Applied Materials Could Drop From 1 To 3 In 2016 Semiconductor Equipment Rankings

| About: Applied Materials, (AMAT)
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Summary

Strong performances by Lam Research and KLA-Tencor will, for the first time since it took over the No. 1 position in 1992, knock Applied Materials to the No. 2 spot.

Lam Research is also gaining market share in the important deposition-etch equipment market used in 3D NAND and 3D Logic devices.

ASML, by a combination of macroeconomics and internals could further displace Applied Materials to the No. 3 position.

Introduction

Strong performances by Lam Research (NASDAQ:LRCX) and KLA-Tencor (NASDAQ:KLAC) will, for the first time since it took over the No. 1 position in 1992, deliver a 1-2 punch to knock Applied Materials to the No. 2 position in the semiconductor wafer front end (WFE) equipment rankings for CY 2016.

The top 10 rankings for semiconductor equipment suppliers is shown in Table 1 below for 2015, also illustrating the 2014-2015 growth rate in U.S. Dollars and also in the currency of the country where the vendor is headquartered. I noted in an April 2016 Seeking Alpha article that seven of the top 10 companies were foreign-based, and the U.S. Dollar appreciated 14.5% against the Yen and 19.8% against the Euro in 2015. The last column shows the growth rate in the currency of the country, rather than revenues and growth rates converted to U.S. Dollars.

As an example, ASML's system revenues decreased 16.0% when its revenues, in Euros, were artificially converted to U.S. Dollars. In reality, ASML's revenues increased 3.8% when maintained in Euros.

Table 1 - Top 10 WFE Equipment Suppliers 2015

Rank

Vendor

2014

Revenue

2015

Revenue

2015 Market Share (%)

2014-2015 (%)

Growth in Dollars

2014-2015

(%)

Growth in Currency of Country

1

Applied Materials

6,335

6,420

19.1

1.3

1.3

2

Lam Research

3,857

4,808

14.3

24.7

24.7

3

ASML

5,635

4,731

14.1

-16.0

3.8

4

Tokyo Electron

4,667

4,325

12.9

-7.3

7.2

5

KLA-Tencor

2,129

2,043

6.1

-4.0

-4.0

6

Screen Semiconductor Solutions

1,128

972

2.9

-13.9

0.6

7

Hitachi High-Technologies

937

788

2.3

-15.9

-1.4

8

Nikon

818

724

2.2

-11.5

3.0

9

Hitachi Kokusai

599

634

1.9

5.7

19.5

10

ASM International

557

583

1.7

4.5

24.3

Total Market

26,662

26,028

-2.4

1.3

Lam Research Moves to No. 1

SEMI, the international equipment consortium, forecast in mid-July 2016 that wafer front end equipment will grow 1.9% in 2016. Conversely, Gartner forecast in early May 2016 that WFE equipment would decrease 2.0%.

Hypothetically if we average the two there should be no growth. That won't necessarily be the case for each vendor, which I will discuss later in this article. For the time being, we could merely duplicate Table 1, and combine Lam Research and KLA-Tencor revenues to illustrate the Top 9 companies for 2016.

Table 2 - Top 9 WFE Equipment Suppliers 2016

Rank 2016

Vendor

2016

Revenue

2016

Market Share

(%)

1

Lam Research

6,851.5

26.3%

2

Applied Materials

6,420.2

24.7%

3

ASML

4,730.9

18.2%

4

Tokyo Electron

4,325.0

16.6%

5

Screen Semiconductor Solutions

971.5

3.7%

6

Hitachi High-Technologies

788.3

3.0%

7

Nikon

724.2

2.8%

8

Hitachi Kokusai

633.8

2.4%

9

ASM International

582.5

2.2%

Total Market

26,027.9

The acquisition of KLAC by LRCX was supposed to occur in Q3 2016, but is not expected to be completed in Q4 2016.

LRCX reported delivered strong fiscal fourth quarter 2016 results with both earnings and revenues outperforming estimates. Likewise, KLAC's quarterly revenue was up 21.5% on a year-over-year basis. Both these revenue gains should cement its move to the No. 1 position in 2016.

Lam Research continues to see increased adoption rates of 3D NAND technology, FinFETs and multi-patterning, competing in these markets against Applied Materials (NASDAQ:AMAT). One of the key processing technologies for these markets is dielectric etch.

