Investor's Business Daily, April 25th, 2007
Chip gear makers built more than equipment last year. They also built strong sales. Final numbers aren't in, but it's expected that sales rose 21% from 2005, to $40 billion.
Partly based on a U.S. economy that's expected to cool, analysts expect gear sales to rise just 5% this year, to $42 billion.
Yet, when it reports first-quarter results on Thursday, Varian Semiconductor Equipment VSEA is expected to report per-share profit of 66 cents, up from 26 cents in the year-earlier quarter. Analysts see sales rising 40% to $239 million.
The company makes a widely used product called an ion implanter. These $3 million devices fire groups of charged atoms deep into silicon wafers. The ions enable the silicon to conduct electricity.
Varian also is delving deeper into services. It's repairing more of the machines it sells. And it's selling more spare parts to longtime customers. This has propped up its sales.
Its share price has risen from 17 in August 2004 to near 56. In an interview with IBD early this month, Chief Financial Officer Robert Halliday talked about plans to keep Varian on a fast growth track.
IBD: On Feb. 26, Varian said it had won a service agreement worth more than $30 million with an unnamed big chipmaker. What impact will that have on your sales and earnings?
Halliday: The service contract in February was the largest ever for us. Those are mostly labor contracts, but also for parts. It's a reflection of our wins in equipment sales. The more equipment we sell, the more service opportunity we create.
It's like if you own a car and General Motors GM says you can buy a new engine for that car, the equivalent of that engine might cost $200,000 to $300,000 for an ion implanter.
IBD: Who are your main customers?
Halliday: We now have large market share, with all the big chip producers (as customers). That includes Intel INTC in the U.S., Samsung in Korea and TSMC TSM, the biggest foundry in the world, in Taiwan.
IBD: In March, VLSI Research named Varian the top-rated company in China in customer satisfaction. How do you keep customers happy in China?
Halliday: One way is that we have a very strong service organization, maybe No. 1 in the industry. It's hard to rank service. It isn't just that our tools don't often break down, and that we support them aggressively. It's our service products.
The specific challenges in China are physical importation of parts and hiring strong field people. We've been in China a long time. But our organization has been stronger in the last six or seven years. All of the big chip companies are there now.
IBD: What types of chip companies are buying the most gear?
Halliday: What's really driving the business the last couple of years is (flash) memory spending.
In the first part of 2006, it was Nand flash gear spending. And some Nor flash. Consumer goods like iPods, digital cameras and video games (which all use Nand flash memory chips) drove that.
Spending on DRAMs (the main memory in computers) picked up at the end of 2006 and the first part of 2007. The new Vista operating system from Microsoft MSFT drove that.
Spending by memory chip makers for equipment was, I guess, close to 70% of the total (last year). It will probably be similar numbers this year.
IBD: You said in January that Varian had a 44% share of the ion implant gear market, and rising. Do you have a target for market share?
Halliday: Our target is 70%. We haven't given a hard year for hitting that target, but we're moving pretty fast. It won't be 70% in 2007, but it's feasible we'll get there in 2009.
IBD: How are chip designs changing, and what does the gear industry need to do to respond to those changes?
Halliday: Chips get smaller and faster. (Chipmakers) focus on faster chips that use less power.
Temperature (how much heat a chip generates in doing transactions) is more important than anything. They're focusing on that. When you look at what they do to get more processing power, rather than continuing to go vertical (make larger chips) they're looking at (adding circuitry in) layers, like skyscrapers. They call them by various names, like 3-D chips.
IBD: In 2006, Varian set records for earnings and cash growth. Can you match that this year?
Halliday: With just reasonable industry growth, we expect we can.
