Semiconductors

1
Semiconductors

• Manraj Aujla Winky Cheung Shane Johnston Puneesh
  Lamba Insoo Park

2
Agenda

• Industry Overview
• Technology
• Market
• Intel
• AMD
• Applied Materials

3
What is a Semiconductor?

• Materials which have a conductivity between
  conductors (general metals) and nonconductors or
  insulators (such as ceramics)
• Semiconductors can be
• pure elements, such as silicon or geranium
• Compounds such as gallium arsenide or cadmium
  selenide

• Doping
• A process in which small amounts of
• impurities are added to pure conductors
• Causes large changes in the conductivity

Silicon is the most popular material for
semiconductors
4
How is a Semiconductor Made?
5
Where are Semiconductors Used?
6
Brief Timeline of Semiconductor Development

• 1950s to 1960s
• Mainly used for military and aerospace operations
• U.S. Air Force incorporates semiconductors in
  Minutemen Missile design
• The Pentagon and NASA quickly become two of the
  industrys major customers.
• The Semiconductor industry reaches 100 million in
  sales

AUTOMATIC TESTING SYSTEM FOR MINUTEMAN MISSILE
7
Brief Timeline of Semiconductor Development

• 1970s
• Semiconductor industry becomes more focused on PC
  market
• In 1970
• Intel invents SRAM and EPROM and introduces
  microprocessors
• Enables the "brains" of a computer to be on one
  chip for the first time.
• 1975
• the first personal computer goes on market

1975 IBM 5100 Personal Computer
Price 8975 to 19,975 depending on memory (16K,
32K, 48K or 64K)
8
Brief Timeline of Semiconductor Development

• 1980s
• The semiconductor industry surpasses 10 billion
  in sales
• IBM enters the PC business with a line of desktop
  PCs
• later to become the single largest use for
  microprocessors
• Motorola introduces first pager to incorporate a
  microprocessor
• longer battery life and the ability to have more
  pagers on a network.
• Hewlett-Packard introduces the first scientific
  pocket calculator.
• sent slide rule manufacturers out of business.
• Motorolas first cellular phone comes to market.

Motorola Dynatac CIRCA 1973
9
Brief Timeline of Semiconductor Development

• 1990s
• Sales in the PC market grow dramatically,
  semiconductor industry surpasses 100 billion
  sales by 1995.
• U.S. chip companies command more than 50 percent
  of the global market.
• Sales shift the demand from PCs to communications
  products.

10
Brief Timeline of Semiconductor Development

• 2000
• Worldwide semiconductor sales exceed 200 billion
  for the first time in history.

11
Growth of Computation/Second over Time
Source IBM
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Structure of Semiconductor Market

• By product

13
Structure of Semiconductor Market

• By business model
• Fully Vertically Integrated OEMs IBM, GE, HP
• Silicon Suppliers Intel, AMD, TI, Micron
• System Manufacturers Apple, Sun Microsystems
• Equipment Manufacturers Applied Materials
• EDA Cadence, Synopsis
• Foundry TSMC, UMC
• Fabless Design/Distribution Adaptec, Altera

14
Characteristics of Semiconductor Industry

• Short Life Cycle
• Products tend to be out of favor quickly in the
  market because of fast innovation.

• Moores Law the number of transistors on a
  chip doubles every 18 months

Source IBM
15
Characteristics of Semiconductor Industry

• Research and Development

• A great portion of revenues is spent on RD
• Needs to be done in order to keep pace with
  competitors

16
Characteristics of Semiconductor Industry

• Increased Foreign Consumption

17
Characteristics of Semiconductor Industry

• Decline of Japan, Rise of New Powers

18
Characteristics of Semiconductor Industry

• RD is getting more expensive competitive More
  alliances with foundries at the centre

Source IBM
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Semiconductor Industry Leaders

• By market capitalization (in millions of )

Intel Texas Instrument Taiwan Semiconductor Applie
d Materials ST Microelectronics Advanced Micro
Devices
INTC TXN TSM AMAT STM AMD
214,249.594 49,893.930 44,013.621 39,050.602
24,051.889 6,225.830
20
SemiconductorIndustry Leaders

• By Sales (in millions of )

