Wednesday, September 29, 2010

Paula Mints addresses SEMA meeting on solar power

Frequent contributor, Navigant Consulting director Paula Mints spoke before a Solar Engineering and Manufacturing Association (SEMA) meeting held recently at Flextronics in Milpitas, CA. She covered key successes and challenges in the photovoltaics industry. The drive to reduce costs, understanding supply and demand forecasts, and certain reliability issues all were included in her presentation. For our readers that did not get to see Mints speak in person, we've collected some of her most popular 2010 articles on the solar industry. If you attended the event, let us know what you thought of Mints' talk in the Comments section.

A solar toast: Nothing succeeds like success
Before the industry celebrates a banner year, industry stakeholders should take a moment to consider what out-of-control growth, high levels of inventory, and severely constrained margins might bring in the mid-term.

Analyst Paula Mints updates us on PV trends
In this video interview from Intersolar North America (July 2010), Mints summarizes the current state of the PV industry, including capacity, pricing, and quality news.

The PV industry black swan
A black swan event is an observed market behavior that performs in an unexpected manner. In terms of the PV industry, such expected unexpected behavior is seen in the not-so-rapid rise of supply control by two countries: China and Taiwan.

What thin-film PV has in common with Mark Twain
Rumors of thin-film PV technology's demise are exaggerated, writes Paula Mints from Navigant Consulting -- despite an uphill competitive battle with crystalline silicon, it does have a place in the future of multi-GW deployments.

FITs: The ecstasy and the agony
As Germany's FIT program demonstrates, incentives can propel the PV industry into a viable renewable energy source. But beware. Poorly administered, poorly designed, and even well-designed programs have created even more anxiety for the industry.

Tuesday, September 28, 2010

WaferNEWS Watch: How to fix FORM

An industry insider offers a prescription to fix what's been ailing probe card vendor FormFactor; two analysts explain why the market's just taking a breather, not heading down; and why subcomponent suppliers get no love from one analyst.

How to fix FORM

No question it's been a banner year for the semiconductor industry. But we've seen Formfactor on the losing side of our WaferNEWS Fab 50 stock watch several times in recent months, and after its latest news of exec swapping and manufacturing shufflings, we asked an industry watcher's take on what's ailing the probe card company. Part of the problem, we're told, is that FORM is backed into a corner; rival MJC has taken up to 70% share at Samsung, and after that FORM's biggest accounts are Elpida and Spansion. Meanwhile, memory probe card pricing has tanked. So with revenue opportunities shrinking, customer mix not ideal, facilities all over the world, and less money coming in, the company "needs to cut costs and fast," the source tells us, or "conceivably lose money throughout the entire DDR3 probe card cycle."

This watcher's prescription to fix FORM: 1) Rationalize all manufacturing at the Livermore site (closing Korea and Singapore shops), and get down to a ~$40M B/E Q run rate. 2) Define core customers and Tier 2 customers -- and focus all efforts on the former. 3) Tend to knitting until the next upcycle (1-3 years) -- or get FORM lean enough to sell.

It's a pause, not a downturn

After meeting with dozens of Asian companies throughout the technology supply chain, Credit Suisse analysts John Pitzer and Satya Kumar come away with two key messages:

-- It's a pause, not a downturn. In 1H10, PC units looked ready for 20% growth; now it looks more like 15%, with decelerating momentum and no companies bumping up forecasts causing alarm bells to ring, Pitzer writes in a research note. But semi inventory and wafer capacity are still well below 3Q08 levels, capex % is still quite low, and semi content in devices isn't going down.

-- Capex not falling off a cliff. Kumar thinks 2011 capex will be flattish vs. original 15% expectations, with particular weakness in memory, and the data points are a mix of weak (e.g. LED chips, retail NAND) and strong (tablets, smartphones). However, he sees another 13% capex bump in 2012, since capital intensity is still strong and growing. "We think 'the cycle' for SCE driven by emerging market penetration and product cycles (smartphone/tablet) is very much intact," he writes in his own research update. PC OEMs/ODMs have been doing a little better in the past few weeks, partly helped by Chinese price cuts and a new government rebate program ahead of the October Golden Week holiday period.

