U.S. Semiconductor

1
U.S. Semiconductor
INTEL, AMD, AMAT

• Jonathan Chao, Jesse Galpin, Kevin Sandhu, June
  Jiang

2
Semiconductor Industry

• Industry Background
• Industry Profile
• Industry Trend
• Current Environment
• Key Industry Ratios and Statistics

3
Industry Background

• From the early 1900s to the 1950s vacuum tubes
  
• Invention of the transistor in 1948
• In 1958, integrated circuit (IC)
• In 1971, Intel Corp. Intel 4004 microprocessor,
  which ran at 108 kilohertz and served as a
  component in a calculator

4
Industry Background

• Ongoing technological advancement
• Rising performance, falling prices
• Moores Law describes pace of innovation
• Inherent cyclicality
• Huge capital investments
• Marketing chips going for the design win
• Targeting the end user

5
Types of Chips

• Bipolar technology versus metal oxide technology
• Discrete semiconductors
• Analog semiconductors
• Digital semiconductors
• Microprocessors
• Memory chips
• Logic devices
• Microperipherals
• Microcontrollers
• Standard cell logic
• Optoelectronics.
• Digital signal processors (DSPs)

6
Types of Chips
7
How Chips Are Made

• Semiconductors are produced through a highly
  advanced and complex manufacturing process.
• The two basic stages in chip production are the
  front end and the back end.
• The front end involves materials preparation
  (circuit design, photomask making, and
  manufacture of raw wafers) and wafer processing
  (repeated cycles of deposition, etch, doping,
  planarization, and in-process testing).
• The back end consists of packaging and final test
  operations.
• http//www.intel.com/education/makingchips/index.h
  tm

8
Industry Profile
9
Industry Profile
Source IC Insights.
10
Industry Profile
11
Industry Trend

• Semiconductors drive economic productivity
• Lower trend line growth (next slide)
• Evolving corporate strategies
• High-end microprocessors drive the market
• DRAM market especially prone to boom-and-bust
  cycles
• Automotive chips receive renewed focus
• Outsourcing continues to grow

12
Industry Trend
13
Current Environment
14
Current Environment
15
Current Environment

• Consumer products drive chip demand

16
Current Environment

• FASB accounting rule change to phase in

17
Key Industry Ratios and Statistics

• Global Sales Report.

18
Key Industry Ratios and Statistics

• Semiconductor equipment book-to-bill ratio

19
Key Industry Ratios and Statistics

• Wafer fabrication plant utilization rates

20
Key Industry Ratios and Statistics

• Institute for Supply Management (ISM) Report on
  Business

Source http//www.ism.ws/ISMReport/PMIndex.cfm
21
Key Industry Ratios and Statistics

• US index of leading economic indicators
• Gross domestic product (GDP)
• U.S. Consumer Price Index, CPI
• U.S. Civilian Unemployment Rate
• 3 Month U.S. Treasury Securities Yield

22
INTEL

• NASDAQ INTC

23
Background Agenda

• History
• Current Events
• Company Overview
• Management
• Business Structure
• Operations
• Products
• Customers
• Competitors
• Financial Analysis

24
History (1 of 3)

• 1965
• Moores Law the number of transistors
  incorporated in a chip will approximately double
  every 24 months
• 1968
• Integrated Electronics (Intel) Corp. is founded
  by Gordon Moore and Robert Noyce.
• 1971
• Intel goes public

25
History (2 of 3)
26
History (3 of 3)

• 2004 2005
• New technology Not Processors
• Centrino
• Dual-Core processors
• 64-bit architecture
• Hyper threading

27
Current Events

• Intel will make new Apple CPUs NOT Motorola
• Intel court battles with AMD and MicroUnity
• Intel and RIM collaborate on BlackBerry devices
• Intel will team with Microsoft in support of new
  DVD format HD DVD by Toshiba not with Sonys
  Blu-ray Disc
• Agreement to Acquire Digital Broadcast Technology
  Assets, Expertise from Zarlink Semiconductor
  expand digital home segment
• Earnings (3rd Quarter) announced Oct. 18, 2005

