Richard S. Hill – Chairman of the Board & Chief Executive Officer
Thomas Caulfield Ph.D. - Executive Vice President, Sales, Marketing & Customer Service
Kaihan Ashtiani - Vice President and General Manager of the HDP Business Group & Gapfill Business Group
Timothy M. Archer - Senior Vice President & General Manager, PECVD Business Unit
Novellus Systems, Inc. (NVLS) Analyst and Press Event July 14, 2008 4:00 AM ET
This PowerPoint presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended including statements related to the company’s views regarding our beliefs that there continues to be momentum and growth in the electronic industry, our expectations of the company’s long term growth rate will remain strong in the IC unit segment, our beliefs regarding mega-fab trends in memory manufacturing, our plan to transition to specialized equipment platforms, our expectations that there will be changes in investment patterns specifically with respect to CapEx consolidation, a shift to memory dominating spending and an increase in technology alliances, our plan to transition from aluminum to copper to avoid the cost of additional complexity.
Our belief that copper technology spending will represent approximately 64% of total WFE in 2008 as the leading memory players adopt copper, our plans with respect to growing our customer base and leveraging our logic position as memory transitions to copper, our plans to take advantage of the economic downturn to gain market position, our belief that the electronic and semiconductor industry will continue to grow even with the backdrop of macroeconomic woes, our belief digital projects will drive demand, our belief that ASP declines are required for demand to remain at historic levels, our belief that Moore’s law affordability dilemma is changing the industry dynamics, our plan to leverage our logic position for memory conversion to copper, our plan to implement the Novellus play, our belief that our latest products meet the needs of the market, our belief that PECVD growth rate will be higher than the overall wafer fab equipment market, our expectations with respect to the number of VECTOR express systems installed through the fourth quarter of 2008.
Our expectation with respect to the rapid adoption of the VECTOR extreme system through the fourth quarter of 2008, our expectations with respect to the production of the VECTOR extreme mega-fab wafer output, our belief regarding the reliability and performance of VECTOR extreme, our AHM investment plan over the next five years due to the growing need for lithography enabling films, our belief as to the benefits of the VECTOR extreme AHM systems, our belief that the VECTOR extreme AHM delivers the highest quality as well as being the easiest to integrate film, our belief that the VECTOR extreme AHM provides the lowest cost to customers while providing the highest productivity solutions.
Our production plan with respect to the VECTOR extreme AHM system, our belief that the VECTOR extreme AHM builds on the company’s momentum and will increase the company’s market share growth in PECVD patterning films through the fourth quarter of 2008, our belief that the company’s PECVD opportunity is growing faster than the overall market, our belief that patterning films will continue to be the fastest growing segment of the PECVD market, our belief that the launch of the VECTOR extreme AHM provides memory mega-fabs with the lowest cost coupled with the highest throughput AHM solution, our belief that HDP will be a $500 to $600 million market between 2008 and 2012.
Our belief that 70% of the HDP business is from memory makers, our believe that SPEED Max addresses the needs of customers due to the benefits of process configurability, higher rate of productivity, capital expenditures and the extended technology and variability of application. Our belief regarding the benefits of the SPEED Max platform, our beliefs regarding the factors driving HDP growth and the introduction of new products, our belief regarding the acceptability of the SPEED Max platform worldwide through the fourth quarter of 2008 and our belief that SPEED Max is the industry benchmark and is well positioned to gain further market share.
Such risks and uncertainties include but are not limited to uncertainties related to growth in the electronic industry, unexpected changes in the IC unit segment negatively affecting our long term growth rate, inability to accurate predict mega-fab trends in memory manufacturing, inefficiencies in the allocation of funds to our strategic product research and development efforts, unexpected loss of a large customer, uncertainties in the semiconductor industry, uncertainties related to the acceptance of new technology in to the memory market, unexpected increase in the cost of copper which is cost prohibitive. Inability to accurate predict the cost of copper and amount of resources necessary to obtain sufficient amounts of copper to fulfill customer demands for memory players, introduction of new product by competitors, inability to gain market position during the economic downturn, difficulties in predicting supply and demand for newly introduced digital products, lack of ASP decline, no change in the semiconductor industry due to Moore’s law affordability dilemma.
Unexpected manufacturing and production complications impacting our ability to leverage our logic position for memory conversion to copper, inability to allocate resources to effectively implement the Novellus play, unexpected shift in market demands, inability to accurate predict the PECVD growth rate, inability to accurately predict the company’s ability to maximize its position within the semiconductor industry, unexpected technical complications affecting the rate at which VECTOR extreme systems are installed through 2008, inability to accurately predict the rate at which VECTOR extreme systems will be adopted in the remainder of 2008, increase in cost related to the production of VECTOR extreme systems, inefficiencies related to the cost associated with developing the VECTOR extreme systems, inability to accurately predict the cost and time needed to manufacture and produce the company’s AHM product.
Lack of demand for lithography enabling film, introduction of competing AHM products which prove more cost effective for our customers, inefficiencies in the manufacturing and production of VECTOR extreme AHM systems, inability to increase the company’s market share growth in PECVD patterning films throughout the remainder of 2008 due to unexpected changes in the market demand for PECVD product, inability to accurately predict the HDP market through 2012, inability to accurately predict the percentage of the HDP business attributable to memory makers, introduction of products which compete with our SPEED Max products, inability to accurately predict customer adoption of the SPEED Max platform, difficulties in predicting the factors driving HDP growth, failure to introduce new products in to the market and lack of customer acceptance of the SPEED Max platform as well as other risks indicated in our filings with the Securities & Exchange Commission.
For more details please refer to our SEC filings and the amendments thereto including our annual report on Form 10K for the year ended December 31, 2007, our quarterly report on Form 10Q for the quarter ended March 28, 2008 and our current reports on Form 8K. Forward-looking statements are made and based on information available to us on the date of this PowerPoint presentation and we assume no obligation to update them.
Ladies and gentlemen we do ask you in deference to those around you and those on stage to please take your cell phones and any other electronic communication devices and turn them to silent or to turn them completely off. Thank you for your cooperation.
Ladies and gentlemen welcome to the Novellus Systems Semicon West Analyst and Press Event. Please welcome Chairman and CEO Rick Hill.
Richard S. Hill
Good afternoon ladies and gentlemen. Thank you for joining us today at the Novellus Theater at the Yerba Buena Center for the Arts. It’s hard to believe 10 years have gone by at which we entered a partnership with the Yerba Buena Center to use this every Semicon time in order to be able to have a special event for analyst and customers. Recently you will have noticed that we announced a long term agreement over the next 10 years where the theater itself actually carries the Novellus name. We’re very proud of our contribution to the semiconductor industry and also our contribution here in San Francisco to the arts and the Yerba Buena Center which has been so good to us over the last 10 years. We look forward to this year where we have a display that we’ll see shortly and also we look forward to the future years of presenting to you here at the Yerba Buena Theater Center for the Arts.
Before I start, one of the things that you saw was a very, very long notice on the things we’re going to talk about today which are really forward-looking statements and today I think we’re going to take a bold step. In these uncertain market times, we’re going to try to delve in to some detail about the potential for all of our products PECVD and HDP in particular as well as an overview of the company on what we see the opportunity. Most of you know we just made our announcement for the second quarter prior to this meeting. We announced that we have generated $158 million in cash with prior to the one-time charge that we took, we made $0.06 a share and in these very, very turbulent times, we’re happy with those results but more we’re happy with the progress that we’ve made in products and operationally throughout the company.
We believe while the market may not be ideal right now, the long term opportunity for semiconductor remains very, very positive. And, we believe that Novellus will be a major enabler of extending Moore’s law with semiconductor technology. Today we’re going to talk about the dynamics in the industry and how we’re going to respond to that. We’ll give a special presentation by Kaihan Ashtiani, regarding our new SPEED Max introduction. Tim Archer will talk about our PECVD business and the VECTOR extreme the new ashable hard mask tool that you’ll see immediately following the presentation in the reception area next door. We’ll have a reception from 5:30 to 7:00 PM and of course no analyst and press event at Novellus is complete without a full and open Q&A session. I believe we’ll even have an open line from people who are on the call outside. That may not be true this year, I’m not sure if we were able to effect that.
So anyway, without further adieu I’d like to introduce Tom Caulfield who will talk about the industry dynamics.
Thomas Caulfield Ph.D.
Welcome. I’m Tom Caulfield, Executive Vice President Sales, Marketing and our Customer Service Team. I have worldwide responsibility for how we drive wins with our customers. So, let’s talk a little bit about these industry dynamics. Despite the economic environment we find ourselves in with high oil prices, credit crunch and this grey cloud that is over everybody’s head, you still see key segments in the electronic industry growing strong and thereby the semiconductor industry, our customers, continue to do well. You can’t talk about how the electronics industry is doing without first looking at the PC market, it represents 30% of what makes up the electronics industry and has very healthy growth, contracted growth, 12% this year to 300 million units. The growth is driven in submerging and developing nations to 150 million units at an 18% [cager]. And laptop unit growth, this whole idea of mobility is leading the charge from a product perspective at 30% growth. In mobile phones, another 10% cager in unit growth demand in 2008 to 1.3 billion units. Smart Phones are really leading the charge in that with a 41% growth, the advent of higher content coming through our wireless devices. And then lastly consumer electronics, LCD TVs are growing at 30% in 2008 with a run rate we entered this year-on-year in first quarter is 41%. And of course the portable media players, these convergence to some of these devices like the iPhone, the media players, that’s growing at 10%. For our customers who feed and supply this electronics industry you see unit demand continues to grow greater than 10% on a year-on-year basis, cager and their revenue growing at 4.3%.
