Applied Materials analyst day preview

March 26, 2012 — Applied Materials (AMAT) will host its annual Analyst meeting this week (March 28). Barclays Capital and Citi share expectations for AMAT’s update and the wafer fab equipment (WFE) outlook in general.

Figure. WFE spending by segment ($B). Source: Barclays Research.

A more bullish outlook from foundries might increase AMAT’s projections, though Barclays expects limited changes to the H2 2012/2013 gameplan. Applied Materials is more optimistic on 2012 spending outlook, citing increasing fab capacity needs due to higher unit demand of mobile devices and increasing die size of key mobile chips, Citi analysts report after a pre-Analyst Day call with AMAT CEO Michael R. Splinter. 2013 will also see a boost, Splinter said.

Mobile competition and higher capital intensity (due to lack of EUV/450mm) will drive wafer fab equipment (WFE) to the mid/high-$30 billion level in the next several years, Citi reports.

More information is also expected around AMAT’s Varian Semiconductor (VSEA) purchase. The company expects record revenue from its recent VSEA acquisition in FQ2 on foundry strength, leading Citi to say that AMAT is clearly "ahead of its curve in integrating VSEA into its semi operation."

Industry trends, such as the use of deposition in 3D packaging and the slow growth in displays, will also be covered. Barclays expects AMAT to focus on the recovery roadmap and the future growth potential, such as metal-oxide and LTPS technologies for displays.

Silicon — 2012 WFE market at ~$31B, focus on 2013
Applied Materials should maintain its outlook for the 2012 WFE market to total ~$30-35 billion (flat to -15%), likely including the LED MOCVD market. Barclays models 2012 WFE market at ~$31B (or flat to down slightly), with order sustainability at least through 1H12 driven primarily by foundries. Specifically, Barclays sees AMAT’s Silicon orders growing from ~$1.42B in Jan Q to ~$1.55B in April Q and ~$1.50B in July Q. Barclays does see foundry strength as 1H12 loaded, and looks to a resumption in NAND spending growth to pick up the slack in 2H12 (though the magnitude of the likely order decline in foundry remains uncertain). At this point, Barclays sees a potential for a $28-32B 2013 WFE market as largely driven by macro-economic forces. In terms of segments, Barclays expects, on a Y/Y basis, a slight uptick in NAND and MPU, flattish DRAM, and a decline in Foundry. For Foundry, although the magnitude of the decline will likely be dictated by whether and how much leading foundries like TSMC raise their 2012 capex budget to compensate for currently poor 28nm yields, Barclays expect a rise in capital intensity coupled with growing customer demand for leading edge capacity should enable a 2013 WFE market of $28-32B.

AMAT lost share in WFE market
At last year’s analyst day, management highlighted expectations for AMAT to gain 1+% share in the WFE market, driven by gains in etch, inspection, and ECP. On its most recent call, however, management discussed the fact the company actually lost market share in etch and CMP, though AMAT did see some gains in electroplating, deposition, and other. AMAT’s portion of the overall WFE pie appears to have declined by ~3% in 2011. This looks to be the case even when factoring in the portion of the company’s AGS business likely attributable to 200mm equipment and Silicon service. Barclays does recognize that the WFE mix shift in 2011 turned more to litho as well as AMAT’s relatively higher exposure to DRAM likely played a role in the decline. However, Barclays does believe that share gains continue to prove somewhat more difficult than likely expected.

VSEA’s implant tools
With the completion of the Varian acquisition in November 2011, AMAT once again takes part in the Ion Implant market, which Barclays estimates at ~3-3.5% of WFE in 2012. Barclays expects management to highlight the attractiveness of this segment with Varian’s 75+% share of the market now fully tucked in under SSG. Prior to acquisition, Barclays would recall that Varian had two remaining areas for share gains — the High Energy market and Japan, where share gains lagged compared to other served areas. Going forward, Barclays expect AMAT not only to address traction in those markets but also to highlight continued traction with the PLAD (plasma doping) tools, which enabled Varian to have a 100% market share in the Ultra high dose market.

Currently, Varian’s PLAD tools are mainly used by memory manufacturers, though DRAM has a larger share. With NAND spending expected to pick up in 2H and a potential lift in DRAM in 13, Barclays expects AMAT to highlight the increasing TAM over the next several years. Barclays also notes that among the various development work Varian has done to date to expand into adjacent markets (solar, LEDs, CMOS image sensors), the Solion solar tool remains the key revenue contributor in the near-term, though look for incremental color on the longer-term opportunities from the other adjacent markets during the Varian break-out.