28
Company Overview (1 of 4)

• Mission
• Do a great job for our customers, employees, and
  stockholders by being the preeminent building
  block supplier to the worldwide digital economy

29
Company Overview (2 of 4)

• Values
• Customer Orientation
• Results orientation
• Risk taking
• Great Place to work
• Quality
• Discipline

30
Company Overview (3 of 4)

• Objectives
• Extend silicon leadership and manufacturing
  capability
• Deliver architectural innovation for platforms
• Pursue worldwide opportunities

31
Company Overview (4 of 4)

• Strategy
• Utilize core competencies to develop advanced
  products
• Exercise control over value chain
• Utilize Intel inside marketing campaign
• Expand into faster growing complementary
  businesses
• Invest in companies globally to further strategic
  objectives (Intel Capital program)

32
Management (1 of 2)

• Joined Intel as Technology Development manager in
  1974
• Elected to BoD in 1992
• Served as COO 1993-1997
• Intels fourth president 1997
• CEO in 1998
• Chairman of the Board May 18, 2005

• Joined Intel in 1974.
• Elected to BoD in 2002
• Served as president and COO 2002-2005
• CEO on May 18, 2005

33
Management (2 of 2)

• Andy D. Bryant
• Executive Vice PresidentChief Financial and
  Enterprise Services Officer
• Joined Intel in 1981.
• CFO in 1998.
• Chief Financial and Enterprise Services Officer
  in 1999

• Sean Maloney
• Executive Vice PresidentGeneral Manager,
  Mobility Group
• Joined Intel in 1982
• 1999 Senior VP
• 2001 Executive VP
• 2004 Co-manager of Mobility Group

34
Business Structure (1 of 2)

• Past
• Intel Architecture Business
• Intel Communications Group

• Present
• Mobility Group
• Digital Home Group
• Digital Enterprise Group
• Digital Health Group
• Channel Products Group

35
Business Structure (2 of 2)

• Mobility Group
• XScale processors for handheld devices (PDAs)
  Pentium M (Centrino) for notebooks
• Digital Home Group
• Develop processors for digital entertainment
  devices in the living room.
• Digital Enterprise Group
• Develop processors for all corporate systems
  (PCs to datasevers)
• Digital Health Group
• New area of focus - Products such as
  motion-detecting sensors that could help senior
  citizens live more independently.
• Channel Products Group
• develop specific products for local markets
  around the world.

36
Operations

• Manufacturing
• Leader in semiconductor manufacturing and
  technology
• Competitive advantage through economies of scale,
• 11 fabrication facilities
• 6 assembly and test facilities worldwide
• 2003 3.7 billion on capital investments Switch
  from 200mm wafers to 300mm wafers cuts price 30.
• Research and Development
• 2005 5.2 billion on RD. (3.78b so far this
  year)
• 7,000 researchers and scientists in labs around
  the world.

37
Major Products

• Microprocessors, chipsets, boards, flash memory,
  application processors used in handheld devices,
  cellular baseband chipsets.
• Networking and communications products, optical
  components and network processing components,
  embedded control chips

38
Major Customers

• Distributors
• Original Equipment Manufacturers (OEM) of
  computer systems and peripherals
• PC users (retail)

39
Major Competitors

• AMD
• ATI
• Broadcom
• IBM
• Nvidia
• Qualacom
• Samsung
• SIS
• Spanshion
• Sun Microsystems
• TI
• Transmeta
• Via

40
Financial Analysis
41
Financial Analysis
42
Financial Overview

43
Financial Overview
44
Financial Overview

• Regression Line Shows Sales Increasing at 573m

45
Financial Overview

• Revenue (pink) v. EPS (blue)

