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Behind The Mask: Some Weather Downturn Etec, EKC chalk up impressive numbers in niche markets HAYWARD, CALIF.--It pays to call Hayward home. Okay, that may be an overstatement, but Etec Systems and EKC Technology, both corporate residents of this bayside town, are part of a small contingent of companies weathering the downturn, even prospering relatively speaking despite otherwise miserable conditions and zero visibility. Early this month, in the midst of bad news and punishing economic conditions for equipment vendors, Etec Systems reported record financial results for the 4Q and the fiscal year ended July 31. Etec's revenues for fiscal 4Q98 reached $87.8 million, a 21 percent increase over revenues of $72.6 million in fiscal 4Q97. Net income for fiscal 4Q98 was $18.2 million, a 48 percent increase compared with $12.3 million in fiscal 4Q97. Diluted earnings per share for fiscal 4Q98 were 80 cents, a 48 percent increase compared to 54 cents in the same period in fiscal 1997. Gross margin for fiscal 4Q98 was 57 percent up from 49 percent in 4Q97. For the fiscal year 1998, revenues were $288.3 million, a 20 percent increase over FY97 revenues of $240.9 million. FY98 net income was $46.8 million, a 26 percent increase over FY97 adjusted net income of $37.2 million. Reported fiscal 1997 net income of $34.4 million included a write-off for in-process technology and a favorable adjustment to the tax valuation allowance. So how can a semiconductor equipment company put up record numbers in the middle of what some industry veterans have called the worst downturn in history? "One of the things that is different about our biz is that we don't actually make wafer processing equipment, even though we are often lumped in with semiconductor equipment companies because we sell these big, expensive machines," said Steve Cooper, Etec chairman, president and CEO. "In reality, we make the equipment that makes the mask. The drivers for our business are different than wafer volumes. We are driven by designs and the migration to smaller feature sizes." While semiconductor companies are pulling in the reins on capital investments such as wafer processing and testing equipment, the only way to ensure continued competitiveness is to continually decrease feature sizes. To do that, a company needs masks and, hence, Etec. The company is estimated to have a 70 percent market share in the mask-making equipment sector and, according to Mr. Cooper, just about 100 percent market share in the U.S. and Europe. "If you are going to make devices, whether its 100 devices or 1 million, you have to by new mask-making equipment," Mr. Cooper said. "And we have over 70 percent market share." Etec shipped 33 mask pattern generation systems in fiscal 1998, up from 32 systems in the prior fiscal year. The company also shipped the first DigiRite laser direct imaging system in fiscal 1998. Despite the modest increase in unit shipments, revenue increased 20 percent year over year due to a change in mix toward new higher-margin products such as the ALTA 3500, the MEBES 4500S and MEBES 5000 mask pattern generation systems, Etec said. Sue Billat, a senior capital equipment analyst with BancBoston Robertson Stephens, said the photomask sector tends to both lag and lead the industry when there is a downturn. "It tends to slow down after the industry has, which we have clearly seen," she said. "It also tends to lead it, because as chip makers start to see more design activity, they tend to begin investing in mask-making equipment." Du Pont Photomasks, Inc. (DPI), a photomask supplier based in Round Rock, Texas, also is apparently weathering the storm. In late July, DPI announced record results for its fiscal year, which ended July 31. DPI's sales for FY98 came in at a record $271.6 million, a 4 percent increase from the previous year's record of $261.2 million. Sales for 4Q98 were $67.9 million, slightly below 4Q97's revenues of $69.9 million. DPI was apparently expecting more. "As a consequence of the difficult business climate our customers are facing, we are experiencing slower volume growth and more intense pricing pressure, particularly at the trailing edge," said J. Michael Hardinger, chairman and CEO. "This price pressure, combined with the severe devaluation of the Korean won earlier this fiscal year, resulted in a slowdown in our average selling price growth--and, therefore, our earnings." Jupiter, Fla.-based Photronics, Inc., also a photomask maker and a leading competitor with DPI, also seemed to be doing well during its last quarterly report, issued last month. Photronics said its sales for fiscal 3Q98, which ended Aug. 2, were $57.7 million, up 9 percent from the $53.1 million in 3Q97. More importantly, the company said sales for the first nine months of 1998 rose to $169.9 million, an increase of 20 percent over $142.1 million in sales for the first nine months of 1997. Net income was down, thanks to a non-recurring charge of $3.8 million ($2.4 million after tax), in connection with a restructuring plan for the company's North American operations and the disposition of its Large Area Mask (LAM) business in Colorado Springs, Colo. Net income amounted to $17.4 million, down from $18.3 million during the first nine months of last year. "I am pleased with our ability to manage our operations in this steep downturn in the semiconductor industry," said Michael J. Yomazzo, Photronics' president and CEO. "We were not able to continue our sequential quarterly growth, however, our revenues represent significant growth over the prior year. While our business is driven by new semiconductor designs, we are not completely immune to the effects of a prolonged cycle such as the one the semiconductor industry is currently experiencing. Photronics' position as a strategic partner to leading semiconductor manufacturers and our success in diversifying internationally, has helped to mitigate many of the downturn's effects." Ms. Billat said large downturns eventually take their toll on the photomask sector as well as the rest of the semiconductor industry. She said she does not think the fact that mask makers and mask-making equipment vendors appear to still be on their feet is an indicator of an impending upturn. "I think we are still in that trough in the middle," she said. Mr. Cooper said the photomask sector is eventually dragged into a severe downturn as chipmakers' capital investment budgets continue to dry up. "We are in a serious downturn now, and as a result, we do get impacted by the fact that budgets are constrained," he said. "We have already been impacted. Our three-year compound annual growth rate is 51 percent. Last year, we grew at 20 percent. This year we will grow at about 18-20. This is a very serious downturn, but we still estimate that we will keep growing." Mask makers are not alone in weathering the semiconductor downturn. "Some of the things that drive their business, drive ours," says Gene Goebel, 30-year industry veteran and VP/GM of EKC Technology's remover business. "As long as people are producing high-end semiconductor products and technology, what we supply is vital to operations. According to Mr. Goebel, segment, cycle and strategic expansion have keep EKC out of the downturn's undertow. While silicon wafer suppliers like MEMC Electronic Materials and Komatsu suffer the effects of overcapacity and design shrinks, the value-added materials segment presses forward. For instance, like Etec, its Hayward neighbor, EKC Technology had a record year last year in the 30-plus percent growth range. This year the company expects to outperform that figure, according to Mr. Goebel, though not at the growth ratio of previous years. For competitive reasons, EKC declined to disclose figures. The company, which supplies photoresist developers, removers and cleaners, as well as a new line of chemical mechanical planarization (CMP) developers and cleaners, recently began to feel some of the effects of the downturn. These effects will be reflected in double-digit growth for the year. Most companies would envy a double-digit growth rate in these market conditions; EKC has enjoyed 30-plus percent growth for several years. The impact on EKC may not last long, though. Mr. Goebel notes that EKC has seen an improvement in orders going out to Asia and Europe, part of a September trend that he hopes will continue. While segment is key, quicker product cycles and the better, faster, cheaper motto drive EKC's businesses. "We get the benefit of that, our cycle time to the marketplace is much faster" than gear makers' product cycles, says Mr. Goebel. He also attributes EKC's resiliency to its strategic acquisition of Moyco's CMP slurry assets in early 1998 and its relationship with Biakowski in the CMP space. EKC entered the CMP market because the company considers it a strong new market for developers and cleaners. u |