So here we are with these macro economic woes, the electronics industry is maintaining its healthy growth rate, there may be some pauses a little bit because of this but you see the long term growth rate still there because of the pervasiveness of electronics. But what’s going on in this equipment industry because the electronics are growing and unit demand is growing for our customers, why are we in such a downturn right now? And to go through this discussion, I’m going to bring back a chart I showed a year ago in the States and it rationalizes supply/demand dynamics in this industry for our customers. The first line is unit demand or units shipped starting in January, 2004 all through the present quarter we’re in and you can see this blue line has some variations to it, this is the seasonality of how demand goes with the holiday season and during the course of every year, there’s a cyclicality or a seasonality to it. We could take like we did last year and give a best fit line through that curve and no matter where you look it’s a constant 10% over a certain horizon of a couple quarters at this constant growth rate in units shipped to the field or shipped to the electronics industry of 10% cager and then on top of this we could put this white line, which is how capacity has been added in our industry by our customers to go after this demand.
Then we can see and hone in on these different points, no different than it was last year, that when the supply and demand, the capacity our customers put on in unit demand diverge there is a temporary pause in how they spend to put capacity on, it creates these downturns for the equipment industry, but they come back and they come back with vengeance. To get an idea, a little bit more fidelity, let’s blow up this top right section of the chart and you can see the following, we truncate everything before January, 2004 and we look all the way through to January, 08, the blue line is the unit demand, the yellow line is the best fit through that unit demand growing at a greater than 10% cager and the white line is how our customers are putting capacity on. We could then and go fast forward or look forward and say, okay given the seasonality of demand, given the 10% growth rate in unit demand, we could show how that demand is going to modulate with the dotted line below the yellow fit and we can see the forecasted capacity that’s going on comprehending the fact that our customers have slowed down some of their capacity addition and you can see where a couple quarters here, where this thing has to converge and our customers will need to put capacity on to meet the demand.
Fundamentally as long as our industry continues to grow or the electronics industry continues to drive a 10% compounded annual growth rate of IT, supply/demand balance will come in and our customers will need to invest. In think fundamentally what happened here is in the 06 to 07 timeframe there was a bit of an overzealous capacity being added and no one really comprehended nor should they of some of the macro economic lulls we were going to have so the capacity got a little ahead of demand but it will catch up.
With that what’s going to keep driving this unit demand? What’s going to keep this 10% of ubiquitous electronics, the digital era? We called it a consumer led marketplace, but really what the consumer led marketplace is, it’s about digital products, that’s what drives demand and the pervasiveness of digital products is our business devices and our personal use of electronics kind of blur. What is my cell phone? Is my cell phone a consumer product? Is it a business, is it a mobile unit? Well, it’s all of that. It’s a digital product that provides value to my personal life, my ability to do my job in the business. In any case, what drives this starts with PCs as I said before. PCs and notebooks drive overall demand, 30% electronics market. We have the adaptation of Windows Vista that doubled the amount of memory that computers need and soon the DRAM, you’re starting to see DRAM pricing bounce back. This will continue to drive the need for more and more DRAM.
Solid state drives, a key application for NAN. We see 2009, towards the end of 2010, where price parody is going to drive solid state drives to becoming a real growth engine for NAN. Headsets and Smart Phones, another key application for NAN. And then they’re rounding out the rest of the electronics whether it’s GPS and flat panel digital media with HDTV and Blu-ray or the gaming stations. This is what’s going to keep that 10% growth rate. But it requires something. It requires something that’s no different than what this industry has been built upon. It’s about taking the cost of electronics, the cost of functionality down over time to create the new applications and new volume opportunity for our customers. So our customers need to continue to drive their average selling prices down as they have historically, so they can continue to grow the market and grow this unit demand.
Fundamentally if they have to take the cost of price down like that to drive the demand they have to continue to take the cost down and the biggest lever they have is [Moore’s] Law. Moore’s Law allows them to take half their cost out of every generation of technology and they take it off of that. But it doesn’t come with a dilemma. And this is what our customers are facing right now. They say okay, Moore’s Law, I do that, I take costs out but it’s getting more and more difficult to follow Moore’s Law. The complexity of technology, adding of layers and lithography steps, all that adds to complexity and complexity is another term for increase of cost and it comes right back down on the affordability of Moore’s Law. Are we getting the cost our customers need out of Moore’s Law?
They can and they will but they have to shift on how they’re doing their business. Our customers are changing the dynamics of how they’re spending and what they’re spending on. Let’s talk a little bit about these dynamics because it’s key to understanding to define what equipment companies like Novellus need to do to be positioned for these changes to win in this marketplace. The first thing is, is changing investments patterns by our customers. With CapEx consolidations, with the shift to memory dominating spending from Logic. As you see there is technology alliances popping up all over the place as our customers look for ways to get affordable technology. This first chart shows the consolidations I just spoke about. You go to the early part of 2000, 2002 and see that the top 10 spenders in that year represented 50% of the total amount of dollars spent. You fast forward to 2008, top 10 spenders represent 70% to 75% of what’s spending. This is the consolidation, this is the economy of scale that this industry is looking for.
The second thing is we look at who is spending. In the late 90s it was about the era of the microprocessor, everybody was looking to get connected to the Internet and PCs were fueling this growth in microprocessors dominated the spending. Two-thirds of the spending was for micros, one-third for memory. We come to the current millennium and we get well into 2007, 2010 it’s reversing. Not that Logic is spending less, but NAN now, an application enabler is driving the growth. It’s driving the growth because of the advent of digital media. So we’ve gone from two-thirds logic to one-third memory in the late 90s and we switched to two-third memory, one-third logic in spending.
What does that mean? It means there is a diverging taking place in what solutions equipment companies need to have to satisfy their customers because how memory is going after the marketplace is different from logic in their requirement to divergence. The key to that is the creation of the mega-fab trend in memory where that’s not happening in logic. And what’s driving fundamentally back to the equipment suppliers is they need to recognize that that’s urgent and specialize their equipment to be solutions of these customers from a memory to a logic maker.
Let’s look a little bit at that. This is a chart that shows what average capacity or peak capacity that was going on for semiconductor companies starting in 2003 and you can see the largest fabs whether its logic or memory put on somewhere around 25,000 wafer starts a month per fab and that was their output. Fast forward to 2008 and the logic guys they’ve grown their capacity to get some economy to scale but fundamentally they can’t grow it too high in one fast because they have a high part member mix, many customers, many applications and the best economics for them is not to grow to these mega-fabs. Conversely the memory guys had small member of part numbers and they could drive tremendous efficiencies by leveraging large scale fabs, take one fixed cost and spread it against the total output and they don’t have to worry about the churn of all these different products coming to their line and they can optimize unit process step by step in the fab for the maximum output. You see here the logic guys grew to maybe 40,000 to 50,000 wafer starts a month type of capacity they’ve put on at any given fab but the memory guys went to 140,000 to 160,000 wafer starts a month to leverage this economy to scale.
The fact of the matter is one tool can’t do both of those. Maybe one platform can, but it needs to specialized to meeting these diverging needs. I point to the VECTOR last form that we have for PECVD because it’s the best example I could show you how we had the express platform for both our memory and logic customers initially and now we’ve augmented that with an extreme version where we meet these diverging needs of a mass producing memory mega-fab customer to the extreme and give the flexibility of what the express offers to our customer.
The last trend that’s happening and it’s happening faster and accelerating is that memory is transitioning from aluminum to copper because they need it for the function. They don’t need it for the function, they need it for the cost reduction because if they stayed in aluminum they’d add complexity, that very complexity I talked about before that adds cost. By transitioning to copper at a minimum our customers will keep the cost the same as they go down Moore’s Law but the people that integrate the most savvy way will actually find copper interconnect is cheaper than aluminum connect and maybe even a way to take cost out of the interconnect in the back end of the line.
So here’s what’s happening, the copper transition began a little over 10 years on logic and by 2011 80% of the equipment that’s spent, 80% of it will be for copper back end enabled. It’s very exciting for Novellus because I have talked about the market opportunity for us. When DRAM alone ships from an aluminum interconnect to copper there’s 14 new applications we could go compete in leveraging our strong position in logic today of copper transition or memory transition to copper. So what does this all lead to? Our customers are changing who’s spending or how much they’re spending and how they’re spending and the Novellus play is taking advantage of these market dynamics is what our customers are doing to drive their profitability and to drive their business.
So what’s our play? It starts with the product, it’s always about the product. First and foremost you need the technology superiority and expendability. If you can’t play in Moore’s Law you don’t have the table stakes at this game. We need to continue to drive the capability of our tools and enable our customers to drive Moore’s Law. But that in itself is not enough. Lowest manufacturing cost, we can’t just make costs comparable generation to generation. We have to show them paths to take cost out and we’re doing that in our tool set with these application specific platforms and solutions. It’s about the customer. We’re focusing on proving our customer responsiveness. We started a program, launched it two and a half years where everybody in this enterprise knows what the customers wants, everything is about responsiveness from everything we do in our day-to-day lives. In fact our extreme platform was in direct response to a key customer and that’s listening to what they wanted us to provide for them.
