Morgan Stanley's 10/24 Report
I don't think anyone has posted this, but I just received this from my Dean Witter broker today. Basically Deahna thinks the Stepper manufacturers are overly optimistic.
--Demand from chip makers remains strong for DUV photolithography equipment, and we believe Cymer remains the dominant excimer laser supplier for photolithography applications.
--However, we believe Cymer, through no fault of its own, is susceptible to further push outs and potentially lower sequential growth over the next few quarters. We believe this could result in a declining sequential quarterly shipment scenario before the company once again begins a likely multi-year growth path.
--Our primary concerns that could potentially unfold into the above mentioned scenario are technical performance issues, overzealous market share gain forecasts by some photolithography system suppliers, and challenging initial DUV production ramps. All three of these issues or a combination thereof could negatively affect some photolithography system suppliers' ability to ship according to their respective operating plans.
--Cymer's recent orders, its backlog, and six month forecast from its customers suggest that our thesis is incorrect. In fact, the company fully expects to grow sequentially in each of the next two quarters (i.e., 130+ and 135+ units in F4Q97 and F1Q98, respectively versus our estimates of 110 units in each quarter). Based on Cymer's outstanding manufacturing execution over the past year, we believe the cdompany can easily execute its plan. However, we believe circumstances beyond the company's control could create a situation in which it would have to react by slowing its quarterly shipment rate. This, in turn, could create a short-term quarterly earnings decline.
--Over the past year and three quarters, photolithography system suppliers have shipped about 160 steppers into fabs with Cymer 4000F or 5000 series lasers. Cymer has shipped 472 lasers in total. Therefore, excluding industrial lasers (about 12), we believe about 300 lasers are WIP (work in process) at the stepper manufacturer level.
--In its conference call yesterday, Cymer's management said more steppers were shipped into fabs with its lasers inF3Q97 thanin F1Q97 and F2Q97 combined. This implies that the rate of DUV stepper shipments is accelerating, which is to be expected. As a result, we believe our 1997 stepper market estimate of 290 is intact. However, we believe some Of Cymer's customers may be behind their internal plans while continuing to buy lasers in anticipation of accelerating shipments to meet or approach internal plans.
--If we continue to assume a six month lead time, Cymer's F3Q97-F2Q98 laser shipments should translate into DUV stepper market shipments in 1998. Cymer shipped 124 lasers in F3Q97. Assuming 5-10 unit sequential growth in each of the next three quarters, the company should ship about 550 lasers by F2Q98. Therefore C1998 stepper shipment s should approach 550 units. However, our market estimate for 1998 is 475 steppers. That implies Cymer is on track to ship too many lasers for C1998 stepper shipments assuming a continuationn of six month lead times. If lead times shrink below six monts, the excess would be greater. Additionally, we are not assuming any competitive laser shipments, which is very possible.
--Further more, we believe a bottom-up summation of stepper supplier DUV shipment forecasts for 1998 yields a solution in excess of 600 systems (ASML 150, Canon 150, Nikon 275-300, SVG 25-50 Micrascan III's). In fact this sums to 600-650 systems, which is significantly more than we believe the market can produce and ship. In light of these aggressive internal forecasts, we are concerned that some suppliers may be purchasing lasers in anticipation of higher than possible shipment levels over the next five quarters.
--If we are correct, we believe there could be a laser inventory correction or a slowdown in the rate of Cymer's incoming orders.
--If we receive indications that the market can accelerate beyond our expectations (e.g., above 475 steppers in 1998), which would alleviate a potential excess of laser inventory at the stepper manufacturer level that we believe is currrently building, we would then revise our model upward and upgrade Cymer. That scenario would be based on our opinion of Cymer's substantial long-term competitive advantages and the major opportunity facing the company over the long-run. Still it is probably inevitable that the company will lose some share over time.
--In our last report, we indicated that some of Cymer's customers were upset with Cymer's field service capabilities. In F3Q97, Cymer added 40 people to its after market operations, which now stands at 164. In the conference call yesterday, Cymer's management indicated that chip maker satisfaction with its field service is high. They also stated in the call, and we concur, that Cymer is the only excimer laser supplier to the photolithography industry that is currently building a global service infrastructure. This is important because chip makers that migrate to competitors will likely experience service and support growing pains again.
--Other notables, Cymer now has capacity to produce 1000 lasers in 1998 with 46 test bays worldwide. Additionally, the company now has a new, and highly automated manufacturing facility. As its relatively immature work force matures ove r the next year, combined with the companies (sic) increased automation and metrology capabilities, we expect Cymer's gross margin to expand from the 38% range in F3Q97 to the 45% range in late 1998.
--In summary, we believe the DUV photolithography market is one of the fastest growing and most important markets in the semiconductor capital equipment industry. Within that market, Cymer is the purest play on that potential growth. We believe Cymer's long term future prospects are outstanding. Unfortunately we believe the market will likely go through some initial ramp issues that could negatively impact Cymer's near-term outlook. Whether we are wrong or not on the near-term outlook, we look forward to positively recommending Cymer again at an appropriate time in the future. |
