KLA-Tencor, Part 2
Top Dog or Mutt?
by Ron (RonNTup@aol.com)
For a refresher, we ended yesterday's column with this statement: "For certain, however, we are still in for hard times, as Japan has not sorted out its banking mess. It is widely believed that 'where goes Japan, so too goes Asia.' I believe that once that mess is straightened out, the region will begin to recover. Only then will we see equipment purchases rebound and [KLA-Tencor] return to its days of glory."
Now we continue, looking to the future of KLA-Tencor and the industry.
Technology is always marching forward, and those that are not able to invest in the latest manufacturing technology will be run over by it. In today's semiconductor market, if you're not innovating, the market will simply pass you by. If want an example, consider the relic that the Intel (Nasdaq: INTC) 486 PC has become.
As a result of the inability of Asian DRAM players to invest in new technology, they are rapidly losing market share -- as are all the other companies that are forced to sit on their hands during this downturn. In Korea, two of the largest DRAM manufacturers (Hyundai Electronics and LG Semicon) are merging in an attempt to survive. Texas Instruments recently sold its DRAM business to Micron. Motorola is leaving several semiconductor markets and Fujitsu is closing several plants here and abroad (there are other examples, but these come to mind).
Why is this important? Because this flushes unprofitable businesses from the market. This amounts to a reduction in semiconductors produced (especially in DRAM) and this helps prices and demand to finally stabilize. This stabilization will lead to increased demandï¿½ and this will fuel the next equipment purchase cycle.
Along with stabilization of the DRAM market, we'll see the desire to lower costs and raise semiconductor yields (please visit past posts in the KLAC folder for a discussion of yield). This ensures the adoption of next generation manufacturing technologies. Truth be known, this adoption of new technologies will fuel future growth in the semiconductor equipment market.
There are several new technologies that are rapidly gaining popularity. A technology that is quickly being adopted is a process known as Chemical Mechanical Planarization (CMP). This process ensures wafers are ultra-flat prior to the manufacturing process. As devices shrink in size, the flatness along the wafer becomes critical. This is where K.T. [KLA-Tencor] enters the pictureï¿½ and this is one area where we are huge! CMP inspection has long been one of our specialties.
Another technology that is coupled with CMP is the desire to shrink line widths to below 0.25 micron (if you were to slice a strand of hair width-wise 1000 times and were to measure one of those slices, you would get roughly one micron). By shrinking line widths, you can fit more chips on the wafer. This reduces the material cost and increases profitability.
Yet another technology involves the move to copper interconnects. Currently, the industry is using aluminum (known as "the metal"). Aluminum can shrink only so far before the dielectric changes and it is no longer a viable conductor for electricity. This is where copper steps in. It can be shrunk to very small line widths without a noticeable loss in conductivity. Right now the metal of choice is aluminum, but in time, it will become copper.
The last technology of significance involves the move to larger wafers. The current wafer standard is eight inch (200 mm). In order to reduce per chip cost, the industry would like to move to 12 inch (300 mm). However, there are significant hurdles to 300mm. Namely, the entire fab [fabrication plant] would have to be re-tooled in order to handle these larger wafers. Every stepper, etcher, polisher or inspector in the fab would likely have to be replaced in order to handle these new wafers. This comes at a considerable cost and is part of the reason that the industry is "dragging its heels" on this one. Everyone wants to go to the dance, it's just that no one wants to be the first on the dance floor.
All of these technological changes have one thing in common: KLA-Tencor. As a company, we provide a vital service. When technology changes (or even during regular manufacturing processes) there are hurdles to overcome. And the only way to overcome those hurdles is to inspect your wafers, report the results and then go beat up on the SpeedFam guys, the Applied Materials guys and the other processing guys to get the tools back into control. KLA-Tencor inspection tools point the way and direct the yield enhancement team to the tool that is causing the yield inhibiting problems. This is why our tools commonly pay for themselves in less than one year's time. They tend to find the problems that cost companies money and help them to employ the solutions that aid profitability.
It is my opinion that KLA-Tencor is indeed the Top Dog in what it does. In fact, it is "Best of Show." As a company, K.T. owns about 80-90% of the inspection market, has no long term debt, has about $552 million in cash and working capital, spends about 17% of its revenue on Research and Development and has very little competition (there are several posts in the KLAC folder that approach this topic).
If you look far enough down the tunnel, you will see a tiny pin prick of light. PC sales are doing a little better and Intel has indicated that business is not so bad. Additionally, the shaking of the semiconductor tree is knocking down the weaker leaves, and this ensures the cycle will continue.
Certainly, there is ton of bad news still out there. Additionally, the market is wrought with uncertainty. But, you can be certain of one thing: the market will return to KLA-Tencor. The integrated circuit is making its way into our everyday lives. It is common to find chips in toasters, coffee machines and under the hood of new automobiles. These chips have to be made by someone, and the resultant wafer has to be inspected in order to ensure it is going to work when it is finally packaged and sold to the consumer. Regardless of who makes the chip, there is likely a KLA-Tencor inspection tool in place to aid them in their yield enhancement activities.
Certainly, the market is down and the semiconductor equipment segment is wrought with pain. However, my bet is that once you take this puppy to the groomer and subject it to a haircut and a flea bath, you will find the purebred underneath. For more discussion, please visit the KLAC message board.
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Day Month Year History Annualized FOOL -1.32% -5.89% 34.22% 350.44% 43.47% S&P: -0.40% -3.19% 1.46% 114.79% 20.12% NASDAQ: -1.68% -10.80% -3.79% 109.79% 19.45% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 97.75 2588.07% 9/9/97 580 Amazon.com 19.11 108.31 466.76% 5/17/95 1960 Iomega Cor 1.28 3.56 178.23% 10/1/96 84 LucentTech 23.81 57.63 142.04% 4/30/97 -1170*Trump* 8.47 3.06 63.84% 8/12/96 130 AT&T 39.58 57.13 44.34% 2/20/98 200 Exxon 64.09 75.75 18.19% 2/20/98 270 Int'l Pape 47.69 45.56 -4.46% 2/20/98 215 DuPont 59.83 53.50 -10.59% 7/2/98 235 Starbucks 55.91 37.00 -33.82% 8/13/96 250 3Com Corp. 46.86 27.38 -41.59% 8/24/95 130 KLA-Tencor 44.71 21.50 -51.91% 1/8/98 425 3Dfx 25.67 10.69 -58.36% 6/26/97 325 Innovex 27.71 10.75 -61.20% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 69402.50 $66820.63 9/9/97 580 Amazon.com 11084.24 62821.25 $51737.01 4/30/97 -1170*Trump* -9908.50 -3583.13 $6325.38 5/17/95 1960 Iomega Cor 2509.60 6982.50 $4472.90 10/1/96 84 LucentTech 1999.88 4840.50 $2840.62 2/20/98 200 Exxon 12818.00 15150.00 $2332.00 8/12/96 130 AT&T 5145.11 7426.25 $2281.14 2/20/98 270 Int'l Pape 12876.75 12301.88 -$574.88 2/20/98 215 DuPont 12864.25 11502.50 -$1361.75 8/24/95 130 KLA-Tencor 5812.49 2795.00 -$3017.49 7/2/98 235 Starbucks 13138.63 8695.00 -$4443.63 8/13/96 250 3Com Corp. 11715.99 6843.75 -$4872.24 6/26/97 325 Innovex 9005.62 3493.75 -$5511.87 1/8/98 425 3Dfx 10908.63 4542.19 -$6366.44 CASH $12005.75 TOTAL $225219.69