Semiconductor Equipment Acquisition Targets By China

| About: Axcelis Technologies, (ACLS)

Summary

Chinese companies made at least 30 acquisitions between 2012 and 2015.

A report by Credit Suisse listed several U.S. semiconductor equipment companies as potential candidates for additional acquisitions, some of which are discussed in this article.

Based on a sampling of recent acquisitions, the barriers to acquisition are extremely low.

A June 27 article in Digitimes notes that:

Capacity expansions are expected to take place at more than 10 12-inch wafer fabs in China over the next five years, according to sources at semiconductor equipment providers, which are eyeing surging 12-inch fab tool demand from the region.

A January 11, 2016 note by Credit Suisse on the Asia Semiconductor Sector noted:

"For market entry, we expect that China could try to pursue selective M&A of smaller players, similar to the recent deal from China's E-Town Dragon Capital to propose an acquisition for equipment supplier Mattson (NASDAQ:MTSN). Mattson is a niche tool supplier with equipment in dry strip, rapid thermal processing and market expansion tools targeted at dielectric etch and millisecond annealing. The company counts many major global chip companies (Samsung, TSMC (NYSE:TSM), GF, UMC (NYSE:UMC), SK Hynix, Toshiba, SMIC (NYSE:SMI) and Infineon) as customers with 83% of sales from Asia and over 300 patents and annual sales around US$200 mn. If MTSN deal is approved by the regulators, we may see more aggressive acquisition by China private companies as they try to acquire overseas companies to build domestic knowhow. Other smaller equipment companies in US include, Axcelis (NASDAQ:ACLS), Nanometrics (NASDAQ:NANO), Ultratech (NASDAQ:UTEK), Kulicke and Soffa (NASDAQ:KLIC) and Rudolph Technologies (NYSE:RTEC)."

These two reports go hand-in-hand, so I'd like to take a look at each of these smaller equipment companies and present some insight to investors now, before any announcements may take place.

Mattson Technology

I want to start with Mattson, to see what it is about the company that made it a target, in hopes of shedding light on what would make the above companies a target.

On May 11, 2016, Beijing-based private equity fund E-Town Dragon completed its previously announced (Dec. 2, 2015) acquisition of Mattson Technology, Inc., a provider of semiconductor wafer processing equipment.

According to its latest 10K, revenue for 2015 decreased YoY by 2.2%, which is consistent with the overall decrease in the wafer front end equipment market.

Consolidated Statements of Operations - USD ($)

shares in Thousands, $ in Thousands

12 Months Ended

Dec. 31, 2015

Dec. 31, 2014

Dec. 31,

2013

Income Statement [Abstract]

Net revenue

$ 172,532

$ 178,404

$ 119,434

Cost of goods sold

107,785

119,587

82,028

Gross margin

64,747

58,817

37,406

Operating expenses:

Research, development and engineering

18,831

19,426

16,915

Selling, general and administrative

31,870

28,866

27,842

Restructuring and other charges

2,526

412

3,662

Total operating expenses

53,227

48,704

48,419

Income (loss) from operations

11,520

10,113

(11,013)

Interest income (expense), net

(135)

(228)

(494)

Other income (expense), net

(208)

335

(10)

Income (loss) before income taxes

11,177

10,220

(11,517)

Provision for (benefit from) income taxes

862

339

(542)

Net income (loss)

$ 10,315

$ 9,881

$ (10,975)

Click to enlarge

According to its latest 10K filings, revenue plummeted for Q1 2016 compared to Q1 2015, as shown below. More importantly, Income from Operations dropped from $4.3 million in Q1 2015 to a loss of $4.1 million in Q1 2016.

Condensed Consolidated Statements of Operations - USD ($)

shares in Thousands, $ in Thousands

3 Months Ended

Mar. 27, 2016

Mar. 29, 2015

Income Statement [Abstract]

Net revenue

$ 28,689

$ 58,254

Cost of goods sold

20,400

36,860

Gross margin

8,289

21,394

Operating expenses:

Research, development and engineering

4,496

5,250

Selling, general and administrative

6,735

8,841

Restructuring and other charges

1,108

0

Total operating expenses

12,339

14,091

Income (loss) from operations

(4,050)

7,303

Click to enlarge

My Take

Back on May 23, 2013 I wrote an article in Seeking Alpha entitled "Semiconductor Equipment Companies That Are Hot Or Lukewarm," and MTSN was on my "Lukewarm" list. I noted that:

"Back in 2004, Mattson held a dominant position in the strip market with a 28.4% share. In 2012 its share dropped to 16.8%."