Intel Flextronics International Kyocera
Corporation Texas Instruments Infineon
Technologies Applied Materials (7th) Advanced
Micro Devices (9th)
INTC FLEX KYO TXN IFX AMAT AMD
28,560.000 13,520.978 9,892.362 9,210.000
7,240.628 4,477.291 2,697.029
21
U.S. Semiconductor Industry Recap of 2002

• U.S. 2002 Sales 70 Billion
• Worldwide 2002 Sales 141 Billion
• U.S. Jobs 270,000
• Percent of Sales Outside U.S. Market 70
  percent
• More than 30 Percent of Revenues Invested in the
  Future
• Capital Equipment 10 Billion, 14 percent of
  Sales
• RD Investment 13 Billion, 18 Percent of Sales
  

22
Semiconductor Industry Stock Performance
23
Stock Market Recap

• Topped out in 2000, then declined drastically in
  2001 and 2002
• Slowly recovering in 2003
• Sales went from 200 billion to 140 billion
• More outsourcing building own foundries too
  expensive
• Expenditure in equipments gone from 50 billion
  to 20 billion

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Industry outlook

• Estimated sales of 163 billion in 2003
• SIA16 increase, adjusted from 10.1 in June
• Deutsch Bank 12-13
• Taiwanese Semiconductor 15-16
• Weak US helping
• Estimated future growth
• 2004 19.4 (SIA), 14-15 (DB), 19-20 (TSM)
• 2005, 2006 under 10
• Current capacity utilization rates at 86,
  compared to 61 in 2001

25
Estimated Future Growth
Source IBM
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Future Developments

• Productivity will continue to improve, though at
  lower rates
• Revenue growth rate of the industry will continue
  to remain lower than traditional rates leading
  to
• Consolidation
• Growth and dependency on foundries and off shore
  manufacturing
• Partnerships in development and manufacturing

27
Future Developments

• Investment in RD required for leadership will
  continue to grow
• More focus will be on innovative transistor
  structures, materials, circuits, design, and
  systems architecture
• More chipmakers moving from parts to entire
  systems, consumer electronics, etc.

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INTEL CORPORATION
29

• HISTORY
• Founded in 1968, supplying memory chips such as
  DRAM and EPROMS
• Success of memory chip sales funded the
  microprocessor design, which revolutionized the
  electronics industry in the 1970s.
• Intels 8080 chip was chosen by IBM in 1981 and
  successively became the industry standard.
• 1990s, Intels Pentium and Celeron chips were
  installed in 4 out of every 5 computers sold.
• CURRENT
• The worlds largest semiconductor chip maker,
  supplying advanced technology solutions for the
  computing and communications industries.
• Products include chips, boards and other
  semiconductor components that are the building
  blocks integral to computers, servers, and
  networking and communications products.
• Recent Products Itanium for server market,
  Centrino for notebook market, Pentium 4 3.2 HT
  for desktop market.

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• Business Risks
• Competition Intel faces competition from other
  firms in the industry primarily based on product
  price, performance, bundling, marketing, and
  customer brand loyalty.
• Top Competitors AMD, IBM, Texas Instruments
• Cyclical Nature of Semiconductor Industry This
  is based on customer demand, inventory levels,
  production capacity, and decelerating selling
  prices
• Fluctuation in PC market (Desktop, Notebook, and
  Servers)
• Nature of Semiconductor Industry The industry is
  based on rapid technological innovations and the
  economical production of the subsequent products.
  Therefore, Intel must continue to allocate a
  large R/D budget to stay competitive.

31

• Segments
• Intel Architecture Business
• The Intel Architecture business develops platform
  solutions around microprocessors
• and chipsets for end products in the desktop,
  mobile and server market segments.
• Microprocessors A microprocessor is the central
  processing unit (CPU) of a computer system. It
  processes system data and controls other devices
  in the system, acting as the brains of the
  computer.
• Desktop Platform In 2002, Intels Pentium 4
  processor was the highest volume desktop
  processor.
• Mobile Platform Mobile products provide notebook
  and laptop PC users with the performance they
  need while providing wireless capability and
  meeting the power consumption and size
  constraints of mobile PCs.
• Enterprise Platform The Enterprise Platforms
  Group provides microprocessors and chipsets for
  server and workstation systems. XEON
• Chipsets Intel chipsets are compatible with
  variety of industry-accepted bus specifications,
  such as the Peripheral Components Interconnect
  (PCI) local bus specification and the Accelerated
  Graphics Port (AGP) specification. In addition,
  Intel provides chipsets compatible with the
  following memory types Double Data Rate (DDR)
  Dynamic Random Access Memory (DRAM), Synchronous
  DRAM (SDRAM) and Rambus DRAM (RDRAM).
• Board-Level Products All board-level products
  are based on Intel microprocessors.