46
Financial Overview

• INTC over the past 365 Days

47
Financial Overview

• INTC over the past 365 days
• 50day/200day moving averages - Suggesting a Sell

48
Financial Overview

• INTC over the past 365 daysvs
• Semiconductor Industry over the past 365 days

49
Financial Overview

• INTC over the past 365 daysvs
• AMD over the past 365 days

50
Financial Overview

• 49.9 billion spend on 2.5B shares
• constant buyback program (2.5B each ¼)

51
Financial Analysis
52
Financial Analysis
53
Financial Analysis
54
Financial Analysis
55
Financial Analysis
56
Financial Analysis
57
Value Drivers

• Consumer spending/optimism
• Research and development
• Economies of scale efficient cost

58
Financial Analysis

• 4 Dimensions of Fisher

• 2. People Factors
• Voted best place to work
• Top Executives at Intel for minimum 20 years
• Lost Andrew Grove, founder and former Chairman
• Otellinis new structure not just cosmetic

• 1. Functional Factors
• Production Leader
• Marketing Leader
• intel inside
• Pentium M
• RD Leader
• Strong Financials

• 3. Essential Business Characteristics
• High barriers to entry
• E of S
• Fragmented competition Diversified

• 4. Value of the Stock
• Moderate price
• Price Ratios indicate proper pricing

59
Financial Analysis

• BUY

60

• Advanced Micro Devices

61
Overview

• History
• Current Events
• Company Overview
• Management
• Business Structure
• Products
• Customers
• Competitors
• Strategy
• Financial Statement Analysis
• Valuation
• Recommendation

62
Introduction

• Advanced Micro Devices, Inc. (AMD) is a
  manufacturer of integrated circuits based in
  Sunnyvale, California
• Founded in 1969 and is the second-largest
  supplier of x86-compatible processors, and a
  leading supplier of non-volatile flash memory
• It has manufacturing facilities in the U.S.,
  Europe and Asia and sales offices throughout the
  world

63
History
September, 1969

• Opened first headquarters at Sunnyvale CA
• Over the next 5 years AMD grew substantially with
  1500 employees and making over 200 products

Advanced Micro Devices
May, 1969
September, 1972

• The establishment of AMD
• The main goal at the time was to create a
  successful semiconductor company

• AMD goes public
• NYSE AMD

64
Current Events

• October 27, 2005
• AMD announced that the digital backbone of the
  new Lucasfilm Animation Singapore digital
  animation center is powered by AMD64 processor
  technology - the gold standard for 64-bit
  computing
• October 25, 2005
• Enterprise and Industrial Designers Turn to AMD
  Geode and AMD Alchemy Solutions for Low-Power,
  High-Performance Processing. AMD embedded
  solutions provide low power consumption which
  gives designers the ability to create efficient
  and versatile devices for a wide variety of
  applications

65
Company Overview (1 of 2)

• AMD's Purpose, Vision, Mission, and Values

Purpose

• To empower people everywhere to lead more
  productive lives

Vision

• With a strong commitment to our core values and
  mission, we anticipate and respond quickly to
  changing customer needs while preserving a
  culture that brings out the best in each of us

66
Company Overview (2 of 2)

• AMD's Purpose, Vision, Mission, and Values

Mission

• To achieve success by combining innovative
  concepts with leadership in process technology
  and design and manufacturing excellence to offer
  products and services that reduce the cost,
  improve the performance and shorten the time to
  market for our target customers worldwide.

Values

• AMD is a proud guardian of the culture. This
  culture is a belief that people are the ultimate
  source of our competitive advantage. AMD
  employees work hard, have fun, and celebrate our
  successes.