Looking at the table below for Dry Strip, while MTSN increased to 10.9% in 2015 compared to 2014, it was actually lower than in 2013 and significantly lower than the 28.4% share in 2004.

In MTSN's key markets, I've listed market shares for each:

Dry Strip

2013

2014

2015

Market Share

15.0%

8.7%

10.9%

Source: The Information Network

Click to enlarge

Dielectric Etch

2013

2014

2015

Market Share

2.5%

3.8%

2.6%

Source: The Information Network

Click to enlarge

Anneal

2013

2014

2015

Market Share

8.0%

11.5%

11.2%

Source: The Information Network

Click to enlarge

For dielectric etch, a key technology for 3D ICs, MTSN lost share in 2015 to Lam Research (NASDAQ:LRCX), Applied Materials (NASDAQ:AMAT), Tokyo Electron, and Hitachi High Technologies. Mattson had entered the dielectric etch market in 2010.

In the anneal market, MTSN exhibited a strong 11.2% share, up from 8% in 2013. In 2011 the company had only a 6.6% share.

When the acquisition was first announced on December 2, 2015, management most likely suspected Q1 2015 was going to be a disaster quarter, as shown in the Q1 filing above.

In fact, management also likely suspected that Q4 2015 was going to be a disaster quarter, as shown below.

Condensed Consolidated Statements of Operations - USD ($)

shares in Thousands, $ in Thousands

3 Months Ended

Dec. 31, 2015

Dec. 31, 2014

Income Statement [Abstract]

Net revenue

$ 32,050

$ 51,747

Click to enlarge

My take is that MTSN management was must have been ecstatic to get sell out and walk away with tidy golden parachutes. I could just envision the Dom flowing liberally in the executive suites.

What is really important, in my opinion, is the desperation of E-Town Dragon to acquire a U.S. equipment company, because management must have looked at the books after the Dec. 2, 2015 announcement and chose to buy anyway, closing on May 11, 2016 after Q2 financials were announced. This sets the stage for further acquisitions. Let's look further.

Axcelis

According to its latest 10K below, revenue for 2015 increased YoY by 55.6%. Most importantly, the company had a profit of $14,678 in 2015. However, this was the first profit for the company since 2011, and 2011 was the year of the first profit for the company since 2006.

Consolidated Statements of Operations - USD ($)

shares in Thousands, $ in Thousands

12 Months Ended

Dec. 31, 2015

Dec. 31, 2014

Dec. 31, 2013

Revenue

Product

$ 278,875

$ 179,246

$ 169,587

Services

22,620

23,805

26,045

Total revenue

301,495

203,051

195,632

Cost of revenue

Product

181,060

113,285

106,678

Services

18,729

19,602

21,019

Total cost of revenue

199,789

132,887

127,697

Gross profit

101,706

70,164

67,935

Operating expenses

Research and development

32,586

33,533

34,756

Sales and marketing

23,325

20,713

21,159

General and administrative

25,059

23,958

25,471

Gain on sale of dry strip assets and intellectual property

(1,167)

Restructuring charges

18

2,621

2,334

Total operating expenses

80,988

80,825

82,553

Income (loss) from operations

20,718

(10,661)

(14,618)

Other (expense) income

Interest income

64

32

44

Interest expense

(4,976)

(1,069)

(457)

Other, net

(601)

1,531

(1,073)

Total other (expense) income

(5,513)

494

(1,486)

Income (loss) before income taxes

15,205

(10,167)

(16,104)

Income tax provision

527

1,099

1,040

Net income (loss)

$ 14,678

$ (11,266)

$ (17,144)

Click to enlarge

Revenues on a quarterly basis are shown below.

31-Mar-16

31-Dec-15

30-Sep-15

30-Jun-15

Sales/Revenue

67,521.00

70,458.00

79,317.00

78,437.00

Sales Growth

-4.17%

-11.17%

1.12%

7.03%

Click to enlarge

While ACLS grew 55.5% for 2015, QoQ revenues dropped 11.2% in Q4 2015 to $70.5 million and another 4.2% in Q1 2016 to $67.5 million. For Q2 2016, outlook for ACLS announced on May 2, 2016 was revenue of mid-$60 million. This would mark the third quarter in a row of negative growth and revenues roughly half of the high in Q3 2015.

