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Politics : Formerly About Applied Materials -- Ignore unavailable to you. Want to Upgrade?

To: Proud_Infidel who wrote (18505)	4/3/1998 5:00:00 PM
From: Gottfried	Respond to of 70976

Brian, "Intel sees strong Asia PC growth" infobeat.com GM

To: Proud_Infidel who wrote (18505)	4/3/1998 9:45:00 PM
From: Paul V.	Respond to of 70976

Brian and threaders, I may have overlooked the following if previously posted. If not posted it provided interesting reading. www3.techstocks.com Mar 25, 1998 Technology Outlook with Infrastructure Carl Johnson of Infrastructure infras.com provides the following interview. Subscription information can be found by clicking here. Below is the write up. Q: What is your general outlook for the semiconductor equipment companies? Business conditions in the equipment companies are worse than people are currently being led to believe. In the past few months we have seen the device companies in Korea and Japan, and some situations in the U.S., slow their capital spending dramatically. I do not feel as though the industry is going to rebound from this quickly - unlike the very fast recovery we saw in 1996. Ron Leckie and I have been preparing a piece that details the disconnect between the stocks and current business conditions. Interestingly, this downturn has completely different characteristics than more recent cycles. My personal feeling is that it may take a little bit longer to come around than people expect primarily because we have so much capacity in place. Q: What is going to pull the industry out of this? A: Well, a move to larger wafers and a move to smaller feature sizes typically takes place during these cycles. The pushout of 300mm is a real negative for many players in the equipment business. Smaller companies with a desire to survive will have to devote more resources to the 300mm toolset just to maintain their viability. The pushout of 300mm actually plays in to the hands of the larger companies because they have much deeper pockets. Everybody is hoping that we will absorb the capacity we have in place. If you look at the signs we are getting about final demand - recent news from the contract manufacturers comes to mind immediately - and the die shrinks that allowing existing facilities to produce more chips in the same fab - you have the foundation for a continued state of excess capacity in the industry. Today we are saturated with existing technology. The fragmentation of the PC market, collapsing modem prices, memory chips, graphics chips and disk drives are all indications of a near term peak. This happens in the technology business all the time. Investors will have to tread carefully over the next couple of years because entities they once thought were viable could be out of the business. These downturns really bring a "survival of the fittest" aspect to the game. At INFRASTRUCTURE we call it a No-Limit Poker game. Q: No limit poker? A: A long time ago we wrote a piece called "No-Limit Poker" to outline the rules for the device manufacturing business. In reality this pertains to just about every aspect of the technology world but we were really focusing on the DRAM business. Basically No-Limit Poker rules state that companies must sit at the table and play every hand, because if you skip a generation of technology it is virtually impossible to catch up. The ante's are constantly going up. Look at the cost of a wafer fab. We have gone from $500 million to $1 billion, to $1.5 billion and now $3 billion over the past ten years. Experienced players know you have to bring the right product to the market at the right time and in the right quantity. Delays are not tolerated. If you can't play the hand you will have to leave the table. Smaller players cannot participate in the business because the stakes are so high. Shakeouts, like the one we are having today, will ultimately make the stronger players stronger and the weaker players - well, they will sell out or get out of the business. Looking at the equipment side of the industry I really see a number of consolidations. Many of the smaller companies realize they have to develop a critical mass to supply and support a $3 billion fab. We heard the consolidation story, ad nauseum, during SEMInvest '98. If they don't consolidate, they run the risk of losing their business to a process-sequence-integration expert like Applied Materials. Here are a few facts to ponder that, in my view, support industry consolidation: If we look at the equipment industry itself total revenues on a global basis run slightly below $40 billion. On a domestic basis, 1997 revenues were a hair below $25 billion (as measured by SEMI's market statistics department). There are over 2,200 players (this is actually SEMI's membership). Most of these companies are not large manufacturers - some are consultants and small suppliers. This list has grown enormously during the recent capacity expansion. There are some 80 publicly traded semiconductor equipment companies and a lot of those have come on to the market during the 1993 to 1996 time frame. It was the best of times during 1994 to 1996 but as of late, a good portion of them are not making money. If this downturn lasts for the balance of 1998 and part of 1999 their survival has to be questioned. Q: What companies do you like in the semiconductor area? A: Right now we have been focusing on businesses that are focused on improving the manufacturing effort. We also like companies that facilitate the development and construction of new products. The latter category, being particularly focused on companies that supply technology, is germane to companies that help existing capacity put out new products - we are not talking about wholesale toolset changes, we are really talking about new chip designs. For example: let's say you have a fab that is capable of doing 0.35 micron and can be pushed down to 0.25 micron. In essence, a good portion of your front end wafer processing