We attended the Needham Growth Conference which is one of the first conferences of the year and in the quiet period before most companies reported so even though there was no “official” comment from most companies on the quarter, the surrounding commentary spoke volumes:
- The down cycle (and everyone admits its a cycle and no one admits to ever saying it wasn’t still cyclical…) is on going and appears to be somewhat bouncing along a bottom or near bottom level of business.
- There are no early signs of any sort of up turn or change in the cycle.
- Hopes of a H2 recovery are currently just that….”hopes”
- Its unclear whether we could have another leg down and no one was ruling it out or in….
- Everyone laid the blame primarily on the memory market although foundry/logic is no great shakes either
All the companies in the space are small and mid cap suppliers, sub suppliers, and not the core big cap names; AMAT, LRCX, KLAC, ASML or TEL.
Given the tone of comments overall it would be our take away that the large cap companies will likely have to take numbers down further and get incrementally more negative, when they report, based upon what we heard from the other companies at the conference.
While the stocks seem to have hit some resistance floors in the stock prices, its not like they are bouncing off a bottom. Each time the stocks start to recover a bit they seem to get pushed down again by another piece of negative news, so we seem to be stuck in a low range until there are some clearer signs of a recovery or at the very least a firm bottom (which we have not yet seen…)
One of the comments we heard at the conference that we concur with is that we are concerned of the “death of a thousand cuts” where the industry continues to get negative incremental news rather than just get the bad news over with.
We can’t imagine that TSMC will increase CAPEX when it reports this week. Apple which is 20% of their business is obviously not doing all that well and surely has cut back even further on orders. It seems highly unlikely that TSMC will increase capacity and we think there is significant equipment reuse between 7NM and 5NM and that technology spending will not make up for weaker capacity spend.
Memory pricing, and therefore capital spending remains weak. It will take some time for the excess supply to get worked off, especially in light of reduced demand. It would take time for excess supply to be worked off with good demand but with falling demand its difficult to handicap.
ACLS–Happy for non mainstream business
While Axcelis clearly has exposure to the memory market they also have a lot of non-core business which is much less impacted than the mainstream, leading edge market. That “outside the core” business will help soften the weakness but not eliminate it. The recently announced buy back is appropriate and positive. The company remains on plan and delivering on promises
Cabot – new non semi biz coupled with being a consumables play
Cabot has been one of the more consistent performers as they are a consumable supplier rather than a capital equipment supplier and as such are based on wafer starts and layer count and not capital spend. However, wafer starts are not super strong …but its still better than being an equipment company
Formfactor- Memory still weak and Intel is still a bit slow to ramp…
Also in the consumable business is FORM. However form is more new design driven or different design driven. They have a better balance between memory and logic than previously. Everything else is OK, we just need a demand recovery.
MKSI- Most experienced management-Upcoming ESI close
MKSI’s CEO, Jerry, has been with the company for 35 years and has seen it all before and knows how to deal with it and make it right. The team at MKS did a great job with Newport and we are sure they will do the same great job with ESI. Management is not running in fear of the cycle but dealing with it head on. He contemplated the length of the downturn through his “canoe” analogy of varying shapes.
UCTT – As an AMAT and Lam supplier its hard to outperform
Its harder to escape the pull of gravity when the customers are weak as is the case here. Acquisitions have helped in the past but nothing that was exciting or at a great valuation. we are just waiting for a recovery here to get things moving again.
Ichor- Great, realistic, experienced management -weak customers
Much as with Ultraclean its hard to escape the customers weakness. Acquisitions have been very good and jump started ICHR since its IPO. Management is making the best of the situation and buying back its very cheap stock.
COHU- In early innings of integration not helped by weakness
So far, so good but the jury is still out on the combination of the two companies. Obviously its that much harder to do an integration during tougher times but hopefully the results will be worth it
Tower Jazz- Towers above the other players
Russell Ellwanger has taken what was a uncertain company and turned it into a great business model. He has done a great job of not only doing great “roll up” acquisition deals, but more importantly, managing them to perfection after rolling them up. Not “integrating ” them into the “borg ” of a large company but optimizing the different models and expertise of each individual. Business may be soft but the model works well with strong process capability & technology on top of sound business practices. They will outperform in the recovery.
Summary: Good companies, Ugly neighborhood
waiting at the station.
It feels like everyone is waiting at the station for the recovery train to come along and whisk them off to good times again. The problem is we are just waiting and not much within our control to hurry it along. On top of that the train timing is unclear at best and in fact could be longer than hoped for. There is a bit of helpless resignation.
The semi equipment industry is at the bottom of a very long trickle down that starts with Apple and China, through TSMC, Samsung & Micron etc . We need to see signs of a recovery coming from top down as any recovery won’t start from the bottom up… that we are still waiting on.