ACLS also noted in its May 2, 2016 Investor Presentation that its market share was 18.3% for 2015, up from 12.4% in 2014. On the same slide the company hypes its share gain for its High Current (Purion H) from 6.0% in 2014 to 12.4% in 2015.

But let's take a closer look. The tables below show that indeed the Purion H gained share in 2015. However, that's on revenues of $80 million in a total sector of $650 million. Also, there are only two competitors, Applied Materials and Sumitomo Heavy Industries Ion Technology (NASDAQ:SMIT), which was originally Sumitomo Eaton Nova, a company that used to license and manufacturer Axcelis implanters in Japan but was divested in 2009.

In the second table below, Axcelis lost share in the Medium Current (Purion M) sector from 3.9% to 2.2%.

In the High Energy (Purion XE) the company gained share to 55.7%, an increase of 15%. But SMIT's share increased 28% in 2015 compared to 2014. Nearly twice the relative growth rate of ACLS. The market share loser in the sector was AMAT.

High Current (Purion H)

2013

2014

2015

Market Share

4.1%

6.0%

12.4%

Source: The Information Network

Click to enlarge

Medium Current (Purion M)

2013

2014

2015

Market Share

1.1%

3.9%

2.2%

Source: The Information Network

Click to enlarge

High Energy (Purion XE)

2013

2014

2015

Market Share

49.5%

48.4%

55.7%

Source: The Information Network

Click to enlarge

My Take

In the past 10 years, ACLS was profitable in only three. Revenues have dropped two successive quarters and the company indicates that revenues will further plummet in the current quarter.

ACLS sells only one product - implanters - since it divested its plasma strip business to Lam Research in late 2012. This may be a negative, although its high Purion XE share overrides this issue.

ACLS competes with AMAT, which has been losing market share in the implant sector it re-entered when it acquired VSEA a few years ago, which I discussed in a June 21, 2016 Seeking Alpha article entitled "Recent Acquisitions By Applied Materials And Lam Research Are Showing Long Lasting Affects."

ACLS competes against SMIT, Nissin Ion Equipment, and Ulvac, all of which are Japanese. IN fact, in the Medium Current sector where ACLS competes against these companies as well as AMAT, ACLS is in last place.

ACLS notes in its Investor Presentation that Purion H is the fastest growing new product in Axcelis' history, with four customers running production for memory and foundry applications and many Purion H's in production at 2 customers in 4 advanced DRAM fabs. The problem is that DRAMs are in oversupply, which will limit sales of the Purion H in the near term.

According to data from Axcelis, a NAND fab with 1000 wsm will require about 37 total implanters: 10HE, 20HC, and 7MC.

Unlike DRAM, NAND is in short supply, which I discussed in a May 16, 2016 Seeking Alpha article entitled "A Shortage Of NAND Flash Memory Is Coming Soon - What Caused It And What Will Be Its Impact."

Also, a similarly sized Fountry/FinFET fab will require 30-40 total implanters:0HE, 25-30HC, and 5-10MC.

Using this model and with market share data listed in the tables above, ACLS is positioned to reap the rewards of the large number of High Energy (Purion XE) for NAND (10), but none for Fountries or FinFETs. Likewise, the largest product utilization for both types of fabs are High Current (Purion H)(45-50). Again, as I stated above, ACLS had only $80 million in revenues in 2015 in the High Current sector that saw revenues of $650 million.

And so a rising tide raises all boats. The growth in 3D (NAND and FinFET) will be a strong driver for High Current implanters, but the opportunity for ACLS is also an opportunity for its competitors AMAT and SMIT.

Ultratech

I discussed UTEK's advanced packaging lithography product and business in a June 1, 2016 Seeking Alpha article entitled "The Other Face Of Lithography - Ultratech And Rudolph Technologies."

In addition to advanced packaging lithography, UTEK, unlike ACLS, is in a variety of other sectors in the semiconductor equipment market. These sectors include:

  • ALD (Atomic Layer Deposition)
  • Laser Annealing
  • Thin Film Metrology
  • Lithography (non-packaging)

According to the table below, revenues have been flat for the past three years. More importantly, UTEK has operated at a loss for the three years covered in this table.