"We believe the normalization in end-demand we witnessed in late 3Q10, combined by the ongoing production normalization mid to upstream is fundamentally a healthy return to rational expectations," Kumar writes. There might be a pause in semiconductor capex in 4Q10-1Q11, but "when the dust settles, product cycles and emerging market penetration should sustain double digit end-market growth rates in 2010, 2011 and 2012, which will sustain an upward trend in capex through this period."

Party's over for subcomponent suppliers?

BoA/Merrill Lynch's Krish Sankar dropped the axe on his 2011 capex estimates, from +15 down to 0%/+5% (similar to Credit Suisse's Kumar above), hallmarked by lower spending among memory firms due to sluggish PC sales. But instead of offering optimism, he turns his blade toward component suppliers: AEIS and UTEK ("Neutral," reduced from "Buy") and ENTG and MKSI ("Underperform" from "Buy"). This sector enjoyed high revenue growth early in the market cycle thanks to rebuilding inventories, he writes, but "as the shipment run-rate slows down, the OEMs tend to draw down inventory thereby slowing the revenue growth for these suppliers."

Outlook concerns dent TSMC

Trading of TSMC shares was suspended for two minutes last Thursday, and ultimately lost nearly 3% of their value (bucking the weighted index) and topped all other stocks in turnover (106M shares), all on concerns that the current cycle has peaked and the foundry will feel a pinch in 4Q10, pulling back from full capacity utilization where it's been all year. Speculation that the foundry will inch up its 2011 capex to $6B may strike investors as a bit risky, according to an analyst.

Money for...something?

Investors liked a short filing by Photronics (PLAB) informing that it has amended its credit plan with lenders to increase the dollar amount from $20M to $30M.

Tuesday, September 21, 2010

WaferNEWS Watch: The problem of too much cash

Barclays' CJ Muse thinks it's time semiconductor companies rethink how they return cash to shareholders -- and he's got a way that makes everyone happy.

Too much cash? Try a variable dividend

Barclays' CJ Muse thinks it's time semiconductor companies rethink how they return cash to shareholders, given their cash positions. Net cash is currently ~15% of equipment companies' market cap -- but they have been hesitant to drive shareholder value through dividends or stock buybacks that could turn out ill-timed with market fluctuations. When times are good, firms are flush with cash; at other times they're afraid of being locked into fixed obligations during a downcycle. That hesitancy is reflected in investor's lack of support in valuations, too: "Investors do not believe managers, in general, are good shepherds of cash," he writes. "Too many times in the past we have seen dilutive acquisitions, too aggressive compensation, and poor business models that burn cash during the downturn."

But that corporate reluctance needs to change, Muse argues, since free cash flows are likely to continue through future cycles, thanks to "quiet share consolidation" (i.e., non-M&A) that will fuel better pricing and business models. Plus, semiconductor capital intensity is only going up, capex probably won't sink back to abysmal 2009 levels, and maneuvers including outsourcing and cost cutting will make companies more variable-cost in nature.

Muse's suggestion: implement a "variable-rate" dividend, where a payout occurs only if the company reports a quarterly GAAP net income in excess of the proposed dividend. That, presumably, would lead to beefier dividends during good times, and less risk for when markets soften. The alternative -- issuing rather small dividends today (1%-3% for some of the big names) -- "are just not enough to attract value investors," he says.

So what would the sector look like if such a plan were enacted 10 years ago? A number of top semi equipment stocks would have paid out dividends ~50% of the time (average dividend 2.5%), but without depleting cash reserves during bad times. And extrapolating into the future, he thinks average payouts would increase to 75%+ of the time -- "meaning the return of excess cash to investors will be a critical differentiator for equipment companies in the future." Those who might benefit most from such a plan? Logical names include LRCX, TER, KLAC, AMAT, and NVLS -- companies who already pay dividends, or have clean balance sheets, continue to cut costs/narrow focus, and aren't investing heavily in adjacent areas (e.g. solar, other tech hardware).

