Founded in 1967, Santa Clara, California-based Applied Materials (Nasdaq: AMAT) led a revolution in the semiconductor industry when it introduced chip-making systems that helped standardize the manufacturing process. (Companies used to make their own manufacturing equipment in-house.) Though sales took off in the early 1970s, the company quickly diversified and lost focus.
James Morgan, who became chief executive in 1977, is credited with focusing the company on its core business -- making semiconductor manufacturing equipment -- and this focus has given Applied Materials a commanding lead in the market. We spoke with him about trends driving the industry, opportunities for growth, and the notoriously cyclical semiconductor business.
TMF: Start by explaining to folks what Applied Materials does, how it fits into the semiconductor food chain.
Morgan: We say that we make the systems that make the chips that make the products that change the world.
|"So we kind of say that our systems see every chip, every day, everywhere, because practically every wafer produced in any kind of advanced technology chip uses a large number of our machines. Anybody who makes semiconductor chips uses our equipment."|
Morgan: Actually, they're not computers. It's production equipment, essentially very sophisticated products that are highly automated. So we kind of say that our systems see every chip, every day, everywhere, because practically every wafer produced in any kind of advanced technology chip uses a large number of our machines. Anybody who makes semiconductor chips uses our equipment.
TMF: Applied Materials' broad product line helped distinguish its business from competitors. Can you talk a bit about that?
Morgan: We focus very hard on leading in two categories. One is the rapid introduction of leading products. Our products are usually number one or two in virtually all of the submarkets we participate in. We also have a very broad global distribution system. Fortunately we lead in each market around the world -- Taiwan, Korea, China, Southeast Asia, Europe, and the United States.
TMF: How about your mix of international, domestic revenues?
Morgan: Over 50% comes from Asia and about 65% comes from outside the U.S. So we are about 35% U.S., 15% or so in Europe, and the rest in Asia.
TMF: What are the big trends in the semiconductor equipment market?
Morgan: What's driving the business now is that gross domestic products are increasing. There's accelerated semiconductor growth, and there's improving order momentum in the wafer fabrication equipment business.
Our particular business is driven by what we see as three waves. The first wave is the move to tighter geometries. Fortunately there's a shortage of capacity at what we call 0.18 production technology. It's gone from 0.35 to 0.25 to 0.18. The equipment that produces that kind of geometry is becoming a larger and larger portion of our business. We've invested a couple of billion dollars in that equipment over the past few years, and since we lead in that segment, we're gaining share across the board.
TMF: You're actually growing faster than the industry.
Morgan: The team's done just an outstanding job this past couple of years. That's the first wave and that's what's been driving the current business.
The second wave is the materials transition. This is one of the more significant material transitions I've seen in years -- to new, improved dielectrics and conducting materials like copper (as opposed to aluminum). That wave is sort of starting and is in development lines now.
TMF: What's the performance advantage there?
Morgan: Faster speeds and lower powers. That means you can continue to follow Moore's Law by reducing the cost per function and therefore expanding the business.
The third wave is the move to 300 millimeter wafers. We have a broad line of products for 300 mm and those are just now going into the development labs.
TMF: Explain that a bit.
Morgan: Three hundred millimeter refers to the wafer size. It's like moving from a salad plate to a dinner plate.... Each of those three waves is a requirement for new types of equipment.
TMF: But it's the first wave, the move to 0.18 technology, that's really driving sales right now?
Morgan: It's what's driving our bookings now. We are getting some bookings in the other areas, but basically it doesn't show up. The 0.18 technology is a big advantage for customers.
TMF: It's less expensive for them, right?
Morgan: They can make their chips more powerful and cheaper per function.
TMF: When do you start the next round in terms of getting ready for 0.13 production technology?
Morgan: We have development programs in that area now, but I would say that won't be much of a factor in our revenues until we move more into the new materials.
TMF: Can you talk a little bit about the impact of new revenue streams coming from wireless devices.
Morgan: Some investors say that Applied Materials is one way to participate in the Internet without taking the application risk of the dotcoms or the various types of chips since we make the equipment that makes the different chips. The Internet and all of these sophisticated devices need leading-edge chip design, which requires the kind of equipment we're able to ship.
|"Some investors say that Applied Materials is one way to participate in the Internet without taking the application risk of the dotcoms or the various types of chips since we make the equipment that makes the different chips. The Internet and all of these sophisticated devices need leading-edge chip design, which requires the kind of equipment we're able to ship."|
Morgan: I would say the Internet is driving a lot of it, but all these things are driving demand. The PC business continues to grow. All the Internet applications are growing. All of the infrastructure, such as networking products from Cisco (Nasdaq: CSCO) and servers from Sun Microsystems (Nasdaq: SUNW), all of that requires an increasing number of really advanced chips and that continues to drive our business.
TMF: On one hand you have a very broad product line, on the other hand you can't be all things to everyone. How have you managed to strike a balance?
Morgan: I think we've been a very focused company, focusing on wafer fabrication front-end equipment and services. The services business is becoming an increasing part of our business, too.
TMF: Where will your sales be in a few years?
Morgan: If you go out a few years I see us as a $12 billion to $15 billion company just in the area we're in. That's why we stay very focused on front-end wafer fabrication equipment because it's a rapidly growing market, and there are several submarkets we're entering we think we can gain share in.
TMF: Give an example of the services you provide.
Morgan: We maintain equipment, manage spare parts, provide training, and do contract work for customers. Customers are outsourcing more activities as kind of a trend in the industry, and we're very fortunate. We have 2,500 people scattered around the world at the sites where our customers have factories and customers and would like us to take on more and more of their activities if we do a good job. The services business is a several-billion-dollar business. Last year, it was about $750 million for us, but it's over a $1 billion run-rate as we look into the early part of this year.
TMF: Some would argue that the semiconductor market is a mature business.
Morgan: Mature business? One way I look at it is think of the world population as 100 people -- probably about two of them have access to a PC and very few of them have phones. The Internet is geometrically increasing all of the connections. So I think we are in the infancy of the information age.
TMF: How are you using the Internet to help your business?
Morgan: A lot of our capabilities are Web-based, and we also have a global information network that's within the company, a corporate communications capability.
TMF: Can you see a cost savings?
Morgan: We do most of all our stuff electronically -- electronic orders, electronic bill paying. Also, more of our customers are beginning to buy spare parts by electronic connections.
TMF: Semiconductors are a cyclical industry. Is it inevitable that we see another low point like we had in 1997 and 1998?
Morgan: I think as you get a broader breadth of applications and chips, as they're used in more applications in the economy, demand will be broader and that should dampen some of the fluctuations. Also, most of the investment now is based on an economic basis whereas for a while there was a fair amount of nationally stimulated investment. That tendency caused some of the investment to get ahead of itself.
I have a lot of friends who bought stock when I did years and years ago and they say, "Now that you've gotten big, what's the opportunity?" I say the relative opportunity is even greater now than it was then because we get first look at everything and last look at the price.
TMF: In terms of challenges, what's the next hurdle to get over?
Morgan: We have to move our products through these three waves successfully. Then we need to continue to develop our global capability to attract, develop, and retain the very best people. And we need to selectively add new areas of opportunity that will continue to help us provide the kind of support that our companies need.
We're fortunate that we work with some of the best companies in the world -- Intel (Nasdaq: INTC), Samsung, IBM (NYSE: IBM) -- and all of these companies are looking for us to take on more types of activities because they trust us. With our global capabilities and their global reach, they continue to offer us more and more opportunities.
TMF: Thanks very much.
Morgan: You bet.