GS US Semi Equipment: SEMICON West
Day 2 - increasingly apparent that Q3 orders
will decline Q/Q
Tuesday marked the first official day of Semicon West, with analyst meetings hosted by
Applied Materials, Credence Systems, and Tokyo Electron, among others. We also
attended 1x1 meetings with Axcelis, Entegris, Photronics, and ASML. We believe that it
is becoming increasingly apparent that Q2 was soft and the Q3 outlook is weak, with the
foundries not having begun to place any meaningful orders despite consensus expectations
for a strong foundry recovery in H2?05. As has been the case for the past 12 months,
managements remain hopeful that a recovery is just around the corner despite the fact that
7 SPE companies have negatively preannounced Q2 results. We continue to expect Q3
orders to be down 5-10% Q/Q driven by declining memory orders vs. expectations for Q3
orders to be flat to up 5% Q/Q. No change to our Cautious coverage view.
The first official day of SEMICON West, a Semi Equipment industry trade show hosted
by Semiconductor Equipment and Materials International (SEMI), began on Tuesday with
analyst meetings hosted by Applied Materials, Credence Systems, and Tokyo Electron,
among others. We also attended several 1x1 meetings on Tuesday with Axcelis, Entegris,
Photronics, and ASML. We believe that it is becoming increasingly apparent that Q2 was
soft and Q3 fundamentals are likely to be weak. Despite Street expectations for a
meaningful pick-up in foundry orders in H2'05, the equipment companies are
acknowledging that the foundries have not begun to place meaningful orders. Although
foundry utilization rates are improving, we believe that the foundries are likely to wait to
place significant rounds of new orders until they are more certain that the recent increase
in utilization rates are sustainable and not just seasonal. We expect Q3 orders to be down
5-10% sequentially vs. Street expectations for orders to be flat to up 5% sequentially,
driven by declining memory orders. As has been the case for the past 12 months,
managements remain hopeful that a recovery is just around the corner. With Q3 already
having begun, managements are now pushing out the upturn again to Q4 despite having
limited visibility.
In general, the equipment companies appear focused on driving the adoption of new
products in an effort to gain market share during the downturn with Axcelis highlighting
its Optima ion implant platform and Credence Systems introducing its new low-end
Sapphire D series platform, in addition to several new product announcements across the
space in conjunction with the show. Consolidation also appears to be a common thread,
with Entegris highlighting the benefits (both in terms of revenue and cost synergies) of its
merger with Mykrolis (also recall that Brooks Automation agreed to acquire Helix on
Monday) and back-end companies offering insight on potential tester company
combinations. We believe that consolidation in the sector is being driven by pricing
pressure that the SPE companies and their suppliers are feeling as a result of significantly
slower industry growth rates. SPE companies are also recognizing the need for greater
critical mass. Companies (including Asyst, Applied, Credence, Photronics, and Entegris)
also continue to be focused on improving their operating models by reducing costs,
particularly in light of what we believe remains a difficult pricing environment.
Below we provide our key takeaways from the Applied Materials and Credence Systems
analyst meetings.
APPLIED MATERIALS HOSTED AN ANALYST MEETING FOCUSED ON PRODUCTS,
INNOVATION, MARKET SHARE GROWTH, AND FINANCIAL PERFORMANCE. Applied
Materials hosted an analyst meeting at Semicon West on Tuesday morning. The meeting was
primarily focused on growth drivers in the semiconductor industry, new product introductions, and
Applied's financial model. Management remains optimistic regarding the growth prospects in the
semiconductor industry, highlighting potential growth drivers that include: 1) increasing silicon
content, 2) increasing die sizes for advanced devices (i.e. multicore processors, DDR2 DRAM, and
SOCs with increasing integration), 3) greater demand for integrated flash memory, and 4) increasing
process complexity. Applied continues to be focused on growing its market share and expanding its
services business (currently approximately 20% of Applied's business).
In terms of the current business environment, management noted that it did not see a meaningful
change in memory spending since its conference call in May. While memory orders are down from
Q3'04 levels, memory customers continue to place orders. With regard to the foundries,
management indicated that utilization rates at the foundries appear to be going up. While the
company did not pinpoint the utilization rate at which foundries may begin to ramp up their
spending plans, management did note that foundries will not be spending significantly until
utilization rates are at sustainably high levels. We believe foundries seem to be waiting to make sure
that the current increase in utilizations they are enjoying is more than just a seasonal improvement
in the business before adding significant new capacity.
