There is one semiconductor equipment industry. Investors need to keep this in mind when they buy or sell a stock. Applied Materials (NASDAQ:AMAT), KLA-Tencor (NASDAQ:KLAC), and ASML (NASDAQ:ASML) compete in the one and only semiconductor equipment industry. Yes, their focus may be different, and sometimes they don't compete in the same sectors, but the same technical and economic issues impact each company, meaning that near-term and far-term factors should affect each of them.
However, if a company spins their outlook in a particular way, it can positively affect their stock performance. These same issues could negatively impact other companies if they don't spin the results in the same way. This is how I interpret the results from Applied Materials last week, with a background of more than 30 years analyzing the semiconductor equipment industry.
Applied Materials announced its earnings on May 15 and the stock shot surged 8% the next day. KLA-Tencor and ASML announced a month earlier. Same industry, same technology, same economics in play, yet its stock plummeted following its earnings announcements.
Below are four topics where Applied Material's spin was interpreted as a positive, when in fact the company is in the same boat as KLAC and ASML. Each of these four topics was discussed during Applied Material's earnings call.
1. On the topic of 3D pushouts:
Gary Dickerson - President and Chief Executive Officer remarked:
Adoption of 3D NAND is progressing at a slower pace than previously anticipated, but we still see increasing investment as customers work to solve technical challenges in a transition from planer to 3D devices…. it's kind of hard to see beyond the next six months.
Overall, while there have been some adjustments in customer's investment plans in recent months…. But if you look at all of the different customers in the segments and you add it all up based on what we are saying, we are still in the range of the 10% to 20%, maybe it's more towards the bottom end of that range, but still in that range.
According to Bob Halliday - Chief Financial Officer:
The planar stuff was more weighted to the beginning of the year and the FinFET stuff is more weighted to the end of the year. And recently, it's been in public domain a lot last month or so. People have become a little bit more worried about VNAND timing this year versus next year. I think there is a little bit more pull recently for FinFET.
Now, I will provide our third quarter business outlook. We expect our overall net sales to be flat to down 5% sequentially.
Ben Pang - Northland Capital asked the question:
Thank you for taking my question. On the outlook for spending, I think you mentioned an answer to a previous question that you are looking at the low-end now rather than the high end of the range, what's the change - what segment has changed the most year-to-date?
Bob Halliday answered:
I don't think we have changed a lot. We didn't change our range. We are probably a little bit lower in the range. I think it's the stuff people have talked about a little bit. NAND - the total NAND is a little bit off probably, not big time. We are still at around the $7 billion number, but a little bit and I think it's mostly timing between years also.
Last month, Rick Wallace, CEO of KLA-Tencor noted in his conference call:
So as the market leader in process control we're working closely with our customers to resolve these issues but there is a steep learning curve and there is questions over the timing and resolutions of these yield issues and that has resulted in uncertainty and delaying plans for the ramping of FinFET technology and an uncertainty associated with the resumption of these programs.
Now for some perspective on the current demand environment, new orders for March was $702 million finishing at the low end of the guided range for the quarter as bookings from foundry and logic customers fell below their original forecast for the quarter. KLA-Tencor bookings result in Q3 is consistent with the widely reported slowdown in leading edge logic demand seen in the industry today as customers have delayed plans for additional production capacity for 20-nanometers following a strong initial ramp.
Finally in DRAM customers are continuing their steady pace of investment in technology transitions in 2014 with the market leader currently ramping 20-nanometer conversion and various other conversion projects are underway as major players continue to invest in this market.
My comments -
a. Both companies are saying the same thing, yet Applied Materials skirts around the issue of pushouts. Halliday merely refers to it as "it's been in public domain a lot the last month or so."
b. Halliday says that next quarter sales will be "flat to down 5% sequentially." He skirts the word pushouts by remarking "NAND - the total NAND is a little bit off probably, not big time."
c. Dickerson states "…customers work to solve technical challenges in a transition from planer to 3D devices." Flat to down 5% is pretty big to me, why didn't anyone take notice!
d. AMAT forecast revenue growth at the bottom of the 10-20% forecast given earlier. Did anyone take notice?
e. Not one affirmation of pushouts, yet the next quarter is flat to down 5% and the year is at the bottom of the 10-20% range.
2. On the topic of Applied Materials Volta CVD Cobalt system:
Earlier this week, we launched our Volta CVD Cobalt system, this precision film deposition technology can be used to form CVD based cobalt liners and selective cobalt capping films that allow customers to overcome critical yield limiting issues as they scale copper interconnects at advanced nodes. This breakthrough strengthens our leadership position in interconnect, while growing the available market for Applied's CVD products.
My comments -
a. What Dickerson didn't say was that the cobalt technology was developed at IBM with work done at IBM Research, Albany, NY, IBM T.J. Watson Research Center, Yorktown Heights, NY, IBM STG Hopewell Junction, NY, and IBM STG, Essex Junction, VT.
b. No company gives away their technology. Applied Materials is paying a hefty licensing fee for the technology, eroding profits on the tool. Applied implies in its press that it is its invention.