There is a measure that we’re seeing momentum on this responsiveness. The VLSI survey just came out again, it comes out every year this time, in 2006 we were here, we were fifth on that list and had started to slide down. We started this program focused on it, last year we gained momentum, this year we just came out, we’re number two, we’ve had the largest gain in this customer satisfaction index as measured by VLSI than any other company over the last two years. We’re in number two and gaining fast on number one. It’s important for us to have the highest reliability in on wafer performance. We could talk all we want about our tools and how they do in the lab. If we don’t bring it to the customer’s site they don’t see it and we have a [inaudible] focus on making sure that happens.
Lastly, I spoke about it before, this industry is changing, memory is transitioning to copper from aluminum and we’re going to take advantage of that and leverage our position there. And then it ends with the environment. As we stand here today, we’re in a downturn. No one wants to be in a downturn, but I’ll tell you if you want to win market share you need the downturn. When our customers are ramping capacity fast and if you have a new offering, you’ve missed the window. They’re too busy equipment, installing equipment, getting a return on that investment, they just made you get output. They’re not interested in looking at better and cheaper ways to do it, as much as they are in a downturn, when they slow down their Cap Expense. It couldn’t come at a better time, even though no one wants it for Novellus because our position of our product has never been stronger. We’re taking advantage of this downturn to win the market share.
We’re also providing products that meet the environmental need of lower energy consumption at the cost dimension, less emissions, less use of chemicals. Not only does it take cost out but it makes our customers go with a green focus which continues to intensive in the future. With that, let me talk a little bit about these products, a high level, as Rick stated earlier, Tim March is going to come up and talk about VECTOR. VECTOR is a perfect example, we have a specialized platform we’ve created, sequential deposition technology. The beauty of it is films get thinner center with every generation of technology this architecture that comes better and better and more and more differentiated. We had the VECTOR Express for our larger customers. We announced Express first quarter 07 and then within the first year we had 100 of them in the field. We created VECTOR Extreme and VECTOR Extreme ashable hard masks that we’re announcing this week at the show for the mega-fabs, large throughput for our customers.
Last year this time or end of June we shipped our first tool ever to the field, a data tool. In September 07 we shipped our second one and as I stand here today we have over 10 of them in high volume manufacturing memory fabs, these mega-fabs around the world. This is tremendous market acceptance and there’s a reason for it. When you’re given a 30% value proposition to your customer lowering their cost of ownership, lowering their capital for wafers out it doesn’t take very much for them to go hot and heavy when you’re doing the right job for them. SPEED Max, Kaihan will speak right after me on what we’ve done here in our high density plasma CVD tool. Again we have differentiated technology, we’ve configured it by logic and memory where we’re given a 50% throughput over the competition, this is their cost reduction. It’s enabled a 32 nanometer, it requires 28% less floor space so our customers not only save on capital dollars they save on the cost of the floor space to put more tools in that same factory to get more output and we’re well on our way to shipping 100 modules to the world by the end of this year. I can tell you that because as we stand here today we have more than 50 deployed in the field and we just launched our first shipment within the fourth quarter 07.
Our Tungsten platform, ALTUS, is a tungsten CVD tool. We’ve had market share leadership over numerous technologies for both memory and logic. In fact in logic we have over 500 of these PNL enabled modules throughout the world. Over the last 30 days we just announced the ALTUS Max offering again specific for the DRAM or NAN mega-fabs in memory because it gives pound for pound the greatest throughput per tool, 60% higher productivity and this is how we’re helping our customers take the cost out of their ability to manufacture.
And the last tool set I’ll talk about is our GAMMA we call surface integrity group it’s a [inaudible] tool. It’s again a multi-station sequential processing so it allows our customers to optimize what they’re looking for. We recently announced a specialization of this platform. We came out with the GXT for our logic customers where it goes after minimizing silicon loss, it goes after the ability to take high density implant the crud left behind in that process off in the most cleanliest way with low defectivity. And then for the memory guys where high density implant is not as important, silicon loss is really not an issue, we have the G400 which is all about zero to 100 B, they call it about 400 wafer starts a day, wafers per hour productivity leading productivity in the industry in taking the cost out and it does high density implants for the memory guys at 250 wafers per hour. Again specialization segmentation of our product line to meet the needs of these customers.
So how do you know we’re winning? How do we know we’re winning? It’s very hard to show in the top line when you’re in a downturn like we are right now. But there are leading edge indicators. We called this play in creating our product specialized for these customers toward the end of 06 and started developing these tools for 07 and launched them. So if we take bookings as a leading edge indicator of future business if you’re going to get relative to your competitors you can see some interesting trends. How do we create this drive? We say okay let’s take second half 07 total bookings for Novellus, total bookings for our competitor and normalize that. And say how did we do relative to that level of bookings? The normalization and anytime we’re above one it means we’re out-booking for future growth, any time we’re below this normalized one level we’re losing share or losing position.
So you can see in the first three months of 07 it’s kind of a little up and down, no real movement here. But starting the fourth quarter 07 we’re starting to get out with Extreme, VECTOR Express our actual hard mass started to ship our first APC modules to the field. We started to gain relatively out-booking our competition and you can see it’s continued for three quarters now. I’ll be the first one to tell you some of it is because of customer concentration, spending patterns, mix of our customers, it’s not all the same. But it’s clear you can’t have this kind of relative booking index if that’s all it was. The fact of the matter is where we know we’ve won share is in applications and tools with our customers we had zero position entering 2007 and the fact of the matter is that we have a significant share, we’ve grown in those areas is another element that gives us the confidence we’re winning with these products in the marketplace.
So let’s see what it means, this market share growth story to Novellus. What does it mean to our top line? I’ll take a little bit of time and go through this chart. Let’s start with 2007 and the yellow bar. The yellow bar represents what DQ would say is available market we serve with our products we have out there today, roughly $6.2 billion. In 2007 Data Quest would say hey Novellus you did $1.2 billion of systems revenue. Now as a company we reported $1.6 billion because we also have our industrial applications group, we also have our shared in services group. If we fast forward to 2012 DQ will say your SAMs not growing, in fact it’s contracting a little bit. What kind of growth story is that? The growth story is in how you’re going to play and where you’re going to go win market share.
So here is what our market share goals are for our products. There is no reason with what we have in TCVD we can’t grow our share in all those application of 45% to 55% in the market. In HDP a subset of the gas filled market that’s in this SAM of $6.2 billion, only going to go after part of that market called HDP, there’s no reason we can’t get 50% to 60% in that focused area. In Electrofil and Tungsten where today we already enjoy leadership market share position there’s no reason to believe we won’t maintain that through the memory transition to copper and take advantage to grow there. In PVD while it’s a huge dam in that $6 billion we’re going to focus only in copper barrier feeds at a much smaller segment and grow that to 50% to 60%.
In CNT while it’s a huge market again focus only on copper barrier feed markets at 50% to 60% and in strip leverage this specialization play in our hardware configurations for both memory and logic, take that to 45% to 55% and when were done from a Data Quest perspective let’s say our systems growth is $2.2 billion or so, that’s that green bar and our company growth will be beyond $3 billion over five years or 15% compounded annual growth rate. That’s assuming that our services business scales with our system business, the more tools we have out, the more spares we sell and then our industrial applications growth continues this growth story and gets to a half a billion dollars. So this is what the market share play means to Novellus because this is where our growth opportunity lays.
With that let me summarize, the electronics and semiconductor industries can continue to grow even in this industry now, maybe it will moderate a little bit but fundamentally electronics are pervasive. Electronics are changing the way we do work, they’re changing the quality of life, there’s emerging nations that want the electronics and we firmly believe 10% compounded growth rate will continue. For this to happen digital products are the driver, ASPs need to decline and therefore Moore’s Law is a requirement for our customers to maintain their business model. The industry has a dilemma with that, they have to find a way to do Moore’s Law and not let the cost creep back in and that’s where we’re playing, we’re playing with technology that’s extendable, that allows our customers to drive Moore’s Law but also at the same time take cost out and we’re doing that by specializing our platforms to meet these diverging needs of our customers. We’re going to leverage the fact that memory is migrating from aluminum to copper play into our strength and leverage our strong position we have in logic. And we’re going to take advantage of this downturn to continue to build product momentum and drive market share so when this thing turns around we exit it growing more than we entered this market.
We have the product, the ones we announced over the last 30 days, the two we announced at this show plus the wins will continue to go, we’re going after this thing to go win this market share. We’re very excited about being in this industry. We’re very excited about our ability to be successful in this industry and we feel we have the momentum with our customers and with our products.
With that let me give myself a break here and invite Kaihan up to talk about the exciting things we have going on in our SPEED Max HDP.
I would like to thank everyone who has attended this meeting. My name is Kaihan Ashtiani. I’m the Vice President and General Manager of the ACB Business Group & Gapfill Business Group. I’m introducing the SPEED Max SUPCVD. We have this module on the floor of the Novellus theater and I believe the reception is after this meeting so you get an opportunity to look at it. We’re very excited about this tool. We have good momentum with this product and I’d like to give you a quick introduction to that.