67
Management Team (1 of 2)
Hector de J. Ruiz, Ph.D.Chairman of the Board,
President and Chief Executive Officer- Dr. Ruiz
joined AMD in January 2000 was named CEO in April
2002.
Dr. Bertrand CambouExecutive Vice President and
President and CEO, Spansion- Dr. Cambou joined
AMD in January 2002
William T. Edwards, Ph.D.Senior Vice President
and Chief Innovation Officer- Dr. Edwards is
responsible for creating the Office of Strategy
and Technology (OST)
Robert J. RivetExecutive Vice President and
Chief Financial Officer- Bob Rivet joined AMD in
2000 as senior vice president and chief financial
officer
68
Management Team (2 of 2)
Dirk Meyer Executive Vice President, Computation
Products Group - Mr.Meyer joined AMD in 1996 as
the director of engineering for the AMD-K7
microprocessor development program
Thomas M. McCoy Executive Vice President and
Chief Administrative Officer - Mr.McCoy joined
AMD in 1995
Henri RichardExecutive Vice President, Worldwide
Sales and Marketing -Mr Richard joined AMD in 2002
Fred Weber Corporate Vice President and Chief
Technical Officer - Mr.Weber joined AMD in 1995
69
Business Structure
definitions

• Microprocessor
• A microprocessor is an electronic computer
  component made from tiny transistors and circuit
  elements on a single semiconductor integrated
  circuit (IC). The semiconductor chip is
  controlled by the central processing unit (CPU)
  which is also the most well known microprocessor.
  
• Flash memory
• Flash memory is a form of rewritable memory
  similar to the Random Access Memory (RAM) that
  allows the storage of information without the
  need for a power supply. Examples of Flash
  memory are USB flash drives, MP3 Players, digital
  cameras and cell phones

70
Business Structure

• Microprocessor Market Computational Products
• Used for control and computing tasks and
  complementary chipset components, which perform
  essential logic functions that support the
  microprocessors
• Flash Memory Market Memory products
• Used to store data and programming instructions
• Embedded Microprocessor Market
• Personal connectivity devices and specific
  consumer markets

71
Products

• Microprocessor Market
• computation devices, mainly microprocessors
• Desktop mobile PC
• Server Workstation
• Dual Core processors Chipsets
• Flash Memory Market
• flash memory devices.
• Floating Gate Technology
• Mirror Bit Technology
• Embedded Microprocessor Market
• A minor product produced is also the embedded
  microprocessors for personal connectivity devices
  
• Personal connectivity devices (PDAs)
• Media players
• Digital TV

72
Customers
Main customers include
1) Original Equipment Manufacturers
(OEM) (Multinationals, Regional Accounts and
Target Market Customers) gtMicroprocessors
Foreign and domestic manufacturers of PCs
and Motherboards. gt Flash Memory Foreign
and domestic manufacturers of mobile phones,
consumer and automotive electronics and
networking equipments 2) Third Party
Distributors Authorized distributors that resell
to sub-distributors and mid sized OEMs and to
electronic manufacturing service providers
73
Competitors (1 of 3)

• Microprocessor Market
• Intel has been the industry leader for years and
  decisions made regarding
• Price and allocation strategies
• Product mix and new product timing
• Impact on industry standards, branding and
  marketing
• all have an impact on AMDs decisions. Intel has
  more financial resources than invests more on RD
  thus will continue to be an ongoing threat to AMD
  both now and in the future

74
Competitors (2 of 3)

• Flash Memory Market
• Intel
• Toshiba
• STMicroelectronics
• N.V. Sharp Electronics
• Samsung
• Silicon Storage Technology
• Micronix International
• Competition is expected to increase and intensify
  in the future when there are more entrants in the
  industry who compete on price

75
Competitors (3 of 3)

• Personal Connectivity Solutions
• Embedded processors faces competition
• Freescale (formally Motorola Semiconductors
• Hitachi
• Intel
• NEC Corporation
• Toshiba
• Via Technologies.
• AMD expects competition to increase as these
  competitors focus on low power embedded processor
  solutions.