LRCX noted in its Q2 2016 earnings report:

"Our dielectric etch installed base for high aspect ratio applications in 3D NAND and DRAM has more than doubled over the last year. This strong performance of the portfolio of our VECTOR Strata and ALTUS deposition and Flex and Kiyo etch products has allowed us to remain on track with our objective first shared with you at SEMICON West a year ago, up 7 percentage points to 10 percentage points of share gain from the 2D NAND to 3D NAND transition."

Let's take a closer look at the market for Lam's products. According to the report from The Information Network entitled "Global Semiconductor Equipment: Markets, Market Shares, Market Forecasts," LRCX held a 41% share of the Dielectric Etch Market, while AMAT held a 1% share. LRCX' revenues increased 65% between 2014 and 2015.

If we follow LAM's comments that share will increase 7-10%, assume a 5% increase in share for the Dielectric Etch, assume revenue growth for 2015-2016 at the same 6.4% growth for 2014-2015, and assume LRCX takes away share from Tokyo Electron, LRCX will grow 18.2% in 2016 compared to only 6.4% with no share gain. Share growth will generate an additional $100 million

Table 3 - Dielectric Etch Market

Revenue ($M)

2014

2015

% Share

2016

% Share

Tokyo Electron

1210

985

48%

939

43%

Lam Research

515

850

41%

1,004

46%

Applied Materials

18

17

1%

18

1%

Others

185

200

10%

213

10%

Total Market

1,928

2,052

100%

2,184

100%

Source: The Information Network

Lam's Strata is a PECVD system (Plasma Enhanced Chemical Vapor Deposition). According to the above report, AMAT led the market with a 57% share in 2015. If we make the same assumptions as before, and LRCX takes 5% share from AMAT, LRCX will have grown 25.0% in 2016 compared to only 8.4% with no share gain, and gain an additional $115 million.

Table 4 - PECVD Market

Revenue ($M)

2014

2015

% Share

2016

% Share

Applied Materials

925

1,070

57%

1,054

52%

Lam Research

580

600

32%

750

37%

Others

220

200

11%

217

11%

Total Market

1,725

1,870

100%

2,027

100%

Source: The Information Network

Clearly, market share gain, as discussed in LAM's conference call, only generates an estimated $225 million, which would move the needle insignificantly toward LRCX taking the top spot in the WFE market. But because of the acquisition, and because of Lam's strong potential showing in 2016, the top position is cemented.

ASML Moves to No. 2?

Table 5 below shows that if ASML (NASDAQ:ASML) wasn't penalized by artificial conversion of revenues generated in Euros to revenues converted to U.S. Dollars, the company would have had a 20.5% share of the $28.5 billion total, slightly below AMAT's share of 22.5%. In other words, instead of a 5.0% difference between the two companies based on artificial conversion to U.S. Dollars, the spread was only 2.0% based on this analysis.

There are three variables that could determine whether ASML will move into the No. 2 spot in 2016:

Exchange Rates

In 2014, because of the strong Euro, ASML was in the No. 2 position. But the U.S. Dollar strengthened in 2015 (1.1096 $/Euro) compared to 2014 (1.3297 $/Euro), and since market shares are calculated in U.S. Dollars, ASML dropped to the No.3 position behind AMAT and LRCX.

Table 5 - 2015 Revenue based on Currency of Country

Vendor

2014

Rev.

2015

Rev.

2015 Market Share (%)

2014-2015 % Growth in Dollars

2014-2015 % Growth in Currency of Country

Growth in

Currency

Of

Country

2015 Market Share

(%)

Applied Materials

6,335

6,420

19.1

1.3

1.3

6,420

22.5%

ASML

5,635

4,731

14.1

-16.0

3.8

5,849

20.5%

Tokyo Electron

4,666

4,325

12.9

-7.3

7.2

5,003

17.6%

Lam Research

3,857

4,808

14.3

24.7

24.7

4,808

16.9%

KLA-Tencor

2,129

2,043

6.1

-4.0

-4.0

2,129

7.5%

Screen Semiconductor Solutions

1,128

972

2.9

-13.9

0.6

1,135

4.0%

Hitachi High-Technologies

937

788

2.3

-15.9

-1.4

924

3.2%

Nikon

818

724

2.2

-11.5

3.0

843

3.0%

Hitachi Kokusai

599

634

1.9

5.7

19.5

716

2.5%

ASM International

557

583

1.7

4.5

24.3

663

2.3%

Total Market

26,662

26,028

-2.4

1.3

28,490

For 2016, the average Euro is at 1.1105 and exchange rates for the rest of the year are unclear, exasperated by the impact of Brexit on the Euro. But is it improbable that the Euro could appreciate sufficiently for ASML's revenues in U.S. Dollars to move the company into the No. 2 position.