Let me start by looking at the HDP dielectric market type. This is a chart that shows the market size from 2002 through 2012 so if you’re sitting at 2008 right now. Pretty interesting looking at the first part of the chart you see there is a growth story there going from $500 million to $600 million market up to over $800 million in HDP in 2006 and 2007 and then you’ll see from 2008 through 2012 flat to slight growth in this market still between $500 million to $600 million market. Looking at this, Tom talked about this a little bit. What is causing this trend? For the first part of the chart as you can see and it sort of relates to the mega-fabs and the use of HDP DRAM especially in 2006 and 2007 with the advent of mega-fab a lot of capacity added to the HDP therefore the market is over $100 million.
Now you see after that in 2008 and 2009 the market goes down and there are a couple of trends here despite the economic conditions. One is that the memory is transitioning to copper so with that one layer of HDP is eliminated where PECVD and other tools in the Novellus portfolio will be used for that application. The other trend that’s happening is that the adoption of other technologies for STI applications that has affected the HDP market. But overall you look at this market and going for the next five years $500 million to $600 million by any account that’s not an insignificant amount of market. Very significant to participate in and we’ve had a product in the HDP and that’s why we put the focus and developed our SPEED Max platform. Good market to play in for the next five years.
With that let’s look at the layers of opportunity with the HDP. Starting from the logic we talked about it, there is a trend with the logic to moving to other technologies especially for the STI, not everybody has moved in that direction but there is certainly a trend. If you look at overall from the 66 geometry to 5X to 4X the number layers and logic is two layers, basically it’s STI and TNB and that has not changed over the years. There are two passes with the HDP tool in that segment. In contrast you look at DRAM and as DRAM makers go to a smaller geometry continues to do aluminum the number of layers for the HDP passes from six to nine for the 5X geometry and then it goes back down to the six partly because of the advent of copper, transition to copper and reduction of some of the complexities in the HDP but it’s still, you look at it compared to logic three times the number of layers significant opportunity DRAM for HDP. Same story with flat. You compare that to logic starting in the 6X geometry, five layers, five passes for STP, goes up to six with the aluminum interconnect then goes back to four layers with the advent of copper but still four passes. Overall looking at the 4X geometry despite the transition to copper you see two layers from logic as opposed to ten layers, ten passes through HDP in memory.
Therefore the focus that we’ve had on memory especially with the HDP to address the needs of our customers regarding those products. HDP does stay the key building block of memory devices and that will continue throughout the five years and beyond that I’ve shown. Given that when you look at, this is an interesting chart as well, we talked about the number layers of the logic versus memory. This is a snapshot of 2007 HDP market, what you see is logic and foundry is 32% of that market, HDP goes through logic and foundry. In contrast memory which is year end and flat is about 70% of that market. Again it refers back to the number and layers that we discus on DRAM and flash. Even more interesting it plays into this story is you look at the top two makers of the memory devices, combine those two, spend more money on HDP than logic and foundry together. It’s a very important fact to pay attention to.
Again 70% of this market for HDP is driven by the memory makers. Coming back to what these customers require from an HDP standpoint, on wafer process excellence. This is not unique to HDP and this is not unique to Novellus to spend a year developing processes. Certainly with SPEED Max we’ve achieved a level of excellence that you’re ahead of our competitors and I’ll talk about that a little bit. In terms of technology and extendibility this goes back to the cost reduction and ability to extend the life of the tool. The customers would like to buy a tool today, they would like to use it for the next two generations if possible or beyond. And finally coming back again to the highly productive tool, you want to get the maximum benefit from the footprint that you’re using in your path to basically yield on your devices.
SPEED Max we started this with select customers in early Q4 of 2007 so it’s not so long ago that we started putting this tool in the field. This is a formal launch today of SPEED Max there was an announcement, there was a press release today on this. On those areas that I talked about in terms of process excellence, the SPEED Max has achieved very good uniformity, very good uniformity of gapfill and we’ve shown some incentive to us that we can achieve very good performance on our customers’ wafers. In terms of technology we’ve shown actually for logic and memory that we can extend the HDP to 32 nanometers. Finally in terms of productivity we’ve shown that we have better than 50% improvement in throughput compared to one of our competitors.
In all of those areas that I talked about in terms of what are the requirements of memory matrix, we have made significant achievements in terms of performance of this tool and since its introduction in early Q4 2007 we’ve had significant wins and we’ve had wide customer acceptance especially memory makers and it’s been a good story for us.
Here are some of the benefits, some of you maybe familiar with the HDP process, there’s the deposition process but it’s a depth edge set. What it does, we deposit the tone you take partially some out to be able to fill the gap completely. Whether you spend time in terms of uniformity looking at both sets of the process in terms of deposition and edge and be able to show excellent uniformity on the wafer. Because of that we have a large process window and that large process window translates in the ability to tune the process in terms of gapfill and show superior performance in terms of gapfill from [inaudible] to wafer. What you want is on the wafer to be able to [inaudible] fill these gaps uniformly such that the dies that are setting at the edge perform the same as the die setting at the center of the wafer. This STM picture shows center and edge of the device, this is a 40 nan-ether spacing for degressors, 5.5 aspic ratio so pretty much you’re looking at leading edge and we’ve been able to fill these gaps with SPEED Max; very impressive performance.
Defectivity, as part Max we have integrated what we call defect improvement package. As people go through smaller geometries it becomes more and more important to pay attention to particle levels, contamination in the tool because as these devices get smaller and smaller you just see a very little particle, tiny particle to fill the device, to fill the die. So here really the end metric is yield and for our customers’ ability to have more dies out of a wafer and when you’ve shown, this is an example of industry average in terms of yield for the flash device and what we have shown the Max is a significant improvement in yield because of the defectivity improvement. So again a very good metric to take to our customers and show them the benefit and value of this tool.
As I mentioned we introduced SPEED Max in early Q4 2007 and we have had very good success with it. Some of those are shown in terms of the end metrics to our customers in this chart. In terms of throughput I talked about this, 65% improvement compared to our competitors, in terms of capital productivity 26% improvement and finally in terms of footprint productivity 29% improvement compared to our competitors. Very good story with Max and we have good momentum. So I put examples together, hypothetical examples. You have a DRAM manufacturer, they’re ramping the facility for 50K additional capacity, our closest competitor 16 systems to address the needs of that capacity, the total floor space is shown there. If I do a direct comparison given what I talked about in terms of throughput improvement, capital productivity, 12 systems of SPEED Max, the savings of four tools, significant capital cost savings in addition to 28% floor space savings. Again when we take these to our customers, these are value that we offer with SPEED Max and these have been the reasons that we’ve been very successful.
Here is a chart that shows in terms of process excellence where we were before we introduced SPEED Max and all the layers that I talked about, DRAM and flash, you have STI, you have IOD, you have IMD, you have passivation, all of those layers, this was the status that we had. We had a couple greens, maybe four greens, two greens for flash, two greens for DRAM. A lot of the processes that we’re working on since the introduction of Max we’ve been able to qualify almost all the layers and now we’re working on STI and that’s in progress to qualify SPEED Max with that layer as well.
As Tom mentioned we just hit our 50th module in Q2 and we expect to double this number by the end of the year, very good momentum for SPEED Max. Geographically this shows where we are in terms of our success and where we will be. A lot of concentration and focus in Korea as you can see and China there goes with it, a flash maker in North America, very significant presence with SPEED Max, so very good momentum for us despite the short time that we’ve been in the market with this tool. Again as I mentioned our 50th tool was shipped. We are leading in terms of technology and productivity with this product and that’s one of the reasons for wide acceptance.
I’d like to summarize this, HDP does stay a significant market for us, it’s $500 million to $600 million market. Tom talked about gaining market share as we grow our market share that’s significant revenue that we’re going to add to Novellus. SPEED Max, we have delivered leading edge productivity. I talked about some of those in terms of benefits to our customers, process excellence, throughput and capital productivity, capital expenditure benefit to our customers and we have qualified this tool on multiple layers for multiple devices and finally we’ve shown the extendibility to 32 nanometers. As I’m standing here as I said I’m very excited about this product. It’s truly an industry benchmark and we are well positioned to gain further market share with this product.
Thank you very much.
Timothy M. Archer
Good afternoon, my name is Tim Archer. I’m the Senior Vice President and General Manager of PECVD Business Unit and today I would like to provide you an update on the new products that Novellus is bringing to market to address the growing need for PECVD equipment now and in the future and the PECVD market is growing. If we look at the time span between 2002 and 2012 the PECVD market is growing at a compound annual growth rate of 7.1%. By 2011 the PECVD market will represent for Novellus an opportunity in excess of $1.5 billion and given the market goals that Tom Caufield talked about in this presentation of achieving between 45% and 55% market share for PECVD, in 2012 our PECVD business can be in excess of $700 million.
There are two primary drivers for why the PECVD market growth rate is higher than the overall wafer fab equipment market. The first is in logic, as advanced logic transitions from 45 nanometers to 32 nanometers we’ll see increased numbers in meta layers required in the back end interconnect to deal with circuit complexities. But more importantly there will be new applications for PECVD. Because of PECVD’s lower thermal budget and improved cycle time relative to competing technology such as furnaces we’re seeing and expecting more than 20% increase in the front end of line layer opportunities for PECVD in this 32 nanometer transition.
