NVLS Interview:
CNBC - SQUAWK BOX
NOVELLUS SYSTEMS CEO RICK HILL
OCTOBER 13, 1998
ABSTRACT: Hill says despite a slowdown, unit production
has increased, which bodes well for the semiconductor
industry. He says the change from aluminum chips to
copper chips will be a sector-wide trend. Hill says the
dynamics of the industry have not changed; it is still
cyclical.
Mark: Some long-awaited positive news for semiconductor
equipment maker, Novellus Systems. The company reported
third-quarter earnings of 22 cents per share, beating Wall
Street estimates by 10 cents, but still off 62% from year-ago
numbers. Novellus cited its aggressive cost-control
measures for the better-than-expected report. The news
fueled a 25% jump in the company's stock price, gaining
more than 6 points, to close at 29 and change. That is still
at the low end of its 52-week range of 20 to 66. But could
this be a sign the semiconductor industry is finally showing
some signs of life? Joining us to tell us more about his
business is Rick Hill, CEO at Novellus Systems. Mr. Hill,
thanks for joining us.
Good morning, Mark. How are you? You know how to take
the air out of the old balloon there.
Mark: Well, you know, believe me, I've lost my share of
money.
No, I understand. And I can appreciate it.
Mark: You know, you've got to be realistic about these
things, and I guess that's what we'd like to know from you.
The numbers are what they are. Bookings fell short of
one-to-one for the third quarter of '98. Interestingly is a quote
in the press release. Company's net sales as a result of
continued slowdown during the quarter of capital spending
by semiconductor manufacturers, especially for capacity
expansion. Now, not to be a doomsayer, but would you
address the question perhaps what we're seeing is some
kind of change in your business, maybe there's -- maybe
you're going to have to rely on -- more on technology
upgrades than capacity expansion in this brave new world.
The real dynamics of this market have not changed. It's
always been cyclical. When I joined the company five years
ago, the only question I was ever asked is when's the cycle
going to be over. And most people seem to have forgotten
the fact that which go back five years ago we've probably
tripled in size during that period of time. And realistically,
that capacity has to be absorbed. And that's what's
happening. It's being absorbed now.
And at the same time, there's a tremendous shift in
technology. It's part of the dynamics of our business. And
that's providing some opportunity, especially for companies
like Novellus.
Mark: Now, one of the shifts in technology that you want to
take advantage of, is the shift to copper from aluminum in
terms of the conductive material within the chip.
Are you betting the company on this? If copper is slow to
take off, can expect you, your company, to be relatively
slow here, too?
Novellus is a well-rounded company. And copper is just one
of the legs of the stool that we have, but there is no doubt in
the marketplace today that copper is going to be big.
The industry is going to shift from aluminum to copper. The
question is only how quickly will it change. Because of the
slowdown, I think it has the opportunity to change much
more quickly than had all these businesses been making
huge amounts of money.
Today what they're trying to do is shift their technology so
they can get a competitive advantage in the marketplace
and prove their gross margins and cons gentle --
consequently with our product line we're very
well-positioned.
Mark: Susan?
There was comments this morning in a couple of the papers
talking to some of the other semiconductor makers were hot
on the heels of Intel and with AMD and others. Is that good
for the demand long term for your business to have more
participants and different approaches in terms of the demand
for equipment side?
First of all, competition in the semiconductor industry is
great for market. It drives down prices and consequently
broadens the number of people who can take advantage of
high technology. As a consequence, where we are in the
food chain, that increases demand for units. When units
increase, it increases the demand for equipment. And even
though we've had a downturn, if you look at unit production,
it's increasing. And that's why I think when you look at this
market over the long term, despite the fact we've had a
slowdown, unit production has increased. Eventually this
capacity gets absorbed, new technology gets put in, and we
have to have an explosive buying of new equipment in order
to sustain demand.
Mark: You know, you mentioned where you are in the food
chain. It occurs to me we're kind of making an assumption
here perhaps a lot of people don't know where you are on
the food chain. Your specialty is your bread and butter is
called chemical vapor deposition. It basically vaporizes the
copper or aluminum or whatever and the machinery deposits
it then in the little grooves, for lack of a better word. That's
pretty much it, right?
Well, that's sort of a technical way to think about it. What I
like to tell people is we're a high-tech spray painting
company. And if you think of integrated circuits, they're
nothing more than a series of very thin layers of conducting
material and insulating material.
And so we're just a high-tech spray-painting company and
our equipment, high-tech spray painters.
Mark: I love it. I think everyone can relate to that very
quickly, almost out of time.
In a recent conference call you said you did not believe
business environment with improve until second quarter of
'99. Is that still the case?
I think we have to see a shortage of equipment capacity in
order for there to be a real significant uptick. I think it's going
to take at least another couple quarters before we see that
consumption filled.
Mark: Okay.
So, that's it.
Mark: Mr. Hill, thank you very much. Appreciate hearing
your thoughts.
Enjoyed it. Thank you very much, Mark.
Mark: That was Rick Hill, chief executive officer at Novellus
Systems. He joined us from Palo Alto.
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