3. On the topic of market share for 2013:
In calendar 2013, we gained 1.4 points of wafer fab equipment market share ending the year at our highest level since 2006. We delivered positional share gains across the majority of our leadership businesses. Our PVD business gained 7 points of share in the year….epitaxy gained 5 points while our implant, thermal and CMP businesses all delivered strong gains. We also built positive momentum in areas that are large growth opportunities for us. We won 6 points of share in overall etch driven by gains in conductor etch.
We gained 5 points of share in wafer inspection and 3 points in litho metrology in 2013. We continue to see strong customer pull for our inspection technology, particularly in defect review. We are extending our leadership in this market with the strong adoption of our new G6 e-beam review tool. This market is also one of the fastest growing segments, with customers using the G6 more extensively to solve defect problems as they ramp new foundry and memory device technologies.
My comments -
a. Applied gained 1.4 points in market share because some of its major competitors are Japanese. Japanese competitors lost 22.5% in 2013 because of currency conversions from yen into dollars, because market share is determined in US dollars. This issue was discussed at length in my Seeking Alpha article here.
b. Applied gained 5 points in epitaxy because its main competitor, ASM International, introduced a new epitaxy machine for 3D that had yet to gain traction at Intel (NASDAQ:INTC) and other 3D manufacturers in 2013.
c. Applied gained 5 points in wafer inspection and 3 points in litho metrology because Hitachi High Technologies, a major Japanese competitor in this sector, dropped 22.5% in yen/dollar conversion. Hitachi High Technologies held the number two position in the overall metrology/inspection market in 2012 but dropped to number four because of the strong yen. In addition, Applied's revenues of $530 million in the total process control market represents just 12% of the process control market and just 2% of the overall WFE (wafer front end) equipment market.
d. Applied neglected to say that it lost market share to Lam Research in the etch market in 2013 to the tune of 8 points. Lam wasn't impacted by the yen/dollar conversion.
4. On the topic of SOI 3D:
John Pitzer, analyst at Credit Suisse asked the question:
Last week, SanDisk kind of talked about a 3D CapEx spend that seems to be targeting flat dollars off of their '14 spend level intentionally. Talking about a longer period to ramp 3D, you have got Samsung this week talking about fully depleted SOI [silicon-on-insulator]. I am just kind of curious as the economics start to become challenging and customers do things to extend nodes or slow progress, how does that impact kind of your view that you had at your Analyst Day in 2013 about a WFE number that can approach $37 billion?
Gary Dickerson, President and Chief Executive Officer of Applied replied:
Well, Patrick [ph] as we talked about in the Analyst Day, we really sized our business at $30 billion. So, we are improving our profitability in our profile - sorry, we are really driving improvements in our business model at $30 billion. So, relative to the increasing CapEx spending, if you look at the planar to 3D NAND more spending is in the areas that are - where we participate and really where we have enabling technologies. So, you look at deposition etch and thermal processes that CapEx is going up and litho as a percentage is going down. So, that is a really very good opportunity for us.
Mark Heller, analyst at CLSA asked the question:
And the other question, any thoughts on the recent Samsung ST announcement with silicon-on-insulator, what is your view on that technology and the potential implications for equipment spending?
Bob Halliday - Chief Financial Officer of Applied replied:
Yes, we know about silicon-on-insulator technology for a while now. It's been around for a while. It's hard for us to see a big inflection here, but we haven't spent a lot of time on it either.
My comments -
a. Intel and TSMC are committed to standard bulk silicon FinFETs. STMicroelectronics (NYSE:STM), Freescale Semiconductor (NYSE:FSL), IBM, GlobalFoundries, Samsung (OTC:SSNLF), and UMC are focused on SOI FinFETs. The SOI market will be huge, and Applied's vision is shortsighted.
b. Dickerson never answers Pitzer's question and diverts the answer to planar NAND. The question was about 3D logic, not 3D memory. Yes, there is a difference.
c. Halliday doesn't have an answer either, but shirks off his lack of knowledge by stating "but we haven't spent a lot of time on it either."
Based on these statements, Applied Materials is in trouble. Despite the fact that Dickerson stated he recently visited all his customers, he and Halliday don't appear to have a clue on what is really happening in 3D. Maybe the skeptic can give them the benefit of the doubt, that since they don't know what's going in 3D, then they don't know that pushouts are happening. But that's a lame excuse.
I question how analysts did not pick up on these issues. Why did the stock pop when next quarter's revenues are flat to down 5%?
Dickerson's and Halladay's remarks supports my comments made in previous articles that I am very negative on Applied's management. I question how AMAT is going to move forward with these executives coming from VSEA (which was a $1 billion company), who now run a $5 billion company and soon will be running a $10 billion company once the merger with Tokyo Electron is completed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.