Takeaways from DB Tech conference

Among several sector presentations at last week's Deutsche Bank Technology Conference:

AMKR: Normal seasonal outlook for 2H10, said CFO Joanne Solomon, with weaker PC shipments somewhat offset by strength in consumer electronics, notably smart phones. The company sees an unchanged ~$500M in 2010 capex, though some peers are reporting customers slowing and pushing out tool shipments. In fact Amkor probably has lower capital intensity than large peers due to end-market mix and a less aggressive ramp in copper wire bonders -- and this should keep revenue growth on pace with others. Look for capital intensity to return to "a more normal 10%-14% level," and stronger cash flow, in 2011, O'Rourke writes.

AMAT: No new guidance, no changes to outlooks; "DRAM, NAND, foundry, and logic capacity ramp profiles have neither changed nor been a surprise." GM Randhir Thakur did acknowledge macroeconomic concerns ahead. Deutsche Bank analyst Stephen O'Rourke notes that a projected 4% gain in etch does not include any position at Intel (and LRCX isn't there either, meaning it's a TEL win). It's also gained share in mask inspection, though mainly from smaller firms (not KLAC).

ECD: No change to guidance from CEI Mark Morelli. Sept. quarter revenues will be down as expected, "but the overall trend is clearly up." Module pricing remains intact (current ASP is ~$2.05/Wp), and manufacturing costs should decline to $1.60/Wp at current production rates. Conversion efficiency goal is still 10% in 2011 and eventually 12%.

LRCX: CFO Ernie Maddock confirmed weaker semiconductor industry data points, but said that no customers had changed delivery schedules or overall spending plans. The company's latest efforts at wet clean "clearly gaining traction," and paired with its dry bevel clean technology the company "is poised to surpass the 50% market share point in overall etch" writes O'Rourke. "Lam has gotten past the label of being a single product company."

RTEC: CFO Steven Roth noted, but did not reiterate, current 3Q guidance and expectations for sequential growth in 4Q10, and echoed other industry sentiment that a robust spending cycle for backend will lead to "a digestion period" and slowdown. In fact, this appears to have already started, with some backend packaging/test outsource suppliers now pushing out tools, notes O'Rourke. With ~40% exposure to backend customers, Rudolph's near-term outlook could be "tempered." It's worth noting how much Rudolph has changed in the past few years, he adds: while markets for its frontend metrology business have underperformed (though notably a new win at a large DRAM/NAND chipmaker), most of its sales are now from new tools, and it's been active with M&A in backend inspection/analysis, segments heavy with use of leading-edge technologies including 3D packaging, flip chip/bump, through-silicon vias (TSV), and probe cards.

VSEA: No change to guidance from CFO Robert Halliday; fiscal 4Q10 (Sept. 2010) is tracking in-line and F1Q11 could be "incrementally positive." DRAM business is weakening as expected, but foundry is growing and NAND is expected to grow. Overall 2011 spending could be flat Y/Y, he suggested.

Notebook outlook: Cloudy, chance of rain?

FBR Research's Craig Berger says checks indicate PC inventory depletions in Asia are nearly over, with HP and Acer both at about four weeks (down from 6-7 in mid-July), though Dell is a bit behind. While sluggish consumer demand is still reported in the US and Europe and iPad seems to be stealing share from notebook PCs, chip firms should see "a slight business uptick as they transition from customer inventory de-stocking to shipping more in line with end consumption," he writes.

Speaking to notebooks, Ashok Kumar from Rodman & Renshaw sees a flat September for notebook shipments from top ODMs, following a weak back-to-school season, "lackluster demand from Europe," inventories plugging the channel, and the aforementioned iPad cannibalization. The December year-end quarter is still unnervingly murky, though early indications point to perhaps a -10% decline or more in shipments, as Acer, Dell, and HP cut back orders to ODMs.

Taking Toshiba to task

With demand for memory going nowhere but up, and robust demand for embedded NAND flash a good area to leverage technology advantages, why be down on Toshiba? Because, says Deutsche Bank's Takeo Miyamoto, the company's memory business has just 14% profit margins (based on guidance) while some competitors post 20% or more. And product mix issues, a strong yen, and startup R&D costs have hampered efforts to improve profitability -- which is vital, he says, for the company to accelerate its ROI in semiconductors where product cycles are so short.