In terms of products, management focused on a number of recent introductions in the metrology,
inspection, etch, thermal processing, and deposition segments. In the metrology segment, the
company highlighted its OPC Check solution, which is used in conjunction with Applied's
VeritySEM metrology system to automate the OPC (Optical Proximity Correction) mask
qualification process. In the inspection segment, management highlighted the company's UVision
brightfield wafer inspection tool, which was introduced in May. In the etch arena, the company
discussed its Centura AdvantEdge Etch product, which is extendable beyond 65 nm. Management
also noted that the tool is able to extend the usable wafer area with only a 2mm edge exclusion
(down from 8mm). In the thermal processing area, Applied highlighted its RedOx offering, which is
aimed at the flash memory segment. Management indicated that flash is an extremely fast moving
market and Applied is working on offering an increased number of products in this segment. In the
deposition segment, the company highlighted its Producer SE Black Diamond II tool
(next-generation low k film with a k value of less than or equal to 2.5). In terms of the company's
services business, management noted that it continues to expand its services offering to penetrate
the entire fab (i.e. clean room, sub fab, eDiagnistics Software, EcoSystems Environmental
Solutions.)
With regard to Applied's financial model, the company's goal is to continue to deliver profitability
even in a declining revenue environment. Management indicated that Applied remains committed to
investing in new product development. To that end, management indicated that Applied is investing
approximately $1 billion in R&D this year and will continue to invest at similar and/or greater levels
going forward. The company also indicated that it intends to do more on the M&A front.
Additionally, the company indicated that it will continue to repurchase stock (increased share
repurchase authorization to $4 billion) and return cash to shareholders in the form of a dividend.
CREDENCE SYSTEMS ANALYST MEETING HIGHLIGHTS THE COMPANY'S PRODUCT
PORTFOLIO, FINANCIAL MODEL, SAPPHIRE PLATFORM, AND NEW LOW-END
SAPPHIRE SYSTEM. Credence System's hosted an analyst meeting on Tuesday morning that was
focused on the company's product portfolio, financial model and continued efforts in reducing costs,
the traction of its Sapphire SOC tester platform, and the introduction of the company's new low-end
Sapphire D10 platform. In regards to the current environment, the company indicated that it expects
H2'05 to be more robust than H1'05 and that customer utilization rates are improving.
The company highlighted its diversified product portfolio in the test segment, underscoring that it
competes in the SOC, analog/mixed-signal, debug and characterization, and flash segments. The
2 Goldman Sachs Global Investment Research
July 13, 2005 Analyst Comment
company also noted that while Credence has historically had a strong presence at the outsourced
package and test houses, its acquisition of NPTest has helped expand its presence with IDMs.
Management believes that its broad product portfolio in the test space as well as its more diversified
customer base will help reduce the volatility the company has been subject to during up and down
cycles in the SPE space.
In regards to the Sapphire platform, management indicated that the company has 25 customers and
has about 130 systems installed at customer sites. The company indicated that the Sapphire platform
hasn't gotten as much traction as possible at outsourced package and test houses (OSATs) because
the OSATs added too much capacity and have therefore been reluctant to order new testers.
On the fl
ash side of the business, Credence competes almost entirely in the NOR flash segment.
Management indicated that the company doesn't have a strong presence in the NAND flash segment
because NAND flash customers are able to utilize their DRAM testers to test NAND devices and as
such don't need to purchase flash-specific testers. Management also touched upon a significant flash
win (we believe at Intel), which the company expects to drive revenues beginning in 2007.
The company introduced its new Sapphire D10 series, which is a low-end Sapphire platform
targeted at low ASP, high volume devices. The platform is less expensive ($500 per pin) than the
original Sapphire ("S" series) in part because it is air cooled as opposed to liquid cooled. It is
targeted at the consumer mixed-signal, flash & EPROM, advanced linear & wireless, and
automotive markets. The company doesn't expect the Sapphire D10 series to cannibalize its
ASL1000 and ASL 3000 platforms. Credence indicated that it has already shipped multiple D10
systems to different customers and has systems in backlog.
Management provided a target breakeven model that assumes sales of $110 million and gross
margins of 47.0% (gross margin improvement is expected to be driven by the company's facility
restructuring and other cost saving efforts). The company is focused on driving down its breakeven
level to $110 million from just under $140 million in FQ4'04. We would also note that Credence's
competitor, Teradyne, filed an 8-k indicating that it reduced its semi test workforce by about 400
employees (about 5-6% of the total workforce) on Tuesday. We believe that ATE companies
continue to focus on driving down costs as they have experienced significant cycle-to-cycle margin
erosion and have generated significant losses over the course of the cycle, we believe driven by
significant pricing pressure.
Each of the analysts named below hereby certifies |
