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Top 10 industry issues

Posted: 09 Jul 2009 ?? ?Print Version ?Bookmark and Share

Keywords:semiconductor equipment? semiconductor industry? industry issues?

The semiconductor capital equipment industry will gather next week in San Francisco for the annual Semicon West tradeshow. As it always seems, this year's show arrives at a critical time when the industry is faced with a number of looming questions. Here are 10 of them:

1. It's the economy, stupid.
In past downturns, Semicon West proved to be a gloomy event. But this year, the show could be very depressing amid the worst downturn in the history of the fab tool sector. Business is terrible now.

At the show, the big question for equipment executives is clear: Have we hit the bottom and is the recovery near? Answer: Some will put a good spin on the story and claim that we're seeing the light at the end of the tunnel.

Our advice: Ignore the song and dance. The fact is that most execs don't have any visibility and are not really sure about their current forecasts. Frankly, there is no real evidence if the current upswing in ICs is real end-user demand or a mere replenishment cycle. Capital spending remains dismal in 2009. Some see another lousy year in 2010.

There is a glimmer of hope for fab tool vendors. Gartner Inc. predicts a gradual improvement throughout the rest of the year and into 2010.

In another good sign, Taiwan Semiconductor Manufacturing Co. Ltd has procured a slew of tools for its 40nm ramp. This month, Intel is expected to release its initial fab tool orders for its 22nm node. I suspect Intel's incumbent vendors have the edge on the business (Nikonlithography; ASMIlow-k and high-k reactors; Hitachietch; TELetch.).

"Samsung remains selective on capex, deciding orders on a month by month basis," said C.J. Muse, an analyst at Barclays Capital. "Technology buys continue, with litho immersion orders placed in Q2. Importantly, we see this trend continuing as we model about 15 immersion order shipments in 2010, clearly benefiting both ASML and Cymer."

One Samsung fab, Line 16, "is originally scheduled for 2010, but our checks suggest 1-2 tool orders have just started to be placed or are slated to be placed in Q3. While still early, this is clearly a place where we could see upside to spending and fill the potential order void in Q4 09," he said. "Finally for DDR3 transition, our checks suggest that Samsung is not buying new testers yet, just modifying existing DDR2 testers."

2. Who will hang in?
This downturn has been brutal on nearly all electronics companies, but particularly semiconductor capital equipment vendors.

"There is no doubt that, as a group, the semiconductor equipment suppliers have taken the worst beating of any of the companies involved in the current semiconductor industry downturn," wrote Bill McClean, president of market research firm IC Insights Inc., in a recent report.

Although McClean projects that capital spending will rebound in the 2H 09, growing by 28 percent compared with 1H 09, it will probably be too little, too late for some companies. Several equipment vendors that never seemed to fully recover from the last major downturn in 2001/2002 now appear to be hanging by a thread.

Every downturn brings consolidation in the equipment sector, and this one will be no different. Expect M&A activity to intensify during 2H 09, even as the downturn lets up, throwing some relief the sector's way.

Might Applied Materials take advantage of the recession and snap up a few companies to augment product lines or move the company into new markets? Is it possible that the long-rumored merger between Novellus Systems Corp. and Lam Research Corp. might finally come to fruition? Anything appears possible at this point.

Here are some companies that, in our opinion, appear to be particularly vulnerable:

? Asyst Technologies Inc. filed for bankruptcy in April, was subsequently delisted from the Nasdaq, and is in search of a buyer. Sources have cited a long list of potential suitors for Asyst, described as "a fixer upper," including Applied Materials, Aquest, Brooks, Daifuku and even an automotive concern.

? Aviza Technology Inc. is already DOA, having filed in June for Chapter 11 bankruptcy protection after selling assets to Japan's Sumitomo Precision Products Co. Ltd.

? Axcelis Technologies Inc. eliminated some 31 percent of its workforce between last October and late May. The company also initiated a host of other money-saving measures, including pay cuts, facility closures and the sale of its portion of a joint-venture in Japan. With few places left to cut, can Acexlis continue to tread water?

? Electroglas Inc. was delisted from the Nasdaq in March for failing to comply with a rule that states listed companies must maintain a market capitalization of at least $2.5 million. The company's most recent quarterly results showed revenue of just $2.2 million, down 65 percent sequentially and 81 percent year-to-year. Back in 2001, Electroglas was reporting quarterly revenues of nearly $60 million.

? A few years removed from routinely booking sales of $40 million to $50 million or more in a quarter, Mattson Technology Inc. managed revenue of just $5.6 million in the first quarter of this year. The company has chopped its workforce by some 29 percent since last September.

? After years of dwindling financials, Tegal Corp. last month retained the services of Cowen and Co. LLC to explore its strategic alternatives, including potential sale.

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