Deposition intensifying thanks to 3D structures
As 3D transistors become more popular and as back-end semiconductor packaging turns to more wafer level packaging (WLP) of 3D multi-die structures with TSVs, both the importance and spending on deposition equipment is expected to increase. In the memory market, NAND is currently reaching a point where cost reduction from shrinks isn’t necessarily enough. Thus, vertical scaling, which accomplishes similar results as 2D planer shrinks by increasing performance and lowering power consumption, becomes more attractive. The key implication here is that capital intensity per square mm actually moves higher by utilizing this 3D process. Thus, as a leader in deposition with close to 40% share, AMAT is poised to capitalize on such industry shifts. To this end, Barclays expect AMAT to highlight and provide updates on its wide Deposition product suit across CVD, ALD, PVD, and ECP equipment offerings.

Display capex mix-shift to metal oxide/LTPS a positive
Big picture, Barclays expects AMAT to update its Display segment roadmap by highlighting technological shift to Metal Oxide and LTPS (low temperature polysilicon) for OLED and high-resolution LCDs as AMAT provides an update on its latest display products. As volume production for these processes ramp up in ’12, Barclays expect AMAT to benefit from Metal Oxide backplane, where Barclays see better CVD (+20-25%) and PVD (+50%) intensity vs. the thin film a-Si technology. Likewise, LTPS should also enable AMAT to see increasing CVD (~2x+ higher) dollar opportunities. Specific to the latest systems, Barclays believes metal oxide and LTPS are enabling 30% and 60-70% bigger TAM, respectively, relative to a-Si. As for spending this year, Barclays notes that Samsung (SMD’s) spending this year will be targeted at LTPS (rather than metal oxide) backplanes, with a focus on scaling to Gen 8 production, which remains difficult given the limitations of fine metal mask technology at the larger motherglass sizes. For metal oxide backplanes, LG Display and Sharp are the dominant spenders this year, though the volume ramp for Sharp’s IGZO technology continues to slip.

Currently, Barclays’ checks indicate that AMAT is seeing supply chain tightness on its latest models in these two categories, though Barclays don’t expect recovery in Display until panel prices stabilize (Barclays model revenues -40% Y/Y in CY12). In terms of end demand, Barclays expects AMAT to highlight smartphones, tablets, and also emerging market countries as the expanding drivers of demand for display. Altogether, Barclays look for AMAT to affirm the bottoming process is now complete for Display and to shift the focus towards growth opportunities in both orders and products (though timing here remains uncertain).

EES trajectory continues to be uncertain
In the latest quarter, EES revenues not only declined 34% Q/Q, but orders were also down
62% due to continued industry overcapacity. OMs even slipped to negative territory (-8%),
though excluding the inventory write-down, OMs were generally breakeven. With so much
negative news around this segment, Barclays expect management will concentrate on providing
color on the recovery roadmap from here. In terms of optimistic areas, Barclays expect AMAT to
maintain that it is the #1 PV equipment provider, is a top supplier to Chinese manufacturers,
and the company continues to have ~50% share in served markets. Moreover, Barclays expect
AMAT to focus on the healthy long-term growth in installations with updates on
upside/downside scenarios for the industry. In terms of product highlights, Barclays expect
AMAT to bring its c-Si PV system to the limelight and showcase an expanding addressable
market in the industry as a result of new process steps and Gen 2 solar cells. While Barclays views the long-term opportunities for EES as attractive, overcapacity and macro conditions will be near term headwinds for the industry (Barclays models revenues -71% Y/Y in CY12).

Updated target model
Applied failed to meet its target model in FY11, led by relative underperformance
particularly in SSG and AGS. Here, Barclays points to pricing pressure from a consolidated
customer base (i.e., read Samsung) as well as higher mix of 200mm lower margin service
revenues (in part due to AMAT’s difficulty in 2011 to fill the early ramp in 200mm
equipment demand). Looking ahead, and considering growing reliance on TSMC and
Samsung as well as initial investments in 450mm R&D, Barclays looks for AMAT to offer a more
conservative target model for both SSG and AGS. For Display, Barclays notes that the tools being
sold for metal oxide and LTPS production are somewhat lower margin than the a-SI
deposition tools, suggesting that the display capex mixshift to these two technologies may
cause some adjustment to the Display target model as well.

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