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• Wireless Communications and Computing Group
• The Wireless Communications and Computing Group
  provides
• Component level building blocks for digital
  cellular communications and
• other applications requiring both low-power
  processing and high
• performance.
• Flash Memory Although flash memory is currently
  used predominantly in mobile phones and PDAs, it
  is also found in common consumer products,
  including MP3 music players, handheld voice
  recorders and digital answering machines, as well
  as industrial products.
• Processors for Handheld Computing Devices The
  Intel XScale microarchitecture is used in many
  handheld PCs produced by Dell, HP, Compaq, and
  NEC.
• Cellular Baseband Chipsets Baseband chipsets are
  designed for multi-mode, multi-band wireless
  handsets. Chipsets support multiple wireless
  standards and deliver enhanced voice quality and
  high integration.

33

• Intel Communications Group
• The Intel Communications Group provides silicon
  and integrated networking
• and communications building blocks based on three
  focus areas
• Ethernet Connectivity Products Ethernet is an
  industry-standard technology used to translate
  and transmit data in packets across networks.
• Optical Components Opto-electronic components
  are electrical components used in optical
  networking equipment, and Synchronous Optical
  Network (SONET)
• Network Processing Components The Intel Internet
  Exchange Architecture (Intel IXA) provides a
  flexible platform for the networking and
  communications industry to build faster, more
  intelligent networks using re-programmable
  silicon.
• Embedded Control Chips Embedded control chips
  are used in a broad range of applications,
  including imaging products, storage media,
  point-of-sale systems, industrial automation
  equipment and automotive systems.

34
Operating Performance
35
Segment Performance
36
Company Analysis
RATIO COMPARISON RATIO COMPARISON RATIO COMPARISON RATIO COMPARISON RATIO COMPARISON

Valuation Ratios Company Industry Sector SP 500
P/E Ratio (TTM) 47.39 52.53 36.88 24.98
P/E High - Last 5 Yrs. 162.62 92.73 65.56 48.07
P/E Low - Last 5 Yrs. 17.46 18.17 18.20 15.97

Beta 2.15 2.39 2.02 1.00

Price to Sales (TTM) 7.49 7.50 5.52 3.35
Price to Book (MRQ) 5.65 5.33 5.14 4.21
Price to Tangible Book (MRQ) 6.39 6.13 6.97 7.40
Price to Cash Flow (TTM) 22.05 30.73 26.49 17.37
Price to Free Cash Flow (TTM) 33.46 39.62 30.05 30.02

Owned Institutions 58.04 53.63 48.59 64.67
Figures At-A-Glance
P/E ttm (trailing 12 mos.) 47.39

P/Sales ttm 7.49

EPS actual ttm 0.68

Avg EPS Est Current 0.29
Avg EPS Est 4 wks ago 0.29

Beta 2.15

Market Cap 211.114b

Avg Analysts Rating 1.8
Instit. Ownership 3,532.5m
54.3

37
Profit Margin Ratios
Profitability Ratios () Company Company Industry Sector SP 500
Gross Margin (TTM) 53.34 53.34 46.69 51.27 47.12
Gross Margin - 5 Yr. Avg. 55.03 55.03 48.69 51.48 46.80

EBITD Margin (TTM) EBITD Margin (TTM) 23.73 16.77 13.99 19.35
EBITD - 5 Yr. Avg. EBITD - 5 Yr. Avg. 27.60 18.79 16.34 20.66

Operating Margin (TTM) Operating Margin (TTM) 22.53 10.47 9.46 19.10
Operating Margin - 5 Yr. Avg. Operating Margin - 5 Yr. Avg. 24.16 13.98 11.38 17.75

