." Everyone who follows the semi and semi
equipment industry over the last several weeks has been awash in data points during the
SEMICON West trade show and earnings season. While we have heard arguments
ranging from where we are in the cycle to how the stocks will/should trade, in our
opinion, by far the most insightful comment that we heard over the last several weeks
came from a semi equipment management team. The comment was, "The math matters to
us now." Upon further probing, we learned that this comment was meant to express this
management team's belief that the days of semi equipment companies trading on
speculation and hope, on rumors and sequential order hype, on 10 year median P/Ss and
multiples on expected peak earnings that will never be achieved are gone, at least
temporarily, if not forever. More specifically, this company believes that semi equipment
companies are now (rightly) being valued on the present value of their future cash flows!
Further, those cash flows have to contemplate the next downturn as investors are now too
savvy to believe that this industry is anything other than cyclical (pure, growth or
otherwise). While this may sound rather mundane to those outside of the semi equipment
industry, to anyone who has spent any amount of time following these stocks, that is a
truly remarkable concept.
While many investors have expressed great frustration regarding the trading pattern of the
semi equipment stocks in this cycle, in the context of the quote above, the stock action of
the last 18 months makes a great deal more sense. During the depths of the downturn,
most of Wall Street doubted that the semi equipment companies would ever generate any
meaningful free cash flow again and the stocks sold off harshly. Then, when the cycle
turned and the stocks started working, Wall Street started to get carried away and
modeled historic levels of free cash flow growth through 2006 using the argument that
the companies restructured significantly and would be more profitable this cycle. For
sure, that was the only way to justify the valuations of the stocks back in the fall of 2003
and January of 2004. Unfortunately, now that the prospects for growth throughout the
supply chain look much weaker than they did only 3-4 months ago, investors aren't
waiting for the semi equipment companies to highlight the bad news, they are selling the
stocks first, anticipating that, perhaps, the Street got carried away modeling strong free cash flow
growth out trough 2006. While company managements and the most bullish investors lament that
stocks look cheap on 2005 earnings, more cautious managements and/or investors who are used to
looking at other cyclical industries are looking at the present value of free cash flows and, to the
extent that the management team who provided the above quote is correct, making the right
decision to be less aggressive with the stocks.
TSMC AND UMC REPORTING THIS WEEK. EXPECT BACKWARD-LOOKING CAPEX
INCREASE FROM TSMC WITH DECLINING UTILIZATION RATES FOR Q3'04 (ALBEIT
FROM HIGH LEVELS) FROM BOTH. UMC H2'04 ORDERS/2005 CAPEX LIKELY TO BE
WEAKER THAN TSMC ON UNFAVORABLE CUSTOMER EXPOSURE. The Taiwan
foundries are both reporting this week and that always makes for a heavy speculation week in the
semi equipment space. We expect TSMC to raise its 2004 capex budget to $2.5 billion from the
original guidance of $2.0 billion. We believe that TSMC has already placed most/all of the orders
for its increased 2004 capex which is being driven by the more rapid than originally expected
expansion of Fab 12, the company's first 300mm fab as well as the initial build-out of Fab 14,
TSMC's 2nd 300mm fab. While some might question why TSMC would be raising capex given the
recent, more cautious news in the food chain, recall that TSMC made this decision several months
ago, before a lot of the more cautious news hit the industry. Further, recall that TSMC spent $3.3
billion in capex in 2000 and its wafer starts and revenues are significantly higher today than they
were in 2000. So, similar to Intel, we believe TSMC's likely capex increase is more about making a
technology transition (more rapid adoption of 300mm) than capacity expansion and we therefore
don't believe TSMC's increased capex budget is at risk just because the supply chain is weakening.
That said, the news isn't all good for the semi equipment suppliers. First, we believe that TSMC's
current capacity expansion will allow it to be more conservative with its 2005 capex spending
during what we expect to be a downturn year for the semi industry. Second, we believe declining
capacity utilization rates at both TSMC and UMC (with a more severe decline likely at UMC) in
CQ3'04 and CQ4'04 (albeit from very high levels) will be a leading indicator for lower 2005 capex
from both foundries. Finally, we believe that UMC is facing greater challenges than TSMC from a
capacity perspective. Reason being is that UMC's customers have built significantly more excess
inventory and are thus more likely than TSMC's customers to begin to draw inventory down and in
turn, decrease their wafer start orders to UMC. As a result, we believe that UMC's exiting orders to
the semi equipment suppliers are at some risk if/when UMC sees additional customer cancellations
and more significant declining capacity utilization rates in H2'04.
