Semiconductor Equipment Sector Rebounding From "Deep Bottom": Wireless Business The Key For Foundries

• On 2:58 pm EDT, Tuesday October 27, 2009

67 WALL STREET, New York - October 27, 2009 - The Wall Street Transcript has recently published its 2009 Semiconductor and Semiconductor Equipment Report offering a timely review of the sector to serious investors and industry executives. This 115 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: DRAM Industry Reorganization -- Semiconductor Supply Chain Status -- Netbook Growth -- LCD TV Growth -- NAND Pricing and Demand -- Micro-Electro-Mechanical Systems (MEMS) Demand Cycle -- Ultra Low Voltage Processors -- Semiconductor Inventory Aging and Type -- Processor Power Developments

Companies include: Intel (INTC); Micron Technology (MU); Microsemi (MSCC); STEC, Inc. (STEC); National Semiconductor (NSM); Texas Instruments (TXN); Taiwan Semiconductor Manufacturing (TSM); ON Semiconductor (ONNN); Intersil (ISIL); Linear Technology Corporation (LLTC); Monolithic Power Systems (MPWR);Advanced Photonix (API); Waytronx Inc. (WYNX); LTX-Credence (LTXC); Mattson Technology Inc. (MTSN); Oclaro, Inc. (OCLR); Silicon Laboratories (SLAB); Microchip Technology, Inc. (MCHP); Cohu, Inc. (COHU); FSI International, Inc. (FSII); Jaco Electronics (JACO); Cadence Design Systems (CDNS); Synopsys (SNPS); Mentor Graphics (MENT); Magma Design Automation (LAVA)

In the following brief excerpt from the Third Quarter 2009 Semiconductor and Semiconductor Equipment Report, an industry expert discusses the outlook for the sector and for investors.

PATRICK J. HO is a Vice President at Stifel, Nicolaus & Company, Inc. He joined the Stifel Nicolaus research team in connection with Stifel's acquisition of Legg Mason's Capital Markets Group in December 2005. Mr. Ho joined Legg Mason in March 2005 after spending the previous three years at Moors & Cabot, where he covered both the semiconductor and semiconductor capital equipment spaces. Prior to that, he spent time in the venture capital world, covering the technology sector for Comdisco Ventures, where he focused on communications and semiconductor companies. Previously, he spent time at the investment bank Hambrecht & Quist (now JPMorgan Chase), where he covered the PC, storage and contract manufacturing sectors. He has a BA in History and Political Science from Yale University.

TWST: Patrick, I gather you cover the equipment side of the semiconductor space.

Mr. Ho: Yes, I'm entirely on the equipment side.

TWST: Here at mid-year, what's going on from a business perspective?

Mr. Ho: I think the key word is stabilization. If you go back to the end of last year as well as the beginning of this year, there were concerns that we were heading into a severe depression. "It looks like the end of the world" was the type of comment that we were getting. I think now we are seeing that it's not the end of the world. But have things been bad? Yes, absolutely but I don't think things are going to get any worse and in some select cases, we've actually started seeing a pickup in business. So I think there's overall stabilization and what I would call select areas of a pickup in business that we weren't forecasting at least in the beginning of the year.

TWST: Is the pickup coming from particular segments?

Mr. Ho: Yes. I think that the biggest pickup is in the wireless area. If you look at companies like Qualcomm (QCOM) or Broadcom (BRCM) on the semi side of the world, that's been a driver at least from the equipment side of things for some of my test players like Teradyne (TER), like Verigy (VRGY). They've seen a pickup there. Also notably with the pickup in wireless, you see in the foundries like Taiwan Semi (TSM) that their business has also picked up, particularly I would say in the last four months or so. So I think that's probably the biggest area of a jump. Now other areas are starting to show some signs of life. I think with the recent earnings season you saw Texas Instruments (TXN) and Linear Technology (LLTC) talk about a small pickup on the analog side. So overall you're starting to see other market segments I think recover along with wireless.

TWST: I guess the key question is recover. How bad does it get and are we still at the bottom rather than climbing out of the pit?

Mr. Ho: I think we are past the bottom. I'm not going to discount or try to sugarcoat how bad things got. I'll note what was particularly interesting at least from the equipment side of things is how quick things got to a bottom, and it was a pretty deep bottom but the severity and the speed of it were also particularly noticeable. Now that we are starting to see incremental signs of a recovery in the semi space, that's where I think the equipment guys are starting to see "stabilization" and, again, in select areas like wireless and maybe slowly in things like analog, you're starting to see an overall recovery. I wouldn't say that the recovery is going to go at the same speed as the decline but I think we're off the bottom and the worst is over.

TWST: Have the equipment guys largely adjusted to a different environment now?

Mr. Ho: In terms of adjusting, I think I'll try to tackle it from two points. One, in this near-term environment, I think the severity and the speed caught almost every company off guard. Now, I think companies tried to adjust as quickly as they could but they were shocked at the speed and how quickly new tool orders and things like services were dramatically cut; in past cycles they weren't as sharply cut as they were in this cycle. So I think in the near term, or at least in this most recent cycle, you saw companies adjust the best they could but, again, because of how fast things declined, it was just difficult to adjust as quickly as they would like. Now, longer term, I think a lot of the equipment companies - I don't want to say found religion but I think a lot of them realized their cost structure as a whole was probably larger than they would like. So given this downturn, I think almost every company in the space basically made kind of a blueprint for where they want to be longer term in terms of their cost basis. On that front, a lot of them have made the adjustments that I think will give them better operating leverage coming out of this downturn and actually probably drive better earnings in future cycles, because longer term they've made what I would call fundamental or structural cost cutting that's not going to come back on their cost basis going forward. And that's something where I think this downturn has been a positive for the group as a whole.

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