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Technology Stocks : Cymer (CYMI) -- Ignore unavailable to you. Want to Upgrade?

To: Edward A. Fitzpatrick III who wrote (20353)	12/8/1998 10:32:00 PM
From: Ian@SI	Respond to of 25960

for those having difficulty accessing the merrill site... Investment Thesis Cymer is the leading provider of deep ultraviolet (DUV) laser light sources used in current and next generation semiconductor lithography equipment. Device manufacturers are continuously shrinking the feature sizes of their chips to both increase speed and decrease size and cost. Below .25um, the traditional i-line light sources are no longer effective and the lithography equipment companies must transition to a new light source: DUV. Starting in 1998 many cutting edge device manufacturers began to transition their production to .25 and .18um. This trend is expected to accelerate in 1999 as a majority of the device companies implement extensive shrink programs that will drive the demand for enabling technology such as DUV lithography equipment. With a DUV laser market share in excess of 98%, CYMI is positioned to benefit from this high growth. Current Industry Conditions We believe the semiconductor industry has just reached the bottom of an investment cycle, but evidence of a sharp industry rebound has yet to materialize and 1999 capital spending plans for the device manufacturers remains at or below 1998 levels. The only spending taking place right now is for technology buys that will allow the manufacturers to continue their device shrinks. Therefore, we are more confident that CYMI will see a marked improvement in business by the end of 1999 than any other company in the group. Market Share Advantage There are currently 532 DUV lasers in production at the end users today and 522 are CYMI lasers. The two primary competitors, Komatsu and Lambda Physik, have only placed a combined 10 units at the end users facilities. To maintain its dominant market position, CYMI has implemented an aggressive demand pull program with the end users. With a combination of an extensive worldwide service and support network and a dramatic cost-of-ownership reduction plan, CYMI is convincing the device manufacturers to “Insist on Cymer”. Inventory Concern Lessened The principle concern about CYMI's business going forward is the volume of DUV laser inventory, approximately 300 units, that exists at the lithography OEMs, primarily Nikon and Canon. Of these 300 units 80% are the older ELS-5000 and the market is quickly moving towards the new ELS-5010. Even though the demand for steppers equipped with ELS-5000 lasers providing .25 micron technology should remain for the next few years, it could take a significant length of time for the individual OEMs to use this inventory. CYMI is not financially responsible for this inventory, but with only five OEM customers, the company must feel the pressure to help resolve this issue. Unfortunately, the company's initial plan to offer an upgrade package to improve the reliability of these older systems has been met with a less than enthusiastic reception. Due to the continuing demand for these older lasers, we no longer feel this issue will adversely affect future business. Historical inventory rates at the OEMs typically run two quarters. Based on the 1999 DUV stepper forecast of 400 units, we would expect inventory levels of 200+ lasers. Financial Highlights Business Has Bottomed: Revenues and earnings are projected to bottom in 4Q '98 at $37.0 million and a loss of d$0.16 compared to 3Q '98 reported revenues of $44.4 million and $0.05. We believe the company should regain profitability in 2Q '99 and experience solid growth by the end of 1999. Our 4Q'98 EPS estimate includes a $4 million charge associated with the write down of inventory, including obsolete ELS-5000 components. Balance Sheet Strength: The company's balance sheet remains sound with $175 million in cash and equivalence. This should enable the company to maintain critical programs, such as research and development, throughout the remainder of the downturn. The company has implemented several cost reduction programs, including shutdowns, layoffs and salary reductions, that should help preserve cash over the next few difficult quarters. ASPs Rising: The rapid industry acceptance of CYMI's latest line of lasers continues to increase the ASPs.