ULTRATECH HIGHLIGHTS SHORTFALL IN REVENUES DUE TO A SHIPMENT
PUSH-OUT FROM A CUSTOMER; WE BELIEVE THIS DATA POINT COUPLED WITH
TWO OTHER SUCH REVENUE MISSES FROM ROBV AND SMTL ARE SIGNS OF THE
INDUSTRY APPROACHING THE LATER STAGES OF THE UPTURN. Last week Ultratech
reported earnings and indicated that it missed its revenue target largely due to a pushout in an
expected shipment to a customer. We have been highlighting in our recent weeklies several such
incidences of negative preannouncements/revenue expectation misses (including one from ROBV
and one from SMTL) due to either push-outs in customer shipments or pushouts in customer
"acceptances" required under SAB-101 in order for the equipment companies to recognize an
already shipped tool as revenue. While the revenue shortfalls may be company specific alone, we
believe that the three combined data points are worth highlighting as they likely indicate that the
cycle is in its late stages given that in previous cycles customers not accepting tools as quickly as
originally expected from some of the smaller semi equipment companies has been an early
indicator of the industry approaching the later stages of the upturn.
ACLS REPORTING WEDNESDAY NIGHT; GS Q2 EPS ESTIMATES ABOVE CONSENSUS
BUT WE ARE MODELING SEQUENTIAL DECLINES IN SALES BEGINNING IN Q2'05 AS
WE DO NOT EXPECT THAT AXCELIS WILL BE ABLE TO OUTPACE THE INDUSTRY AS
ORDER MOMENTUM CONTINUES TO SLOW. Axcelis is reporting June-quarter earnings on
Wednesday after the market close. We model revenues of $155 million (up 16% sequentially) with
EPS of $0.30, vs. the Street consensus EPS estimate of $0.26. We model 2Q gross orders of $165
million (up 12% sequentially), excluding the Sumitomo Eaton Nova (SEN) joint venture. As
earnings season has proven thus far, i.e. with reports from Lam Research and Novellus Systems, it
is difficult to project profitability at (what we believe to be) the end of the cycle due to lumpy
customer acceptance patterns and SAB- 101 accounting revenue recognition. While our estimates
are above Street consensus for the current quarter, we are modeling sequential declines in revenues
beginning in Q2'05, as we believe that Axcelis will not be able to outgrow the industry as order
momentum continues to slow. On its earnings call, we would also expect management to address
its recently announced single-wafer high current implanter, particularly given that Applied's
introduction of a competing tool (the Qua
ntum X) at Semicon West.
WE WOULD EXPECT BROOKS TO GUIDE FOR ABOUT 5% SEQUENTIAL ORDER
GROWTH WITH THE OUTLOOK FOR THE TOOL AUTOMATION BUSINESS
ESSENTIALLY FLAT, IN-LINE WITH OUR EXPECTATION FOR FLATTISH SEMI OEM
SHIPMENTS. Brooks is reporting June- quarter (third fiscal quarter 2004) earnings on Thursday
morning. We model CQ2 revenues of $150 million (up 9% sequentially) with EPS of $0.29, vs.
the Street consensus EPS estimate of $0.30. We model CQ2 gross orders of $160 million (up 5%
sequentially). Recall that the company had indicated on its last quarterly earnings call that while
quoting activity remained strong visibility was low and thus the order outlook relatively uncertain.
We would expect the company to indicate that orders will grow about 5% sequentially in CQ3
(about $170 million in orders). A key to Brooks' call will be gross margins. Recall that the
company significantly disappointed the Street by missing its previous gross margin targets during
the first calendar quarter, which it attributed to product mix. We therefore believe that the Street
will be focused on margin improvement as a driver for the stock. While we would expect
management to maintain its bullish tone we would highlight that similar to other subcomponent
suppliers, we would expect the equipment automation business to be flattish over the next several
quarters, inline with our expectation for flattish semi OEM shipments.
EXPECT KLA TO BE TYPICALLY CONSERVATIVE IN ITS ORDER GUIDANCE AND TO
CALL FOR FLAT TO +5% SEQUENTIAL ORDER GROWTH IN CQ3. KLA is reporting Junequarter
(fourth fiscal quarter 2004) earnings on Thursday after the market close. We model
revenues of $460 million (up 18% sequentially) with EPS of $0.46, vs. the Street consensus EPS
estimate of $0.45. Recall that KLA preannounced its CQ2 orders during its analyst meeting at
Semicon West, indicating that orders were approximately flat sequentially in CQ2 vs. original
guidance for CQ2 order growth of -15% sequentially to +10% sequentially. We would expect
management to be typically conservative in its order guidance, so we believe a reasonable
expectation for KLA's CQ3 order guidance is flat to up 5% sequentially. While September is
typically a seasonally slower order quarter for KLA, orders should be a bit better than a typical
September since the company didn't see the normal seasonal sequential increase in the June quarter
(i.e. most June quarters are up in orders vs. the flat orders the company announced for June this
year).
News, Events and Price Performance
Last week
Monday 19 July (1) Semiconductor Equipment and Materials International (SEMI) released the
June US equipment manufacturer's book-to-bill of 1.08; GS 1.11; Street 1.11. Please see our 7/19
note for additional details.
Tuesday 20 July (1) FormFactor (FORM-$19.23; IL/N) reported $0.17; GS $0.16; Street $0.15.