76
Operational Overview

• Manufacturing
• Leading semiconductor company with manufacturing
  plants in United States, Europe and Asia with
  sales offices throughout the world
• AMD owns 12 manufacturing facilities
• 5 Wafer Fabrication and 7 assembly and test
  facilities
• Research and development is focused on product
  design and system and on processor development
• RD for 2002, 2003 and 2004 816M, 852M and
  935M

77
Strategy

• Leverage the strength of the AMD64 technology
  based processor to increase market share
• Expand into the flash memory market by
  emphasizing more on the MirrorBit technology
• Innovative creations of new flash memory and
  microprocessor technology
• Expand into new growing markets

78
Financial Statement Analysis
79
Financial Overview
NET SALES BY YEAR
80
Financial Overview
OPERATING INCOME BY YEAR
81
Financial Overview
STOCK PRICE 52 Weeks
82
Financial Overview
STOCK PRICE 52 Weeks VS SOX
83
Financial Overview
STOCK PRICE 60 Weeks (5 year)
84
Financial Overview
STOCK PRICE 60 Weeks (5 year) VS SOX
85
Financial Overview

• Current ratio is 1.3 lower than INTC making it
  less liquid than Intel and under performs
  relative to the industry however is slightly up
  from the SP index
• Quick ratio is also trailing by 1.3 making it
  less financially sound than Intel. It also under
  performs relative to the industry and is at par
  with the SP index

86
Financial Overview

• Asset Turnover is fairly comparable to Intel
  trailing by only 0.10 which gives Intel a slight
  advantage of being efficient with their assets.
  They are at par with the industry and above the
  index
• Inventory Ratio on the other hand is a lot lower
  which means AMDs inventory isnt managed as well
  as Intel and trailing both the Industry and SPs
  index.

87
Financial Overview

• From the above table, Intel outperforms every
  aspect of AMD, and AMD only seems to perform
  better than the industry and SP index in Gross
  Margin

88
Financial Overview

• AMD has a higher usage of leverage because their
  debt/equity ratio is a lot higher than Intel as
  well as the industry however is less when
  compared to the SP 500 index.
• Interest Coverage is much more superior for Intel
  than AMD showing that it is better able to meet
  interest payments
• Consistent with the table, the leverage ratio for
  AMD will be much higher because it has a higher
  usage of debt

89
Financial Overview

• AMD does not pay dividends and has a lower EPS.
  However, Sales for AMD is higher but trails the
  industry and SP 500.

90
Financial Overview

• AMD has a high P/E ratio compared to Intel
  because of earnings.

91
Value Drivers

• Consistent expenditures on RD
• Strong potential in the flash memory market -
  MirrorBit technology (hoping to reverse negative
  trend in memory market)
• Competitive position in the existing market

92
Irving Fisher Approach

• FUNCTIONAL FACTORS
• Consistent investments for RD
• Some negative figures
• PEOPLE FACTORS
• Relatively new management that has yet to build a
  history with AMD

93
Irving Fisher Approach

• ESSENTIAL BUSINESS CHARACTERISTICS
• High barriers to entry due to RD
• Diversified competition
• VALUE OF STOCK
• Lower P/CF than INTC Industry
• High Price

94
Recommendation

• PROS
• Has high growth potential
• Good RD
• Good technology
• Positive Trend in earnings

• CONS
• Follower of Intel
• Highly Leveraged
• No Dividends
• Fluctuating Earnings

HOLD
95
Applied Materials
96
Overview

• History
• Company Overview
• Management
• Products
• Business Segments
• Customers
• Competitors
• Strategy
• Financial Statement Analysis
• Valuation
• Recommendation

97
History

• 1967 - Applied Materials founded
• 1972 IPO
• 1992 - Officially becomes worlds largest
  semiconductors manufacturer
• 2005 - Declares cash dividend

98
Company Overview

• Largest supplier of manufacturing material to
  global semiconductors industry
• Business model based on Semiconductor Capital
  Equipment, primarily focusing on
• Wafer fabrication systems
• Related services

99
Company Overview

• Mission
• Applied Materials' mission is to be the leading
  supplier of semiconductor fabrication solutions
  worldwidethrough innovation and enhancement of
  customer productivity with systems and service
  solutions.
• Goal Our customers' business results come
  first!