But a far bigger opportunity for PECVD growth over the next several years comes with this transition of memory from aluminum metallization to copper. If we look at the PECVD layers used in aluminum memory device and compare that to a copper memory device, we can see that PECVD layers will increase by more than 30% in this transition. In fact many of these layers are layers where Novellus equipment because of our productivity advantages of thin film were particularly strong, films like diffusion barriers for copper. So with this growth opportunity in front of us about two years ago Novellus embarked on a new product development strategy to meet these unique needs of the logic and memory trends. In the first half of 2007 we saw the introduction of the VECTOR Express. The VECTOR Express delivered to our customers greater than 30% productivity improvement for thin film. The market acceptance of the VECTOR Express has been overwhelming. As you heard Tom talk about within one year of the launch of this system we were able to announce the 100th VECTOR Express shipment. So we continue to see rapid proliferation of VECTOR Express throughout our customer base.
In the second half of 2007, in fact at Semicon West last year, we launched the VECTOR Extreme. The VECTOR Extreme is a multi-module PECVD platform that set its mark last year as the industry’s fastest PECVD tool. Again the customers’ adoption of this tool has been rapid and in Q2 of 2008 we installed our 10th VECTOR Extreme and by the end of 2008 we expect to have more than 30 VECTOR Extreme systems installed and running in memory mega-fabs worldwide. The reason the memory mega-fabs are choosing the VECTOR Extreme is pretty simple, there is no other tool available on the market that can match the VECTOR Extreme for wafer output. This chart shows the daily wafer output for a VECTOR Extreme running in a memory mega-fab in the month of June, 2008. The average daily wafer output through this tool was 3,800 wafer passes per day. The VECTOR Extreme sets the PECVD productivity benchmark for the industry, greater than 100,000 wafer passes per month per tool. This is precisely the type of high output system that the memory mega-fabs need.
We achieved this high output from the VECTOR Extreme without compromising the on wafer results that our customers have come to expect from our previous generation VECTOR systems. What you’re looking at here is thickness repeatability data within wafer thickness range, uniformity and particle data for a VECTOR Extreme, all of these parameters are industry leading results. With the success of VECTOR Extreme for core memory film we’ve turned our attention for VECTOR Extreme towards what is the fastest growing segment of the PECVD market, the ashable hard mask market. Ashable hard mass between the years 2006 and 2012 is expected to grow at a compound annual growth rate of 16% comparing that back again to the overall PECVD market at 7%. The majority of this growth within the AHM market will be in these leading memory mega-fabs and so here at Semicon West 2008, in fact just across the way here, you’ll get to actually see this tool, we are launching the VECTOR Extreme AHM. This is a multi-module PECVD system specifically designed for the ashable hard mask application.
This multi-module PECVD tool incorporates Novellus’ specialized AHM process hardware which uses special plasma confinement kit to deliver high plasma density within the desired pressure regime which allows us to provide our customers with AHM films that have nearly two etchible activity of competing films. Because of our unique choice of gas chemistry we’re able to deliver AHM films that have step coverage nearly 2X greater than competitive offerings. The VECTOR Extreme AHM is also the first PECVD tool to incorporate Novellus’ unique post-deposition bevel etch module onto the deposition tool itself. Now what this means for the memory mega-fabs is not only do they get the removal of the edge film which eases integration of AHM films but they get that on the deposition tool which saves them over 2X the cost of integrating this same step on a standalone EBR tool and saves them cycle time.
It is the incorporation of these unique features within the process module specialized for ashable hard mask and the incorporation and integration on board of post-deposition bevel edge capabilities that allow the VECTOR Extreme AHM to deliver the highest quality, lowest cost films for our customers. It’s this cost aspect particularly that has made this tool extremely attractive for the memory mega-fabs. Compared to our competition the VECTOR Extreme AHM system is able to deliver throughputs that are nearly 40% higher than competitors’ tools which means for a mega-fab outfitting their capacity to 150,000 wafer starts per month, they can reduce their capital investment by choosing the VECTOR Extreme AHM by nearly $40 million and they can save approximately 80 square meters of floor space.
Because of these cost and performance metrics we can pretty confidently say that VECTOR Extreme AHM is the most cost effective choice for the memory mega-fabs and we’re seeing this value statement in our market momentum in AHM. In the second quarter of 2007 Novellus had nearly zero market position within ashable hard mask. As we stand here today looking forward to the end of 2008, based on the productivity strength of VECTOR Express and now VECTOR Extreme AHM we fully expect to capture 25% of the AHM market by the end of this year.
In summary for PECVD the PECVD opportunity is growing faster than the overall market. We expect it to exceed $1.5 billion within just the next several years. We have launched new products to specifically address the unique requirements of logic and memory. Over 100 VECTOR Express systems were shipped within the first year of tool introduction and we continue to see that grow. The VECTOR Extreme has set this new benchmark of being capable of running over 100,000 wafer passes per month per system in memory mega-fabs. The ashable hard mask is the fastest growing segment of the PECVD market and here at this show we’re launching the new VECTOR Extreme AHM specifically to deliver the most cost effective solutions for ashable hard mask for the memory mega-fabs.
Thank you very much and now I’ll bring back up Rick Hill.
Richard S. Hill
We believe that there is not an end to the electronics business and we’re not out chasing different businesses, we’re focused on the semiconductor business. We didn’t talk today about the industrial business which we also think has a dynamic growth opportunity but we believe that not only do we have the technology that everybody needs to continue Moore’s Law, we believe we have the cost structure, we have the operational excellence and we have the quality. Today when you join us over in the building next door I’d like you to take a look at the quality of the products that we have on the floor.
This is my 15th Semicon and make no mistake about it, this industry has continued to change. This is very competitive but there is no industry where the barriers to entry and the ability to differentiate yourself exist as much as it does in this business. With that there are opportunities for profit, there’s opportunities for growth and there is opportunity for long term potential for employees and our shareholders and our suppliers as well. We are strong believers in the semiconductor industry, we’re focused on making our technology expandable and with continued cost reduction to make sure that our customers receive the optimal value in their product. We have an unique opportunity in the strength of our copper business in the logic arena and to leverage that, but not only the copper piece but as Tim spoke about the dielectric piece as well in the memory market with blanket film.
We also have the opportunity to take advantage of a downturn. Nobody likes a downturn but I think you can see from one of Tom’s slides is during this downturn we are positioning ourselves with companies that are finding it difficult to compete because they haven’t been Novellus customers before, that by focusing on productivity, focusing on technology, you can compete in this business and that is why we believe we’ll be the most successful capital equipment company over the next five years.
Now, with that I’d like to invite up Tom, Tim and Kaihan so you can fire away with questions. We may not have all the answers but we can have a discussion. If you’ve got some concerns or anything you want to raise we’ll try to be as open as we can relative to anything. We just had our announcement so we can normally give a little bit more frank answers than we can in between nowadays. So, with that Q&A position.
[Inaudible] trend among some of the big money makers to move away from that and kind of get back in to the adding capacity in smaller increments? It seems that maybe amongst some of the biggest memory makers that they’re maybe changing how they might spend money and they might actually move away from the mega-fab concept. Do you think that’s actually happening? And if so, why?
Thomas Caulfield Ph.D.
I don’t know if they’re getting away from the mega-fab in fact, I believe they are going more there. But, you are right, they’re trying to put smaller increments in capacity on so they don’t out strip capacity to demand. But, the fact of the matter is they may put a little bit more modularized capacity doesn’t mean they’re not going to get to the full scale, highly used fixed cost mega-fab to take cost out ultimately. I think those are two different things. I think the mega-fab is still there, modulating capacity to meet the demand and not out strip the demand is just how you fill that mega-fab out.
Timothy M. Archer
Just to add to Tom’s comments, I think the concept of a mega-fab is one where you’re trying to maximize the wafer output per month. We see fabs today, we see one very large fab in Korea that frankly when I visited I was actually blown away, 200 meters long, 80 meters wide and the output of this fab is scheduled to be 300,000 300 millimeter wafers per month. I mean, that’s incredible and its two floors, two separate floors, 150,000 each floor exactly duplicated. It’s trying to leverage that infrastructure and be able to cram as much in the space as you possibly can. It’s absolutely overwhelming. But, they’re not going to fill it in one foul swoop. It’s about $8 billion of equipment to fill it.
Well, just on that point, do you think as you [inaudible] move to adding supply in a little bit smaller increments? Do you think that there’s a period of maybe six months or even nine months where there’s some sort of rationalization of the growth rate of the industry, of the order expectations as you don’t have one or two big customers placing big huge orders that kind of holds things up every single quarter and then you kind of get back on this same cadence where you have foundries ordering a little bit every quarter and over the longer term that has implications of kind of how fast the industry grows.