Please see our 7/20 note for additional details. (2) ATMI completed the sale of its specialty
epitaxial services business to International Rectifier Corporation. (3) Tegal Corporation received an
order for its Endeavor AT PVD cluster tool from a consumer electronics maker, to be used in the
fabrication of FBAR (Film Bulk Acoustic Resonator) devices. (4) ADE received an order for its
wafer geometry system from a silicon wafer supplier. The tool will be used to support the
customer's next phase of 300mm production capacity expansion. (5) MKS Instruments
(MKSI-$12.97; IL/N) reported $0.37; GS $0.40; Street $0.39. Please see our 7/20 note for
additional details. (6) Cymer (CYMI-$27.26; NC) reported $0.27; Street $0.29. (7) Teradyne
(TER-$16.84; U/N) reported $0.39; GS $0.37; Street $0.37. Please see our 7/21 note for additional
details.
Wednesday 21 July (1) Kulicke & Soffa (KLIC-$7.67; NC) reported $0.35; Street $0.33. (2) ATMI
(ATMI-$19.43; IL/N) reported $0.18; GS and Street $0.17. Please see our 7/21 note for additional
details. (3) Entegris received a $75,000 order for its 300mm film frame cassette, which will be
shipped during the August 2004 quarter. (4) Mattson (MTSN-$8.10; NC) reported $0.14; Street
$0.13. (5) Advanced Energy (AEIS-$8.78; IL/N) reported $0.13; GS $0.24; Street $0.25. Please
see our 7/22 note for additional details. (6) Lam Research (LRCX-$22.64; IL/N) reported $0.37;
GS $0.25; Street $0.26. Please see our 7/22 note for additional details.
Thursday 22 July (1) Tegal received two U.S. patents for nano layer deposition of conformal thin
films for barrier, copper seed and high-K dielectric applications in advanced microprocessor and
memory device production. (2) Ultratech (UTEK-$12.51; NC) reported -$0.10; Street $0.02. (3)
Advanced Energy appointed Dr. Hans-Georg Betz to its Board of Directors. Betz currently serves
as the CEO of West STEAG Partners (a technology focused venture capital company). (4) Helix
(HELX-$14.23; NC) reported $0.24; Street $0.23. (5) Veeco appointed Peter Simone to serve on
its Board of Directors and its Audit Committee. Simone has held positions at Speedfam-IPEC,
Active Control Experts, Xionics Document Technologies and GCA Corporation. (6) Cabot
Microelectronics (CCMP-$32.15; NC) reported $0.49; Street $0.39.
This week's calendar:
Monday 26 July: (1) Rudolph Technologies (RTEC-$14.05; NC) reporting earnings. Street $0.08.
(2) VECO (VECO-$20.15; NC) reporting earnings. Street $0.14.
Tuesday 27 July: (1) Amkor (AMKR-$4.81; NC) reporting earnings. Street - $0.05. (2) Semitool
(SMTL-$8.00; NC) reporting earnings. Street -$0.06.
Wednesday 28 July: (1) Axcelis Technologies (ACLS-$8.75; IL/N) reporting earnings. GS $0.30;
Street $0.27. (2) MEMC Electronic Materials (WFR-$8.09; NC) reporting earnings. Street $0.17.
(3) United Microelectronics Corporation (UMC) earnings call.
Thursday 29 July: (1) Mykrolis (MYK-$11.41; NC) reporting earnings. Street $0.22. (2)
KLA-Tencor (KLAC-$38.76; OP/N) reporting earnings. GS $.046; Street $0.45. (3) Varian
Semiconductor Equipment Associates (VSEA-$29.46; NC) reporting earnings. Street $0.51.
GS Universe Price Performance 7/23/04 Price performance
Ticker Company Name Rtg Close Week MTD QTD YTD Y-Y
Semiconductor Capital Equipment
AEIS Advanced Energy IL/N 9 -29% -44% -44% -66% -54%
AMAT Applied Materials IL/N 16 -2% -17% -17% -27% -15%
ATMI ATMI Inc. IL/N 19 -12% -29% -29% -16% -24%
ACLS Axcelis Technologies IL/N 9 -8% -30% -30% -15% 2%
BRKS Brooks Automation IL/N 15 -6% -27% -27% -38% -19%
CMOS Credence Systems U/N 9 -9% -33% -33% -30% -2%
ENTG Entegris IL/N 9 -5% -25% -25% -33% -43%
FORM FormFactor OP/N 19 -4% -14% -14% -3% 2%
KLAC KLA-Tencor OP/N 39 -2% -22% -22% -34% -27%
LRCX Lam Research IL/N 23 9% -16% -16% -30% 4%
MKSI MKS Instruments IL/N 13 -24% -43% -43% -55% -45%
NVLS Novellus Systems IL/N 26 -4% -17% -17% -38% -28%
TER Teradyne Inc. U/N 17 -5% -26% -26% -34% -3%
Mean -- -- -8% -26% -26% -32% -19%
Median -- -- -5% -26% -26% -33% -19%
Source: Factset.
I, Jim Covello, hereby certify that all of the views expressed in |
