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.