Timothy M. Archer
Well, we’ve talked about that before, the increments of capacity. By making them smaller and having more customers you in essence get them staggered somewhat which makes the deployment of capital more rational. The reality is you have seen a rationalization in the DRAM market. Capacity is clearly coming down. I think the thing that I fundamentally believe is when you look at a NAM flash and you look at a DRAM, the cost to make them for all intense and purposes shouldn’t be any different but yet there’s still quite a disparity between a NAM flash price and a DRAM price. So, from a standpoint of what the potential is for NAM flash I think it is to be ubiquitous in every single product that we have. So, I think NAM flash opportunity is the big one going forward and I think you’re going to start to see that with the new iPhone that’s coming out, you’ve heard some of those indications of a substantial amount of flash being tied up through those. And, I do believe, that solid state discs is right at the cusp of taking off and I think that will be another major one but, it won’t be the last and it won’t be the only. I think they’re positive but I don’t think given the capital situation, the markets and you guys should know that better than anybody right now. I’m sure every day when you come to the office you’re looking for an email but, the reality is that the capital markets have not been favorable to highly capital intensive businesses because the banks that have a few bucks are trying to keep it for themselves right now as opposed to lending it out to subprime loans of some sort. So, I think that’s a situation that we have to deal with as well. That’s a good question. Next question?
Most of the companies that presented today [inaudible] to the memory market seem to be incrementally more pessimistic over the next six months or so in terms of supply demand in balance, capital spending, etc. Would you generally agree or disagree with that overall assessment.
Timothy M. Archer
I’ll let Tom go first and each of the guys go and then I’ll follow up.
Thomas Caulfield Ph.D.
I think the fact of the matter is the company has a higher position in logic. We haven’t suffered as much in this downturn. But, the fact of the matter is, as Rick pointed to, memory is going to be a driver in this industry, NAM is going to be a driver. Getting the positions now is just getting us ready for when it starts to pick up again so logic has held its own especially with the largest microprocessor company. They continue to drive their 45 nanometer ramp to go after the microprocessor business so I don’t think you’re seeing anything different from what we’re seeing, it’s that we’re less dependent on it right now. But as we grow market share and it comes back we’ll have more opportunity to grow.
Richard S. Hill
I think from a HDP perspective, it’s always nice to see a lot of capacity being put on but some of the films that we talked about today ashable hard mask, copper diffusion barriers, those are really technology enabling films and clearly memory customers trying to drive their costs down and move their technologies forward are continuing to put those tools in. So, from a VECTOR Extreme standpoint, our position is that memory fab continues quite strongly.
Just the same comments of what Tim said is that technology buys are there so where the technology is there’s opportunity.
Timothy M. Archer
Let me sort of summarize everything and give a perspective from an overall market standpoint. I think in general there’s nobody that can argue that memory is not under pressure right now. But, one of the things is our exposure is particularly good, okay. Where our strength is, is with the players right now who’ve used up historically are taking advantage of their knowledge of our capability and productivity, technology, particle performance and they’re using that to pile on right now frankly. They want to win market share. Now, we’ve seen a little bit of a benefit because other people are saying, “Look, if they have such a low cost there must be something in the tools that Novellus is saying.” So, we’re getting a little bump up from people coming in saying, “Hey, bring your tool in here let’s see how competitive it is.”
We have very recent data where we’ve gone in to memory companies outside of the Korean peninsula where they didn’t have us before and we greatly increased their productivity where I think they’re stepping up and taking notice. Now, if the market doesn’t come back strong, these players could potentially fail but I believe the market will come back strong and when they come back strong because of this situation they’ll realize the importance of productivity and we’ll have a position in them and that’s the reason I’m a little bit more optimistic. Do I think this is the greatest market in the world? Hell, no I need Maalox every morning when I get up. I mean, wholly macro. The first thing I do is I log on, I look at all that red on the screen and I’m thinking that I have a hangover from the night before I see so much red. I mean, it’s a tough deal but make no mistake, electronics is not going away and semiconductors are critical to them. And hey, we’re a business that can compete and the real big question is how have we positioned ourselves to compete.
You’ve seen a little bit of that today, you’re going to get to go over and look a little bit at the quality of the product, you’ve seen some data, you’ve seen VSLR research come out. It’s been a little while since we’ve been on that customer satisfaction list, up on the top of it, next year I plan on being on the top of that and I think it’s an early indicator of what our customers are seeing and I know that they do appreciate it and I know that’s what we need to do to win.
Thomas Caulfield Ph.D.
Because if you don’t, the Maalox, that’s typically when I get the call.
Timothy M. Archer
That’s right, you get the call.
A couple of questions about the competitive dynamics particularly against the [inaudible] and then one with [PMP]. So, at this meeting last year one of the topics of conversation was are you going to get into the installer business and I thought you kind of articulately described why you didn’t want to do that at this time. Do you see any incremental competitive opportunities to maybe imply that they are still focused on solar, they still kind of have their eye on the ball in semiconductor equipment. And then kind of part in part with that, one of the problems that has exacerbated in industry downturns in the past is their very competitive pricing and you’ve said in the past that you kind of need to respond basically to what they’re doing in part although technology kind of helps differentiate pricing. Then finally, and then I’ll turn the mic back over, [PMP] didn’t as much discussion, they were mentioned but not as much discussion in either the call or the meeting so maybe if you could give us a little update there.
Richard S. Hill
I’m glad to see you’re here. I commented to some of your co-workers I expected you to be in restraints with the market the way it is right now. But, the reality of the situation I think is [Supply], you can never take for granted they are a very, very competitive company. But, I hope they go gangbusters over there at Solar, I really, really do. I’d just love to see them go in the solar market because do I want 100% of the semiconductor market? You bet I do. Do you think they’re going to give it us without a fight? Absolutely not. But, they’re going to have to work to maintain market share because we’re not playing around anymore. We dabbled, we’re not dabbling, we’re focused. You’ll see some of that focus in the products, you’ve heard about it, I talk about the specifics of the product on the conference call today. This is my 15th Semicon. I’m happy with where the products are. I didn’t talk about [PMP] because I think it’s a detractor. Everybody wants to take a look and talk about [PMP], trust me it’s a wildcard. It’s nothing but upside and it isn’t hurting the P&L.
You talk about the operating expenses, everybody was saying there was no way you can get your operating expenses to $110 million going out of the second quarter. We just did that; we’re going to do better. Okay. We know what we’re doing in this business, we did lose the recipe for a while, we’ve got it back. Okay. We’ve generated $158 million of cash. We’ve got to get profits to keep those kinds of levels up so we need a strong industry but we’ve still got room to work on the balance sheet to continue to generate cash. I like being at over $700 million of cash, I like the competitiveness of the product, I like to have my major competitor focusing on solar. Am I going in to solar? Absolutely not going in to solar.
I have to questions, my question is in Taiwan DRAM, how has your market share improved?
Richard S. Hill
Well, we don’t comment on individual regional market share. I gave you a little tidbit that, and I’ve said this before, when we didn’t go up a year ago – because we didn’t come to the party at all. I can tell you today that it’s much better than it was a year ago. But, that’s not going to do me any good unless they put in production capacity. It doesn’t do anybody any good so that’s the reality.
Richard S. Hill
I did talk about CVD in the conference call earlier today and the progress in CVD is terrific. In fact, I highlighted the fact that we demonstrated the ability to be able to put down [inaudible] 45 nanometer and extend it beyond that where we’re design tool of record. I think that’s a strong product line with strong potential and one of the reasons is because it’s an enabler of technology. Many, many new technologies come in and they sort of thwarted the ability to continue to extend the technology because the customer doesn’t want to change, has not been successful and we talked a little bit about STI. But, with CVD clearly we have a differential advantage, a differentiated machine and I know that Fusen and his group are focused on that business and I think you’ll see some strong results over the next six months in CVD. But, I didn’t shy away from it but we didn’t focus on CVD this Semicon because we’ve focused on it in the past. But, no attempt to shy away from it and I’m sure you could collar Fusen and get his opinion when we’re over in the exhibition hall.
Rick, a lot of the growth forecast was predicated on gaining market share as you showed in the slides, up to roughly around 50% in a lot of those segments. So, I’m wondering if you could share with us of the wins you’ve had so far with new customers who are not where you think your wins would place you in market share at this point and therefore how much more you need to go to get to those kind of overall market share?
Richard S. Hill
Well, I’ll let Tom comment on that and Tim and Kaihan.
Timothy M. Archer
Let’s first start if you look at where we said we were with Data Quest [inaudible]. We could argue that’s about 20% share that would stay in that $6 billion [inaudible]. So while you saw aggressive targets of 50% on average kind of market share they were in subsets of that total spend. As I said, for the full gapfill it was the HDP portion, it wasn’t the full span of [PMP] and all the different layers, it was focused on [inaudible]. And, at the end of the day in five years we’ll go from roughly a Data Quest of say 19% to 20% market share to 30%. So, you can kind of scale how we’re getting market share position based on that. It will be more, I think, front end loaded than back end loaded, but that’s kind of how we’re going to do it. I didn’t want us to leave here saying that we’re going to go capture 50% of that total span. We’re going to gain about 30% of that span by focusing in some segments of that span [inaudible].
Tim, you’re in PECVD, what do you think about your competitors in terms of market share? And, have you gained any market share?
Timothy M. Archer
Well, I think it’s clearly obviously that we’ve gained market share already. We’ve also improved significantly our position for market share growth in the future. If I look, and I think it’s okay to do this, but if I look at those top tier customers that we talk about, the guys who are really are putting capital expenditures on line. We exceed that market share target already with a few of those customers. We are working to with the other two. We have gone and we’ve executed on a new product development strategy specifically to meet the needs of those other leaders and grow our market share. So, fundamentally if we can execute on VECTOR Extreme and VECTOR [inaudible], we’re already off to a good start there [inaudible].