Financials

For Q2 2016, systems sales were 1,254 million Euros ($1,398 million), up from 856 million Euros ($954 million) in Q1 2016. Total 1H 2016 was 2,110 million Euros ($2,352 million). Even if we double 1H 2016 revenues, total CY2016 revenues would amount to 4,220 million Euros ($4,704 million). Again, it is improbable that ASML could move to the No. 2 spot if financials continue at the same pace as 1H 2016.

Ship more systems

ASML noted in its earnings report that full-year 2016 sales are expected to exceed our 2015 record sales, ultimate level depends on timing of EUV revenue recognition and size of the combined 10/7 nm node ramp.

But there is a way for ASML to readily move into the No. 2 position - make more systems.

In Q1 2016, system backlog was 3,018 million Euros, which increased to 3,371 million Euros in Q2 2016. Backlog grew 353 million Euros on top of revenues of 1,254 million Euros.

As shown in Table 6, between 2016 and 2015, ASML shipped approximately the same number of new lithography systems, which fluctuated somewhat based on overall global macroeconomic conditions and the semiconductor industry. For example, in 2006 and 2007, when ASML's new system shipments exceed the average of about 150 systems per year, both Canon and Nikon also increased shipments. The same is true in 2009 following the global recession. So, shipments in this period are not based much on market share gains or losses.

What is a factor, according to the above mentioned report, is the mix of equipment - i-line, 248nm DUV, 193nm DUV wet or dry, and EUV, even though overall shipments were consistent in the 150 unit range per year.

Table 6 - New Lithography Systems Sales by Vendor 2006-2015

New Litho Systems

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

ASML

220

235

115

47

154

195

146

142

116

144

Nikon

165

150

83

45

53

95

46

35

34

42

Canon

179

179

99

13

29

52

46

43

54

80

Source: The Information Network

In 2007, when ASML shipped 235 new systems, 57 (24.2%) were i-line systems selling for $6 million each. In contrast, in 2015 only 4 (2.7%) of the systems were i-line. Compare that to significantly more sophisticated 193nm DUV (ArF) wet systems selling for $60 million each. In 2007, ASML sold 35 units (14.9%) versus 66 units (45.8%) in 2015.

If ASML could spend money to expand production, it could readily move into the No. 2 position. Instead, ASML has chosen to spend money on its YieldStar metrology product in the past few years. The Information Network estimates that ASML generated $135 million (about half of KLAC's similar tool) in revenue in 2015 on YieldStar metrology sales, primarily to customers buying a lithography tool, but that represented only 2.8% of overall system sales.

I noted in a July 20, 2015 article in seeking Alpha entitled "Are The Brains At ASML Hurting Investors With High And Ambitious R&D Costs?" that in my opinion ASML is needlessly over engineering its products.

ASML's R&D spend was 1,074 million and 1,068 million Euros respectively in 2014 and 2015. Much of that was for EUV systems. But the development costs for developing its own metrology system could have been more wisely spent by working with KLAC, which already makes the tool, freeing money for lithography system production expansion.

Summary

Lam Research's acquisition of KLA-Tencor will move the company into the No. 1 position in the WFE semiconductor equipment market in 2016, cemented by strong financials in 1H 2016 by the two companies.

ASML is a different story. I was close to reaching the No. 1 position in 2014 when the Euro was strong against the U.S. Dollar. Since the economy is witnessing a strong U.S. Dollar so far in 2016, ASML will have to wait until the Euro strengthens sufficiently, at least 30%, to move the company into the No. 1 position.

On the other hand, ASML is production limited with a large backlog of orders. Fulfilling these orders by expanding production could propel the company to the No. 2 and possibly No. 1 depending on execution.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.