Pre-Tax Margin (TTM) Pre-Tax Margin (TTM) 21.74 10.82 15.59 17.34
Pre-Tax Margin - 5 Yr. Avg. Pre-Tax Margin - 5 Yr. Avg. 28.36 17.63 15.59 17.17

Net Profit Margin (TTM) Net Profit Margin (TTM) 15.82 5.95 8.89 12.68
Net Profit Margin - 5 Yr. Avg. Net Profit Margin - 5 Yr. Avg. 19.15 11.39 9.15 11.27
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Management Effectiveness
Management Effectiveness () Company Industry Sector SP 500
Return On Assets (TTM) 10.12 3.52 4.32 6.13
Return On Assets - 5 Yr. Avg. 14.46 7.81 6.37 7.19

Return On Investment (TTM) 11.89 3.96 6.64 9.62
Return On Investment - 5 Yr. Avg. 17.55 9.46 10.19 11.65

Return On Equity (TTM) 12.62 3.17 8.29 17.89
Return On Equity - 5 Yr. Avg. 19.41 10.78 14.39 20.04
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F/S Review
40
Acquisitions
41
Risk Assessment
Estimate Revisions Pass
There have been no downward analyst revisions on this company in the past week.

Analyst Downgrades(last week) Analysts Covering Downward Revisions
Current Fiscal Year 33.00 0.00
Next Fiscal Year 61.00 0.00
Analyst Recommendation Pass
The consensus analysts recommendation for this company has either improved or remained constant in the past four weeks.

Analyst Recommendations RecommendationBuy (1) - (5) Sell
Current 1.76
4 Weeks Ago 1.82
Change (0.06)
Institutional Selling Pass
Shares held by institutional investors have either increased or remained constant.

Institutional Selling Number of Shares(in millions)
Shares Purchased 401.8
Shares Sold 171.6
Net Shares Purchased 230.2


42
Equity Analysis
43
Price History Price History Price History Price History Price History Price History
Calendar Year 2002 2001 2000 1999 1998
High Price 36.78 38.59 75.83 44.75 31.55
Low Price 12.95 18.96 29.81 25.06 16.41
Year End Price 15.57 31.45 30.06 41.16 29.64
High P/E 79.78 205.29 50.28 42.46 36.56
Low P/E 28.09 100.85 19.77 23.78 19.02
Year End P/E 33.77 167.29 19.94 39.05 34.35
Dividend Yield 0.51 0.25 0.23 0.13 0.11
Price Performance Price Performance Price Performance Price Performance
Period Actual() vs.SP 500()
4 Week 4.0 3.4
13 Week 18.0 13.2
26 Week 71.8 54.9
52 Week 61.2 44.9
YTD 107.6 76.4
44
Valuation
45
Analyst Consensus
Analyst Recommendations and Revisions Analyst Recommendations and Revisions Analyst Recommendations and Revisions Analyst Recommendations and Revisions Analyst Recommendations and Revisions
  As of11/21/2003 As of 4Weeks Ago As of 8Weeks Ago As of 13Weeks Ago
(1) Buy 14 13 11 9
(2) Outperform 14 14 13 12
(3) Hold 6 7 8 9
(4) Underperform 0 0 0 1
(5) Sell 0 0 0 0
No Opinion 1 1 2 2


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RECOMENDATION

• BUY/STRONG BUY
• -Appears to be undervalued using
  discounting/multiple analysis
• -Industry consensus
• -Future growth prospects are high

47
Advanced Micro Devices (AMD)
48
Background

• Global supplier of integrated circuits (IC)
• Personal, network computer and communications
• Founded in 1969, based in Sunnyvale, California
• Facilities in US, Europe, Japan and Asia
• SPs 500
• Stock Symbol NYSE AMD

49
Background Contd

• 2002 Revenue 2.7 Billion
• Total Asset 5.6 Billion
• 79 of sales is International (Up to 3rd quarter
  2003)

50
Core Products Segment

• PC Processors
• Flash Memory Devices cellular telephones,
  networking equipment electrically rewritten
• Integrated Circuits (ICs)