Okay, how about HDP? When you look that over where do you think you are today versus where you were nine months ago?
[Inaudible] It’s not a secret that we have issues with HDP and we missed some of the activity that was going on in 2006 and 2007 but we’ve recovered that from a product standpoint and from a position, we are very well positioned to help our customers continue [inaudible] with HDP.
Thomas Caulfield Ph.D.
Well, I’d be careful to ever call the Taiwanese a tier two maker. They’ve had tier two equipment up until now but now they are starting to move to tier one equipment so that’s how I see the marketplace. But anyway, go ahead and comment Tim.
Richard S. Hill
I think that’s kind of a major theme here. It’s not about memory transitioning from aluminum to copper, it’s also about leveraging that position with everybody in the memory where we’ve had traditionally less share taking advantage of this transition and that includes the memory producers around the world not just in Korea. So, it is a key element of our strategy. We do have a differentiated product and it’s not just the copper piece, the actual copper plating, it’s the dielectic, the applications that are becoming dielectic, the copper barrier seats, there’s a whole host of applications being generated around this copper interconnect. We have high value propositions for our customers and it makes no difference where they decide to manufacturer it or what tier you call them, if they come to copper we believe we have the value proposition and it’s a key element of our strategy.
I have a follow up question on AHM, do you now factor Extreme in today and you’re going to factor in [inaudible] and you said you expected to achieve 25% of the market by the fourth quarter of this year. Can I ask why a customer would buy VECTOR Extreme express product if you already have a product that is more productivity? You supposedly have a higher productivity better product and if like you said most of your customers are using ashable hard mask on memory anyway and it sounds like Express is the product for the memory sector, why is that [inaudible] back to Extreme product?
Thomas Caulfield Ph.D.
Well, I think like anything it depends on the customer’s timeframe during which they qualified versus what products were available. So, you are correct to point out that last year we introduced the VECTOR Express AHM system. That system allowed customer to experience for themselves the benefit of Novellus AHM technology on a smaller scale. The smaller footprint system still delivered at least a 30% productivity advantage relative to the film and tools they had available at that time. That system integrated the Novellus post deposition bevel edged technology. So, in a smaller more compact fashion that tool demonstrated everything that we wanted to show to the customer and many of those customers now have been quite happy with the results and they’ve ramped and they will continue to ramp with that tool.
What we have done with the VECTOR Extreme is essentially scale up that technology. We go from one post deposition bevel edged module to two. We go from one deposition chamber to two. And, it’s really designed because in these mega-fabs, a customer does not want to install such a large number of systems. It presents tool management issues, tool utilization issues and also presents some additional cycle time issues and so the VECTOR Extreme for mega-fab, I fully believe, will be the tool of choice going forward. But, already today with VECTOR Express AHM they won’t look backwards. They qualified it and they will still stick with that tool until such time as they move forward and qualify Extreme AHM. Extreme AHM will process transparent to Express and so we’ll see the migration here now that this tool is available in the market.
I’ve been coming to these for a long time and what I’m really impressed with is the number of products you have and that sort of thing in this particular session. But, the other thing, the stark contrast to some of the other ones is that number one that in the other ones a few years ago you were hiring a lot of designated hitters from the bat to your two suppliers you were talking about and this year it seems like you’ve kind of gone back to the home team. You’re focused on activity more than you’ve been in past years and I was wondering what is the thinking behind that and what kind of business performance that you’re seeing from your management team and that sort of thing? If you could comment on that.
Timothy M. Archer
Well, to be very honest we went through a transition as a company and I joke oftentimes about Applied. I actually count a lot of the people there as friends, not as enemies. We compete but I don’t look at them as enemies in any way, shape or form. [Thas] brought in some great ideas and some great people in to the company. In fact, Tom [St. Dennis] made a stop at Novellus before going back to Applied Materials and I don’t begrudge him at all. We’re in business, we’re fierce competitors but we’re not enemies. I think though that what happened to us is we’ve always been a smaller company because we started later. You know it better than anyone, Bob Brand very, very well, you knew Brad Matson, and the reality is we came from a much lesser company. 15 years ago we were $60 million, okay. And, the reality of the situation is we got some good ideas, we brought in some good people but, with anything there are sometimes you can do things one way if you’re a large market share position.
For example, you can go and put evals everywhere and then send an army to support those evals. But, if back at the factory you don’t have engineers executing on everything, the guys out there in the field get slaughtered. That’s a function of demand. So, historically that was never our approached. We tried it for a while, you saw our operating expenses balloon up. It wasn’t necessarily a wrong approach or follow approach, it was for us but it was a good approach for them. You can’t argue that they weren’t a successful company and I think that over the period of time where we had brought people in from the outside, some have stuck and do very, very well and are a big asset to the company. For instance, Ted is one of them sitting here in the front row. I don’t look at him as somebody from the other side, they’re part of Novellus.
We’ve gone back to sort of a fundamental approach to the way we’ve done it before but with some enhancements that were brought in to the organization. I’m good friends with [Thas], I converse with him regularly, and he’s an idea machine for the company. But, culturally you have a mass and you’ve got to basically take the business you have and run it to get a return for the shareholders the way that size business needs to be run and what the nature of the industry is at the time. I think we’re back at that point, we’re better in our execution today. I think that we’ve got people in place that over this five year period of time where we brought in [Thas], we brought in Tom [St. Dennis], guys like Tim, guys like Kaihan who’ve been in the company for a long period of time, five years ago weren’t as developed as they are today with the capability to take the roles that they’re taking.
So, it serves a purpose, we’ve got a lot of good things. I think we’re better today. We’re not the same Novellus we were 10 years ago. I think we’re better. When I look at the products I look at how far we’ve come in such a short period of time. Our execution has obviously improved in the engineering function, I give a lot of credit to [Thas] for that. I try not to keep looking back and say, “Oh my, oh my it’s going forward.” And do I believe we can compete and succeed? And, I’ll tell you right now when I look at the product portfolio, I think we can and I think we will. But, a good question.
I had two questions, number one I wanted to ask about PECVD. As I recall back in 2000 when you first launched the VECTOR the pitch back then was that you had a fast, small footprint tool, high productivity, addressing very focused to thin films and yet, that strategy has really not panned out in terms of market share over the long run. When you look at some of the other films in PECVD where longer process times and more complex film set those markets seem like they drive market share. So, I was wondering, you guys have dabbled in low [inaudible] films, some of the more complex film sets, what makes you think that going forward addressing the thin film with higher productivity tools is going to lead you to the market share aspirations that you have today?
Thomas Caulfield Ph.D.
Go ahead Tim, we’ve had this conversation and you know the answer.
Thomas Caulfield Ph.D.
As you said, we introduced the VECTOR as a small footprint, highly productive tool and there are several dynamics that have changed over the years. First of all, we did gain significant market share with the VECTOR in a certain segment of the market. I won’t go in to breaking it down too much for you but most of you are very familiar with Novellus’ position within certain companies in certain segments of the market. We’ve always been very, very strong within the logic and foundry world and where we were not so strong were the areas where as you say the films where thicker, the films were more commoditized, the deposition times were longer and that tends to be the characteristic that you find when you look at memory films and thick [kiosk] films for instance. And what you find is that VECTOR Extreme now being able to put eight deposition stations or in fact, the customer has the option to put up to 12 deposition stations around this single handler. That tool can now handle that range of thin to thick films better than just about any other tool on the market today.
So, I think what we’ve recognized over the years is that the memory requirement as their fabs got larger and they focused very much on footprint and productivity for thicker films, required a unique tool set compared to the success we were having for thin films, copper backing interconnect on the logic and foundry side. So I think now today, with the product line that we have we’re fully committed to VECTOR Express and that going forward for a certain segment of the market and VECTOR Extreme and that going forward for the other segment of the market and, we expect that to allow us to gain market share.
Thomas Caulfield Ph.D.
And I think there’s one other point I want to bring up. We made a strategic error in 2000 from a standpoint of not focusing on [kiosk]. I’ll take full responsibility for that in that we felt [kiosk] was too expensive a film and that it would be replaced by [siren]. And, the reality is that was wrong and we’ve since adapted both the Express and the Extreme to have unparalleled productivity and film quality for [kiosk] and the acceptance of the customer is huge because we can greatly shrink that [kiosk] market for them, thick [kiosk], make it thicker. But, we’re going to make the guys that are in there not like that market and the strength of the VECTOR is still there. Look at the number of parts, it’s much less and because of that we can have a cost advantage, shrink that market, bring value to the customer and go after that market we should have gone after a long time ago and do it the right way; and we’ve done that.
A couple of questions, on this whole modular orders from some of these big memory customers and how that could affect your orders and all of that, if I look at your September order guidance it’s down 50% from peak and the last two years your industrial group has probably done flat or up and [inaudible] has clearly not gone down as much. Is this whole hoopla about orders coming down because of modular, is this something that happened a couple of quarters ago and is already reflected in your June or September orders? Or, is this something incremental that will further affect your orders as you go past September? That’s one question. On the competitive front it sounds like you’re coming out with higher productivity products, you have some very ambitious market share targets in market segments that historically you can’t really shift it too far in one direction without worrying somewhat about pricing. What’s the risk that [inaudible] get’s desperate and starts significantly cutting pricing?