Consolidated Statements of Operations - USD ($)

shares in Thousands, $ in Thousands

12 Months Ended

Dec. 31, 2015

Dec. 31, 2014

Dec. 31, 2013

Net sales

Products

$ 135,628

$ 136,169

$ 140,340

Services

13,148

13,973

16,432

Licenses

400

398

500

Total net sales

149,176

150,540

157,272

Cost of sales

Cost of products sold

71,159

74,872

77,740

Cost of services

12,585

12,395

12,150

Gross profit

65,432

63,273

67,382

Research, development, and engineering

32,886

33,590

33,582

Selling, general, and administrative

46,835

48,746

48,858

Restructuring

751

0

0

Operating income (loss)

(15,040)

(19,063)

(15,058)

Interest expense

(80)

(35)

(48)

Interest and other income, net

442

231

190

Income before income tax

(14,678)

(18,867)

(14,916)

Provision (benefit) for income taxes

450

244

(1,147)

Net income

$ (15,128)

$ (19,111)

$ (13,769)

Click to enlarge

Unlike ALCS, UTEK's Q1 2016 revenues were sequentially up 60% QoQ and the company'

Q2 2016 revenue will be sequentially up above 5% to 10% over the first quarter 2016, as shown in the table below

Fiscal year is January-December. All values USD Thousands.

31-Mar-16

31-Dec-15

30-Sep-15

30-Jun-15

31-Mar-15

Sales/Revenue

45,210.00

28,254.00

33,115.00

45,921.00

41,886.00

Sales Growth

60.01%

-14.68%

-27.89%

9.63%

-

Click to enlarge

Revenue growth for UTEK for 2015 was primarily for Advanced Packaging Lithography, which grew 57% and represented 64% of overall equipment revenues, up from 42% in 2014.

My Take

UTEK's market share in the non-advanced lithography market was less that 4% in each of the four sectors it competes, as shown in the chart below.

UTEK

2015 share

ALD

0.8%

Laser Anneal

3.9%

TF Metrology

1.3%

Lithography

0.1%

Source: The Information Network

Click to enlarge

UTEK addresses several businesses that are not mainstream semiconductor manufacturing. For example, in ALD, in December 2012, the company purchased Cambridge NanoTech, Inc. However, UTEK is focusing its efforts on universities and research institutes, although the company states it may sell these products for production applications. Unfortunately, the time is now. ALD will be a strong competitor to CVD in the 3D IC market. In 2015, UTEK had revenues of only $9 million, up from $5 million in 2014. The total ALD market for 2015 was just over $1 billion.

In Laser Annealing, Ultratech's first commercial laser processing system provides solutions to the difficult challenge of fabricating ultra-shallow junction and highly activated source/drain contacts. UTEK's revenues decreased 65% in this sector in 2015 compared to 2014. The total market was approximately $400 million in 2015 and UTEK's revenues represented just a 4% market share.

According to the company, Ultratech acquired the CGS (Coherent Gradient Sensing) technology originated at Caltech University, California. The first commercial 3D wafer inspection system, the Superfast 3G, was launched in 2013. It was soon adopted for VNAND high volume manufacturing to control wafer distortion and improve the Lithography, Deposition and Planarization process. The Superfast 4G, released in 2015 improved on the 3G performance and low cost of ownership and was adopted for FinFET topography and distortion control. Yet UTEK managed only a share of 1.3% in the thin film metrology sector. This was based on revenues of $9 million.

UTEK's lithography 1X steppers are used for HBLEDs, nanotechnology, and MEMs. Not mainstream semiconductors, UTEK's market share was 0.1% of the overall lithography market, led by ASML (NASDAQ:ASML).

Others

In a future article I will detail KLIC, NANO, and RTEC

Summary

Neither ACLS or UTEK are strong competitors in the semiconductor equipment market. While, ACLS has gained market share in the ion implant market, the main concern to me is the continued losses by the company and three quarters of reduced revenues, particularly since most semiconductor equipment companies QoQ have shown positive growth for Q4 2015-Q1 2016.

UTEK shares these issues of loses the past three years along with extremely small market shares in the semiconductor front end space. The fact that most of its revenue is generated from its advanced packaging lithography makes it attractive for the Chinese market, where most ICs are packaged.

Disclosure: I/we 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.

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