Monday, September 20, 2010

What to do at ESC

ESC Boston will be held September 20-23, 2010, at the Hynes Convention Center in Boston. The show traditionally covers embedded systems design, but is not limited in scope. Here are a few presentations to catch this week.

Product cloning and intellectual property (IP) theft have become a global business, costing companies billions of dollars in lost revenue, says Jim Carver, technology specialist at Avnet Electronics Marketing Americas (EMA), a business region of Avnet Inc. (NYSE: AVT), who will speak about product protection. Carver’s presentation (Thursday, September 23, room 102, from 9:30 to 10:30 a.m.) will cover the current landscape of products available for IP protection, as well as the cost/benefit tradeoffs between various technologies. Attendees will also learn design techniques for implementing a sound security system that greatly limits exposure to risk.

element14, online design engineering community and electronics technology store, invites engineers attending ESC to register at Booth 1117 to win a standard edition of CadSoft’s EAGLE PCB design software. element14 is sponsoring the ESC Theater, which offers a series of technical presentations including live teardowns, as well as the Twitter Scavenger Hunt on September 22 (tweet @esc_hunt for signup and details). They are also donating an Altera Nios II embedded evaluation kit as one of the prizes.

ESC has also collected exhibitor highlights here, including Texas Instruments' announcements, spring-pin test sockets, and more.

If you're attending ESC, give us your impressions of the show in the Comments section.

Tuesday, September 14, 2010

WaferNEWS Watch: 2011 capex trends, wafers flat, EDA still chugging

This week, industry watchers map out the semiconductor capex scene for 2010 and 2011, who's spending how much and where; why MEMC is seeing flatness, but not enough to derail the train; and another reason to be positive about the EDA sector.

Barclays' CJ Muse looked at semiconductor capex trends for 2010-2011, and fine-tunes "where we want investors to be" at the point of a stock price trough. His conclusion is a handful of downgrades: CYMI, KLAC, BRKS, and LTXC (all from "Overweight" to "Equal Weight"), VRGY from "Equal weight" to "Underweight," and a host of price target reductions (AMAT, NVLS, MKSI, AEIS, AMKR, FORM). He pegs a trough "sometime in 4Q10" for many shares, citing "continuing deterioration in semi data points (i.e. DRAM pricing, downward semi earnings revisions) and expectation of equipment orders peaking.

Muse also offers a mea culpa: "In hindsight, clearly the right call would have been to downgrade the group in April following the end of the Fed's quantitative easing, specter of increased government regulations, weakening picture in China -- basically everything that has pressured global end demand," he writes.

Credit Suisse's Satya Kumar still sees MEMC "outperform"-ing the field, but his stance is a little softer after some "industry checks" suggest flat semiconductor wafer ASPs in 4Q10 (vs. 3% expectation) and 1Q11, and "flattish" solar wafer ASPs in 4Q10 -- mostly attributed to production adjustments and excess wafering capacity at SUMCO. "We think longer term semi wafer supply/demand is fundamentally OK, and still believe in 2011 semi companies will increase wafer starts faster than the pace at which wafering companies add capacity," he writes in a research note.

DA Davidson's Thomas Diffely continues to be bullish on the EDA sector, this time singling out Cadence, which he sees improving revenues 11%-12% in 2011, mainly through recent acquisitions and transition to a new business model. "Based on recent comments made by several EDA management teams, and supported by data points coming out of the industry, we believe strength in the core EDA market continues to build," he writes. His current view also calls for some customer attrition over the next few years as contracts come up for renewal, "largely at the hands of Synopsys."

Top share-price growth this week goes to NVMI, on news of two multimillion-dollar orders for its standalone optical CD metrology tools in Asia, from a foundry and a memory maker. Meanwhile, investors saw National Semiconductor's disappointing revenue update as their cue to head for the exits.