Richard S. Hill
I’ll take the second one first. When you’re talking about productivity surges of 30% to 40%, you can’t price your way to hold that market. And so, if we were talking incremental improvements, small amounts of value providing, we could be priced out of that market place. But, we’re talking about huge jumps that you can’t do in price. I also believe that the competition has that pressure from everybody. In your etched market, that’s very competitive there’s a lot of areas that you can’t price everywhere because they need a return as well. I think the reason why, not that pricing isn’t always a key discussion, not that it’s not something that we need to fight for our value everyday but the kinds of levels of value we’re providing our customers, price is the second discussion not the first.
Tim showed in a fab of 50K wafer starts a day in VECTOR Express, the VECTOR Extreme ashable hard mask can save $40 million less in significant expenses to create that application. That’s not something you’re going to get price to [inaudible]. I’m not sure if I heard the first part of your question though or if I understood the first part of your question.
Richard S. Hill
I think we talked about that during the call from the standpoint that I think we’re down from 40% roughly from peak, is the number. But, I don’t have it exactly in mind but I don’t believe it’s quite 50%. And relative to we gave a range of up 5% to down 15% and I commented that that was largely driven by some concerns relative to the memory market. But, having said that, I think if it goes it will tend to be a net positive for us and worst case is it’s pushing out as opposed to going away. But, I commented to that before. Does that answer your question or am I not answering the right question?
It does. I guess if something happened in Korea, for example the last two months that has caused a change in this loss of the expanding [inaudible] companies and as you look out in to your September orders or December orders is there going to be a further decline? Or, has this thing really happened two quarters ago and it’s already in your numbers?
Richard S. Hill
I see. I think what’s changed in Korea over the last several – nothing has changed specifically in Korea that wasn’t here six months ago. You’ve got two large manufacturers, one has gone through a pretty tumultuous time relative to the management and a change in the management so that takes some time to settle out. The other one who has literally done a phenomenal job in coming back from a near death experience is now a little bit plagued by the financial markets and where they are and are somewhat limited from that but are managing the business very responsible and are still very competitive. And, I think the fact is that the companies that are having the hardest time have the best opportunity with us because we give them the most value and the people that want to stay in this business have to take a hard look. They can’t say, “Gee, I’m just going to buy another one of the other guys because that’s easy.” I think they’re under the same stress and the value equation that we have, I believe the tougher that market gets the better that value equation we have looks.
Now, you say is Applied going to be desperate? Well, they’ve got a lot of businesses and they’ve got to fund those businesses so they’ve got to manage a business just like we do. They’ve got to be balanced, you can’t be totally irrational and I don’t believe they’re totally irrational. We compete on a smaller level with some companies that aren’t Applied in very specific segments, there I see irrational behavior. Now, how long they can last, I don’t know but they’re not going to be getting debt financing anymore. But, we’re prepared, we’ve got over $700 million on the balance sheet, we believe we can dominate those markets and so overall we saw what we have.
Just to open up sort of another can of worms but, I’d like to get your opinion about 450 millimeter. The big three have thrown their weight behind it, they seem to be more serious than they have been in the past. It would seem given the timetables I’ve heard about that you have to start developing tools in relative short order. That obviously is going to create a consolidation on your customer side and make/create a consolidation on the buyer’s side which I assume would be good for you. But, do you have enough runway currently in the 300 millimeter market to get back to a more robust market or are we going to get back to a robust market only to go in to a dislocation as the market transitions to 450 as we saw during this transition to 300 which hurt the industry? Just your thoughts?
Richard S. Hill
There’s a real dilemma with 450 millimeter. Can this industry go to three players only? I doubt it. If three players go to 450 millimeter, could any of the equipment companies go to 450 millimeter and never get their money back? I doubt it. It’s a conundrum as Tom says with that issue. I think when to 300 millimeter the equipment businesses financed that and two a company we all look at that and say, “That was a net loser for the equipment business.” There’s nobody that doesn’t believe it and I’m not talking out of school, we’re in business to support our customers, we want them to make the right economic decisions. We believe that the right economic decisions, the amount of value we can give with 300 millimeter is huge with much less investment potential so we sell against 450 millimeter. I mean, a lot of times a couple of the big guys cringe when I bring out my little badge with no 450 on it. Can one equipment company go to 450 and that be any good for the semiconductor industry? I don’t think so.
So is your answer, just say no?
Richard S. Hill
Just say no, that sort of works I guess. We’re not going to make the industry, we have to follow it. But, we believe that the 300 millimeter business is robust and the people that really want to optimize 300 millimeter can be much, much more cost effective and we’ve got to be very careful. Sam, you’re in the room you represent Semi, I think there’s a pretty united front on the equipment side that suggests that 450 doesn’t make economic sense. There’s going to be a big presentation right here, is it in this room? For the 450 on Thursday. You can hear that debate, come out.
So can I assume that you’re not going to build any 450 millimeter tools?
Richard S. Hill
I would assume that, yes.
Your competitor made an unsuccessful bid to acquire another competitor in the CVD area. I just wanted to get your comments on what you think was going on there and what is in Novellus’ best interest? And, do you think you guys could be interested in that party?
Richard S. Hill
If I told you then I’d have to shoot you before you got out the door. Obviously, in order to be acquired somebody has got to want to be acquired. Obviously, that’s not the case with that company. I think that having Applied make acquisitions of those kinds of businesses, I think from an antitrust standpoint would be very, very difficult. That would be like killing the business more so than acquiring the business because I just can’t see that being allowed. And, if we get a new administration it would be even less likely that that would be allowed. When you go and make an acquisition there’s only two things you can acquire, you can acquire a cash flow from the existing operations and you can look across all the public commodities and you know what the answer to that equation is. Then, the next thing you have to evaluate is what the technology portfolio is worth. Because, those are the only two things that have any value in those companies and I think clearly when you look at a company like Applied, it’s got a lot of value. You look at KLE, it’s got a lot of value. You look at [LAM] it’s got a lot of value. You look at Novellus, it’s got a lot of value. You look at [Varing], it’s got a lot of value. You look at [TVL] it’s got a lot of value.
Both from a cash flow standpoint, all of those companies including Novellus have it both from a cash flow standpoint and a technology standpoint. I think once you get through that list of characters, and I’m ignoring the test business because I don’t think anybody has positive cash flow in the test business, do they? The bottom line is there’s not a lot of attractive property out there. So, the question is, is there any intrinsic technology and could you put an imprint on them of a different management style, cut out the infrastructure and make it successful? I think those are the only opportunities that are left and it’s going to be a very trying time for I think small companies that are burning cash right now and I don’t care if that’s Korea, or if that’s in the United States.
I think it’s a good time to be prepared. If you can find some technology and find some ability to rationalize, to potentially take advantage of it but it isn’t something that’s going to happen overnight. But, I think for the small equipment companies, I think it’s going to be a very, very difficult time and as such there could be some desperate sales that could be opportune. That’s how I look at it. The one you’re talking about though has intrinsic values as to whether or not they could ever be sold because of the situation.
I think I have a few questions, the first one is you were focused so long on the back end of line applications. My question is as you go to 45 and 32 nanometer, there’s a lot of action happening at the transistor level, is Novellus going to be part of participating in particularly the [inaudible] and metal applications going forward?
Thomas Caulfield Ph.D.
Well, as I spoke in my presentation, from a PECVD perspective, we are actually participating on front end line of applications. We see a lot of opportunity not only at 45 nanometer but even growing at 32 nanometer for front end of line spacers, oxides, nitrides and stuff that are used that are critical to the formation of the transistor. But, at this point from my product line’s perspective we’re not pursuing the high K arena.
Richard S. Hill
I think the problem with high K and we’ve spoken about this for a long time. If you have a chamber that you can just use and add a single film in to it, a very viable market but very thin film one step, that’s all you’ve got. But, to the extent you have to develop a whole new platform, a whole new chamber, all new material for that one application, it doesn’t make a lot of sense, you’ve got to get a return so there may be some markets that we selectively don’t go after. But, the markets we do go after, we want to be the best and the best means best technological performance and best productivity and cost of ownership.
Okay, is everybody done with any questions? I can take one more at a max, if you want. Okay, one more?
Compared to your objectives of 2012, you mentioned the different segments, could you rank them in terms of where you are today and how much market share you have to gain compared to today? Like, which one would you have to gain the most market share and which ones are you almost there?
Richard S. Hill
Well, I think it’s pretty easy to know this, the area we have to gain the most market share in is PVD and the one that is up there in CMP. I mean CMP we’re starting from a pretty darn low level. But, we’ve talked about it before, some of them we’re over the market share objective. We’ve talked about it before when we talk about [inaudible] and our electro film, we’re a predominate market share player in those particular areas. That’s about as deep as we’re going to go in that equation but I think growth opportunity, Tim highlighted it, in 2012 PECVD can be a $750 million business and I think when you see the quality of the products that we’re introducing and you look at the simplicity and the elegance of the design you’ll see how we’re able to do it.
Thank you for your attention over the last hour and a half. Thank you very much.
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