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Michael Luddy

KLAC AT A GLANCE

P/E ► -10.00   EV/EBITDA ► -21.3   ROA ► -9.9% AVG ROE ► -16.4% AVG Debt to Equity ► 0.676 AVG Current Ratio ► 3.97 AVG Interest Coverage Ratio ► -11.0 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating Expenses Research & DevelopmentSG&AAmortization & Depreciation

With more than 50% market share, KLA-Tencor is the global leader of process diagnostics and control (PDC). KLA provides quality assurance tools in the form of testing equipment and software that can be used during various points in the semiconductor manufacturing process to increase yield and minimize defects. Semiconductor fabrication facilities (fabs) are more expensive than ever and chip design is becoming smaller and more complex. For these reasons, there is increased demand for PDC in order to increase production yield and minimize costly and time consuming defects. Semiconductor demand has been elevated by the Commoditization of PCs, advanced chip design, and also increased demand from China. China is the world's largest emerging market and like most developing countries, China's rapid economic growth has created high demand for semiconductors and electronics. KLA's products are used by almost every major wafer and semiconductor manufacturer. While maintaining over 50% market share, this is a highly competitive industry. KLA faces competition from both established and new market entrants both which could take valuable market share. This is an industry that relies heavily on improvement of product rather then lowering costs and competitors with greater resources could have an advantage.

[edit] Company Overview

KLA's products are used in semiconductor manufacturing, wafer manufacturing, and data storage. KLA helps manufacturers efficiently and effectively increase yield in the fabrication process through inspection and minimization of production defects. KLA is completely devoted to PDC and is the leading expert and innovator in this field.

^[1] KLA deals with metrology (measurement), inspection, and analysis of the production cycle. KLA provides its services in primarily two ways: software and equipment. KLA sells software that collects and interprets data from the production cycle in order to help maximize yield. KLA also sells process control equipment in which chips are sent through and inspected. Service and expertise from KLA engineers is also available at nearly every fab in the world. Several KLA products include:

• Candela CS20: Automated wafer inspection system.
• Archer XT+: Advanced optical metrology solution.
• Viper 2435: Automated wafer and tool disposition.

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[edit] Trends and Forces

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[edit] The Deeply Cyclical Semiconductor Industry

The semiconductor industry is subject to extreme ebbs and flows. Fluctuations in the global electronics market can cause a subsequent downturn or upturn in the semiconductor market. The demand and lifecycles of notable technologies such as the iPod/iPhone, next generation video game consoles, PDA's, and the newest computer systems can impact the quantity of semiconductors needed in a given year. In addition, semiconductor sales have shown about an 80% correlation with GDP growth trends, meaning a downturn in GDP growth could very likely be accompanied by a downturn in semiconductor sales. At the same time, KLA faired relatively well in 2003 during the huge downturn of the semiconductor industry, posting almost $95 million in net income and about a 5.5% operating margin.

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[edit] The Complexity of Chip Design

KLA benefits hugely from the constant progression of chip design and, consequently, design complexity. Complex chip design has significantly increased the cost of building a fab (around $3 billion). The higher costs, in turn, make it necessary for semiconductor manufacturers to acheive higher production yield benefiting KLAC. Similarly, manufacturing the chips has become more difficult and is more prone to errors. This too increases the need for PDC tools to minimize defects and wasted time. PDC equipment spending, as a percentage of total semiconductor equipment spending, accounts for 15%, up from 10% in 2000.

[edit] 2/3 of KLA Revenue Comes from Asia

About 66% of KLA revenues come from Asia due to the concentration of fabs there. Many semiconductor manufacturers are building fabs or outsourcing to fabs in parts of Asia, particularly Taiwan. Asia has lower overhead costs, and it is also convenient to be located near major electronics markets such as Japan and China. The large growth potential in China could be a major factor for semiconductor demand in years to come.

[edit] Competition

KLA commands over a 50% market share in PDC. KLA's sole focus and resources are for PDC. KLA has the largest PDC R&D budget and top tier expertise in the field. These competitive advantages helped KLA post revenues of $2.7 billion and a 21.65% operating margin in 2007.

• Applied Materials (AMAT): The largest semiconductor equipment company in the world with 2006 revenues over $9.1 billion and an R&D budget of $1.15 billion.
• Hitachi (HIT): Operating margin (in 2007) = 1.65%
• Rudolph Technologies Inc. (RTEC): Revenue (in 2006) = $201 million and R&D = $27.5 million
• Nanometrics Incorporated (NANO): Revenue (in 2006) = $96 million
• Veeco Instruments Inc. (VECO): Revenue (in 2006) = $441 million and operating margin = 5.17%

[edit] References

1. ↑ Annual Report 2007, Selected Financial Data pg. 30
2. ↑ Information received from www.kla-tencor.com
3. ↑ Received from Semiconductor Industry Association
4. ↑ Annual Report 2007, Revenues by Region pg. 37