Friday, September 10, 2010

Serious semiconductor research at TECHCON

Semiconductor Research Corporation's (SRC's) annual research conference -- TECHCON -- will take place September 12-14. For the uninitiated, TECHCON is "a competitive conference,” explains Steve Hillenius of SRC. Listen to an interview with Hillenius about the R&D gathering.

The conference only selects about 50% of the total number of papers submitted. Students, whose research was funded by SRC member companies, have the opportunity to present their findings to the members. A highlight of the event is a job fair during which the students have the opportunity to present their credentials to SRC members. has already published a research preview from Professor Joel Plawsky and student Michael Riley of Rensselaer Polytechnic Institute, who collaborated on research comparing copper and aluminum anodes in low-k dielectrics. They will present “Experimental analysis of copper diffusion into porous SiCOH” at the conference, but you can see the research summary on our site now: Cu/low-k extendability work compares Al, Cu anodes

Professor Muhannad Bakir and student Hyung Suk Yang of Georgia Institute of Technology (Georgia Tech), discuss their TECHCON 2010 paper, “Marriage of CMOS and MEMS using Flexible Interconnects and TSVs,” in this podcast.

Awards at TECHCON: Professor Mark Lundstrom of Purdue University is the 2010 recipient of the Aristotle Award given by SRC and presented at its TECHCON technology conference. Professor Li-C Wang, University of CA at Santa Barbara, received the Technical Excellence Award. We interview the winners. Read why in "SRC TECHCON awards Purdue, UCSB research accolades"

Tuesday, September 7, 2010

WaferNEWS Watch: NVLS update, backend bubble, TXN's patient play

NVLS mid-3Q10: When up is down

As expected, Novellus Systems in its midquarter (3Q10) update tightened its outlook to the higher end of previous estimates, tweaking up sales (7%-14%), shipments (7%-13%), and EPS ($0.80-$0.90, up 19%-34%), but did not lift bookings and margins (flat-10%, and ~50% GM) for the first time in several quarters. Credit Suisse's Satya Kumar notes the company is tracking 15 new products and sees no pushouts (yet), and believes it is not losing share in PVD and is "not particularly bothered" by Applied Material's new flowable CVD product. An emphasis that 2H10 bookings will be higher than 1H10 was interpreted by Deutsche Bank's Peter Kim to suggest how low 4Q bookings could be -- +20% in 3Q, flat-10% in 3Q, and possibly -19% in 4Q. "While a meaningful pull back in bookings has not yet materialized, signs of a pending slowdown are clearly present," he writes in a research note. And the company also acknowledged that some customers are "spooked" by signs of PC sector softness, Kumar pointed out.

Kim also points out that NVLS' deferred revenue has been climbing with overall sales but are "relatively low" vs. past cycles. Deferred sales act as a buffer when business slows, so "the lower deferred revenue bank could lead to a sharper revenue decline should the industry enter a downturn," he writes.

Backend bubble building?

Credit Suisse's Randy Abrams has downgraded his outlook on 2011 for Asian test/packaging subcons ASE and SPIL. Semiconductor backend subcons have enjoyed a strong capex rebound toward everything from inventories to technology upgrades and Cu migration; wire bonder supplies swelled 25% in 1H10. But inventory has already surpassed the post-bubble average (72 days in semiconductor, 39 for total tech). "Higher inventory and greater comfort on supply should prompt customers to cut back into 4Q," he writes.

TXN: Patient with in-house capacity

Texas Instruments seems to be looking beyond seasonal trends and share gains/ebbs, content to support long-term capacity requirements with growth in analog and embedded processing, observes Doug Freedman of Gleacher & Co. "TXN is certainly in no rush to fill its 300mm capacity with low-margin product," and can keep those utilizations low because of low-carrying costs (thanks to Qimonda fire-sale tooling), he writes. Management sees perhaps some inventory burn but no "roll-over" cyclicality, and "they believe they are advantaged in supplying semiconductor growth in 2012" as peers lack in-house fab capacity. TI seems "minimally exposed" (≤10% of sales) to reported PC sector softness, Freedman says, though he notes that the handset sector could get rocky in coming quarters since only some of the clamoring smartphone OEMs will pick up marketshare in the current upgrade cycle.