Small-cap semiconductor equipment company Mattson Technology (MTSN), like most of its peers, has had its ups and downs recently as investors try to digest and interpret the guidance from major chip and foundry companies on their spending plans. Mattson still has the potential to leverage migration to 3D NAND and FinFET to significant revenue, profit, and cash flow growth, but it remains a risky call as it is a small player relative to Applied Materials (AMAT) and Lam Research (LRCX) and may find it difficult to maintain or grow its share during this next spending cycle.
Starting 2014 On A Good Note
Mattson is getting 2014 off to a solid start, with good results for the fiscal fourth quarter of 2013. Management previously announced better-than-expected revenue, with sales growing almost 100% and beating prior expectations by about 4%. Approximately two-thirds of the quarter's sales were in etch, with under one-third in RTP, and less than 10% in strip.
Margins weren't quite as impressive. Gross margin fell more than a point and a half sequentially as the company has discounted its new Millios millisecond annealing system for a new customer. Even so, operating income more than doubled sequentially and the company now has two straight profitable (non-GAAP operating income) quarters in a row.
Memory Seems To Be Picking Up
Unlike foundries like Taiwan Semiconductor (TSM) and large logic chip companies like Intel (INTC), memory chip companies have been looser with their spending. As Mattson management tells it, memory companies started to spend on advanced DRAM and 3D NAND equipment in the second half of 2013, and that should continue into 2014. On the other hand, many foundries and logic companies have been pushing their next-gen (FinFET) spending plans back into the second half of 2014.
Mattson has started shipping its paradigm XP etch tool to memory customers and appears to be holding serve in terms of strip, etch, and RTP placements in the memory space. Management also spoke of good Helios XP rapid thermal anneal shipments into foundry and logic, and the company has made two millisecond anneal placements to foundries on a development basis.
Big Opportunities (And Ambitions) In Next-Gen
Not unlike Ultratech (UTEK), a rival in next-gen annealing, Mattson has a lot riding on this next generation of chip architectures. The SupremaXP was designed with 3D NAND and FinFET dry strip needs in mind, and Mattson already sells strip equipment to a wide swath of the industry. Although this is not a particularly large market ($150 million to $200 million in most years), dry strip is the one market where Mattson has a large market share (over 20%) despite competing with Lam Research.
Etch and thermal processing are bigger and more important opportunities for Mattson. While Mattson is a tiny player in the overall etch market (well behind the likes of Lam Research at over 40% share and the combined Applied Materials and Tokyo Electron at around 40%), the company focuses more intently on a smaller ($1 billion out of $4 billion) sub-market where it believes the new paradigmE XP can do well on the back of 3D NAND and FinFET growth.
I expect Mattson's RTP technology and equipment to be the most significant part of the story. Mattson has strong IP in the millisecond anneal space, and the company believes its MSA approach avoids many of the problems of thermal annealing that would otherwise favor Ultratech's laser spike annealing approach.
There has been a lot of noise regarding the adoption of annealing in next-gen processes. LSA is reportedly the process of record at five of six foundries, with Samsung evaluating it at five steps. So far, though, Ultratech hasn't won any 14nm orders and the company (Ultratech) did lose share at 20nm. In contrast, while Mattson is still qualifying with FinFET customers, there was at least some Millios (Mattson's MSA tool) adoption this quarter.
I don't want to set this up as an "either or" situation, as customers may use different approaches at different steps, but Mattson has laid out the ambition of getting 30% share in RTP - a bold goal relative to Applied Materials' 50%-plus share and the past success of Ultratech, as well as Dainippon's ongoing presence in the market. If everything goes right, Mattson could emerge as the RTP leader in 2015 or 2016, and that would be powerful for revenue and margins.
Good Luck Modeling It
Modeling cyclical businesses is always challenging, and it's even more difficult in a case like Mattson where the company's disruptive technology could lead to significant market share shifts. While I believe the company's long-term revenue outlook is in the low single-digits (as it is with most chip equipment companies), the next two or three years could see significant revenue growth and margin leverage.
I also believe that Mattson could have other companies knocking on its door. I don't know if a company like Lam Research wants to enter the RTP space, but I could see Dainippon looking at Mattson as a way to enhance its offerings.
I also would not be all that surprised if Ultratech came knocking. Ultratech has been building up a presence in other areas of the chip process (metrology and atomic layer deposition) and adding dry strip, etch, and more RTP wouldn't seem ridiculous. What's more, if both companies are telling the truth with respect to the quality of their IP and technology in MSA and LSA, they could offer a very compelling array of technology and products in the annealing market. With close to $300 million in cash, Ultratech has the means to do a deal.
The Bottom Line
Mattson has done pretty well since I wrote on it as a Top Idea in late August. While the shares have had some rough periods on worries tied to overall fab spending plans for 2014, they are still up almost 25% since that report - outperforming a large chunk of the semiconductor equipment market. I believe there's still upside today.
Valuation in small/mid-cap equipment runs the gamut in EV/rev terms from 0.65x to almost 2.5x. Giving Mattson a 2.0x multiple on 2014 revenue would support a target above $4 today, while a discounted cash flow approach backs up a fair value of $3 or higher. I don't believe 2.0x is out of line given the potential of Mattson's technology, and I would still strongly consider owning these shares.