51
Foundry Services Segment

• Fees for products sold to Vantis and Legerity
• No longer manufacture products for Legerity or
  Vantis
• Sell products previously manufactured to Vantis
  through 3rd quarter of 2003

52
RD

• Microprocessors
• 180 nanometer process technology ? 130 nanometer
  process technology
• AMD Athlon XP Processor
• Flash memory products
• 130 nanometer process technology

53
Net Sales by segment

• Core Product segment
• 99 of total net sales!!!
• PC Processors (65)
• Memory Products (27)
• Other IC Products (7)
• Foundry Services segment
• 1 of total net sales

54
Net Sales by segment Contd

• Compare with Net Sales in 2001
• 28 decrease in 2002 for PC Processors
• 35 decrease for Memory Products
• 27 decrease for other IC Products
• 65 decrease for Foundry Services

55
Comparison of Net Sales
56
Comparison of Operating Income
57
Comparison of Net Income
58
Comparison of Net Income per Share
59
Comparison of RD
60
Other Valuations

• Market Capitalization 6.2 billion
• 52-week High 18.5
• 52-week Low 4.78
• Debt to Equity 0.91 VS Industry 0.20
• Beta 2.82
• Price to Book 2.56 VS Industry 5.33
• Dividend Yield (5 year average) 0

61
Stock Performance
62
Stock Performance
63
Stock Performance
64
Forecast

• Industry Semiconductor Price-to-book ratio for
  2003 5.33
• AMDs book value per share for 2003 6.56
• Estimated share price 34.96
• Current Price 16.80 (as of Nov 21, 2003)

65
Recommendation

• HOLD
• Expectation of Industry Growth
• Expansion in China
• New facility in Germany
• Cost reduction

66
Applied Materials
67
Questions to Answer

1. Is Applied Materials a Great Company?
2. Are the companys shares selling at a good price?

68
Company Overview

• Worlds largest maker of semiconductor production
  equipment
• Top customer Intel - 10.1 of sales

69
Management Overview

• CEO Michael Splinter
• Named CEO in April 2003
• 20 years at Intel Executive Vice President
• Formerly, all 5 top executives had been with
  Applied for 19 years

70
Competitive Overview
Top 4 Equipment Manufacturers Sales
71
Competitor Overview
Top 4 Manufacturers Sales Over Time
72
Earnings Overview
Sales and Net Income Last 4 Years
73
Earnings Overview
Sales and Net Income Last 7 Years
74
Earnings Overview

• Current Revenues (trailing 12 months)
• 4.7 billion
• Current Net Loss (trailing 12 months)
• 18 million
• Posted losses last 3 quarters

75
Income Statement

• Net Sales
• 31 decline
• 23 decline the year before
• RD
• Relatively consistent
• Average of 15.3 of net sales over the last five
  years
• Gross Margin Percentage
• 50.8 in 2000
• 44.3 in 2001
• 40.6 in 2002

76
Balance Sheet

• Stability through the downturn
• Growing PPE
• Stable Long-Term Debt
• Small Share Issuance
• Growing Stockholders Equity
• Issues
• 40 million in Notes

77
Cash Flow Statement

• Depleting inventories
• 57 million in new debt
• Stock repurchases to offset stock options

78
Great Company?

• I believe Applieds past performance and market
  share make it a great company.
• Are Applieds shares selling at an appropriate
  price?

79
Stock Overview

• Current Share Price (Today) 23.79
• EPS -0.01 (trailing 12 months)
• Book Value per Share 4.83
• No dividends in company history

Ratio Comparison
80
Stock Overview
Stock Price Last 5 Years
81
Stock Valuation

• Free Cash Flow to Equity
• Revenues (analyst growth rates)
• CFO ( of Revenues)
• less Gross Capital Expenditures ( of Revenues)
• Plus Net Borrowings (Debt / Capital Revenues)
• FCFE
• Discounted back using investors required rate of
  return (CAPM)

82
Free Cash Flow to Equity
83
Relative Pricing

• Industry P/B 5.3
• Industry P/S 7.5
• Justified prices based on these ratios
• Based on P/B 5.3 7.6 40.28
• Based on P/S 7.5 9.6 71.76

84
Conclusion

• Applied Materials is a great company selling at a
  moderately high price.
• Moderate Buy