toolset is already in place. What you want to do is to design new products and tap new markets - markets that are not saturated or commoditized. To do this you need new designs which means new photomasks. That plays into the hands of Photronics, Dupont Photomasks and Etec Systems. I always advocate buying these stocks during periods of weakness. Dupont has some currency exposure and it has created some volatility in their earnings but overall their business is moving along nicely. Q: Is the longer term theme in place for the photomask stocks? A: We just bought the photomask stocks in February and would be accumulating them for the long term. You asked what else we like earlier. I am fond of specialty guys - companies that facilitate the efficient manufacturing effort. This includes ATMI Inc., ASYT and PRI Automation. I realize that is a fairly narrow selection of companies but this is where we see steady long term growth. I am a bit reluctant to apply assets to the front end wafer processing companies today. We have no indications that front end bookings and shipments will be rebounding in the next three to six months. With the capacity we have in place, it does not appear that a large scale recovery will occur until we move to larger wafer sizes. Many will take issue with our premise that most fabs are under-utilizing their front end wafer processing capacity but we hear it so many times each week that it is really hard to dismiss. This does not mean we should throw the baby out with the bathwater. There will periodic rallies. For nimble investors tremendous profits can be earned trading front end equipment stocks like Applied Materials, Novellus Systems and KLA Instruments. Q: As you said it will take some time here, you are expecting them to then move lower? A: Yes, I do think they will move lower. Today Wall Street wants to get ahead of the curve. If you looked at the past downturn, the one that we saw in 1996, we saw a fairly dramatic decline in bookings and shipments for these companies in the span of about 6 months. That decline was not accompanied by weakness in final chip demand. Now what we have is a decline in equipment bookings and shipments but at the same time there is some disturbing signals about final demand. Q: What indicators are showing this? A: The preannouncement by Intel and Compaq highlighted the inventory problems. We don't see these two as isolated events. There are rumblings that corporate PC demand is slowing. There are indications that cellular phone demand is slowing. We have seen datapoints of weakness in total semiconductor unit volumes. Granted, a good portion of this has been driven by the events taking place in South East Asia but a good deal of the slowing conditions can be attributed to the saturated condition of the market. People are a little more hesitant to embrace technology that provides marginal increases in functionality. And the price points! Wow! They are dropping faster than anyone ever thought. Q: What about China, could they eventually pick up the demand for semiconductors and computers? A: That is long term growth story. To say that in the near term they will soak up any lost demand is ludicrous. It's just not going to happen. Don't get me wrong. I like the prospects in China but it is going to take a long time to reap the rewards. Q: Are there any other companies you like today I am keen on one back end equipment supplier and that recently reported a very good quarter, Electro Scientific Industries. Q: It looks like they have been beaten down along with the other equipment stocks. A: They are down from a high in the 60's. Q: It appears that they are making great money and are expected to earn $3.30 in 1999. A: They have not disappointed and continue to do very well. They are fairly aggressive acquirers of complimentary technology. ESI has the ability to help manufacturers get higher productivity out of their facilities, it's a very compelling story. Q: It sounds like they are in the growing trend to make the semiconductor process more efficient. A: Exactly! The semiconductor companies are going to focus on making their manufacturing effort highly efficient. That is why I mentioned the automation guys like Asyst Technologies and PRI Automation. Q: Is this right, Electro Scientific is expected to earn $3.30 in 1999? A: Yes. ESI and Asyst continue to be my favorites in the group. I would also be accumulating ATMI Inc.. It is not for the faint of heart and they should be bought during periods of weakness. Q: Has ESI hit bottom here? A: It was down to around $30 then, it went up to about $40 and revenues fell off by $2 million from the prior quarter because of the Asian crisis. Their laser repair and vision systems group were off slightly due to the DRAM cutbacks. Memory repair has held up pretty well and has almost been flat in this downturn. Management has indicated that current sales are being enhanced because memory is being embedded within logic chips and that is helping them. Kulicke & Soffa Industries is one of their major customers. Q: Are there other competitors coming into this area? A: Yes. Cognex is a major competitor in the machine vision business. Q: Is there anything else significant going on out there? A: The contract manufacturers are getting hammered. I think it is too early to get into this area because of overall weakness. Jabil Circuit came out with a negative announcement and it brought the whole sector down. Near term, I would be cautious on them even though Jabil said that business would pick up in the later part of the year. The contract manufacturers may look cheap on the surface but they operate on very thin margins. Q: Anything going on in the communications area? A: In 1998 some of the smaller communications companies will be acquired. We will probably see a scramble in the ADSL space. I would not be surprised to see someone buy Aware. When Texas Instruments bought Amati, we finally saw a chip company move aggressively toward the ADSL space. Thanx Carl!