100
Management

• James Morgan
• Chairman
• Joined in 1976
• CEO from 1977 to 2003, Chairman since 1987
• Prior experience in Venture Capital and
  Manufacturing environments
• Mike Splinter
• President and CEO
• Joined in 2003
• Over 30 years experience in semis industry and
  nearly 20 years with Intel

101
Products

• Manufactures systems that perform most of the
  primary steps in the chip fabrication process
• Semiconductor Capital Equipment with 4 platforms
• the Centura
• the Endura
• the Producer
• the Vantage

102
Business Processes

• Deposition layer of dielectric or electrically
  conductive film is deposited, or grown, on a
  wafer
• Etch
• Ion Implantation
• RTP Rapid thermal processing
• Wager metrology and inspection

103
Business Segments

• Through subsidiary AKT, Inc.
• Manufactures CVD systems and array testers for
  making flat panel displays (FPDs)
• FPD products used in notebook computers, desktop
  computer monitors, Televisions, and other
  monitors.

104
Competitors

• Major Competitors
• KLAC KLA-Tencor
• Operates in Process Control and Yield Management
  industies
• LRCX Lam Research
• Design and manufacture semiconductor processing
  equipment.
• NVLS Novellus Systems
• Develop, manufacture, market and support systems
  used in the fabrication of integrated circuits
• Many small manufacturers compete with various
  business lines as well

105
Competitors
106
Competitors
107
Customers

• Major Customers
• Intel
• Represent nearly 10 of total sales
• Samsung Electronics
• Represent nearly 10 of total sales
• AMD
• Motorola

108
Strategy

• Aiming to
• Increasing market share in existing markets
• Expand into related markets
• Cultivate new markets and business models
• Expand sales to new
• regions and create
• similarly sized
• global markets

Orders By GeographyQ3, FY2005
109
Financial Statement Analysis
110
Financial Statement Analysis
111
Management Performance
112
Stock Based Compensation
113
Stock Performance
AMAT Stock Performance from Oct. 28, 2004 to Oct.
28, 2005
114
Stock Performance
AMAT Stock Performance versus Semiconductors
Index (SOX) from Oct. 28, 2004 to Oct. 28, 2005
115
Stock Performance
AMAT Stock Performance from Oct. 28, 2000 to Oct.
28, 2005
116
Stock Performance
AMAT Stock Performance versus Semiconductors
Index (SOX) from Oct. 28, 2000 to Oct. 28, 2005
117
Valuation
Market Cap 26.5B Enterprise Value
20.8B Trailing P/E (ttm) 19.34 Forward
P/E (fye) 19.95 Price/Sales (ttm)
3.55 Price/Book 2.94 Price/FCF 19.12 Ent
erprise Value/Revenue (ttm) 2.78 Enterprise
Value/EBITDA (ttm) 10.52
EPS (trailing) 0.846 EPS (forward
consensus) 0.820 Dividends Per Share
0.12 Dividend Yield 0.73 Net
Cash Per Share 1.13 Sales Per Share
4.50 Book Value Per Share
5.56 Free Cash Flow Per Share 0.86
118
Value Drivers

• Strong industry position in existing markets
• Largest global supplier of semiconductor
  manufacturing equipment
• Innovative technologies
• New wafer sizing and use of nanotechnologies
• Consistent dedication RD Spending
• Nearly 1B in fiscal 2004 (over 13 of revenue)

119
Fisher Approach

• Functional Factors
• Global leader in semiconductor manufacturing
  equipment production
• Strong customer base with weak competition
• People Factors
• Experienced managers
• Generous with management compensation (stock
  options)
• Essential Business Characteristics
• Strong competitive position
• High growth industry with many applications
• Value of the Stock
• Mid-point of 52 week range
• High levels of growth priced into stock

120
Recommendation

• PROS
• Industry leader
• Commitment to RD Spending

• CONS
• Poor growth
• Pending Lawsuit with major competitor
• High stock option expensing
• Too Expensive!

SELL