May 2008 Interview with: Varian Semiconductor Equipment Associates, Inc., (VSEA-NASDAQ) Executive Vice President and CFO, Robert J. Halliday - featuring: their VIISta™ ion implanter products that are designed to leverage single wafer processing technology for the full range of semiconductor implant applications. |
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| Varian Semiconductor Equipment Associates, Inc. (VSEA-NASDAQ) | |
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The Ability To Creatively Solve High
Value Problems For Customers Has Helped Varian Semiconductor Equipment
Increase Business And Given Them An Edge On The Competition
BIO:
Mr. Halliday
received an MBA degree from The Wharton School of Finance and a B.S. from
the University of Pennsylvania’s Wharton School, and he is a Certified
Public Accountant.
Varian Semiconductor Equipment
Associates, Inc. (“Varian Semiconductor”) is a leading supplier of ion
implantation equipment used in the fabrication of semiconductor chips.
Varian Semiconductor designs, manufactures, markets and services
semiconductor processing equipment for virtually all of the major
semiconductor manufacturers in the United States, Europe and Asia Pacific.
The VIISta™ ion implanter products are designed to leverage single wafer
processing technology for the full range of semiconductor implant
applications. Mr. Halliday: “I am the executive vice president and CFO of Varian. I have been here since March of 2001. I am responsible for finance but also manufacturing, supply chain, legal and human resources.”
CEOCFO: What is the vision for Varian today? Mr. Halliday: “Varian sells semiconductor capital equipment to companies that make computer chips, such as Intel, Samsung, Micron and TSMC. Varian sells equipment, which is called an ion implanter, it is a large piece of equipment that sells for about $3 million. It is about as big as your garage and weighs about 60,000 pounds. It is large special purpose equipment. Worldwide about 425 of these are sold a year. Varian’s goal for the last couple of years has been to capture greater worldwide market share and then longer term to consider ancillary markets for our equipment. If you look at our first objective, which is to capture market share in the ion implant market, we have done very well. If you go back to calendar 2004, about 30% of the market for ion implanters were Varian implanters. Our biggest competitors are Applied Materials, Axcelis and a couple of companies in Japan, Nissin and SEN. Our market share has gone from 30% in 2004 to 64% in 2007 so we have gained rapid market share. In fact in calendar year 2007 alone we gained over 20 points of market share.”
CEOCFO: Why are companies choosing to go with Varian? Mr. Halliday: “There have been several suppliers of implanters. There is one less now, as Applied Materials has stopped selling implanters to the market place and they used to be the leader in market share. If you look at the suppliers they were thought to have similar pieces of equipment but we focused a lot on increasing customer value propositions by helping our customers products, which are computer chips, work better. The second thing we are focused on is helping our customers get better yield, which is the percentage of manufactured chips that actually work and pass all of our customer’s specifications. Third, we have tried to lower their cost of production. If you focus on device performance, yield and cost almost in that order, you provide a high value proposition for the customers. We have helped them particularly on device performance and yield. Our tools are cleaner and get a higher yield in terms of more computer chips that work.”
CEOCFO: How often do companies purchase ion implanters? Mr. Halliday: “An ion implanter can physically last eight years. What you do see are a couple of things that limit that though. One is our customers introduce new generations of chips and that tends to be about every eighteen to twenty-four months. They tend to buy new equipment, the latest model for the new chips. They keep the older models at the old manufacturing lines and the utilization of that equipment gradually trends down a bit. The second issue is; can the old equipment produce the same yield with new chip designs? For instance, when they design new chips they might find that the old equipment might physically work but it will not provide the same yield, so the cost effectiveness of the old equipment is not as good as new equipment, so they invest in new equipment. That is particularly true with our high current implanter product. This product proved to be extremely clean relative to the competition. When you make chips, particles that land on the chip in manufacturing make them fail and lower the yield. When our customers came out with a new generation of chips they found that they only got acceptable yield from our product.”
CEOCFO: Where does Varian go from here?
Mr. Halliday:
“The most straightforward opportunity is the market share, which has gone
from about 30% to 64%. The second opportunity is to grow the size of the ion
implant market. The ion implant market in terms of sales and equipment was
about $1.34 billion worth of equipment sales last year for the whole world.
Into that, you would add $450 million of spare parts and service and sales.
If you look at Varians sales last year, we had sales in the fiscal year
ending September 30th of about $1 billion. We had about 64% of
the market and the market was a $1.340 Billion, and then you add a few
hundred million dollars of spare parts to ours to get to $1 billion in
sales.
“The second
opportunity for us is to grow the market, so we want to grow that $1.34
billion, total available market by either finding new applications for
implanters or doing things more cost effectively than other equipment
suppliers. Ion Implant sales make up about only 4.3% of the total amount
spent on semiconductor manufacturing capital equipment. We’re looking to
identify new applications for implant in others areas of chip manufacturing
to help grow the total available market.
CEOCFO: How is business these days? Mr. Halliday: “In the fiscal year ended September 30th 2007, we had a record year on almost every financial metric. Our sales were up over a billion for the first time ever and they were up from about $730 million a year before which was over 40% increase. Our gross margins on the year are up to 46.3% for the year, which was a four point increase on the prior year. Our operating margins were up ten points on the year to 24.3% from 14.1% from the previous year. The company has successfully turned that increased operating leverage into significant cash generation power. We don’t spend much on capital expenditures; only about $13 million per year, which is equal to our depreciation. Virtually all of our net income goes to cash so we have realized a lot of cash generating power and used it to buy back our own stock aggressively. The last two years we have bought back $640 million of our own stock and shrunk the outstanding shareholder base by about 12% even after option grants exercises. Business was good in 2007. If you look at 2008, business for the industry inclusive of Varian is probably going to be down about 25% for several reasons; I think we are in a bit of a recession this year, which is affecting the global economy for chips somewhat. The second reason is our customers the chip manufacturers probably spent a little bit more on capacity last year which drove up chip supply and caused chip prices to drop. This was particularly evident at the chip companies that make memory chips such as DRAM or Flash chips. A lot of those customers are based in Asia. We think they are going to buy a little less equipment this year because they are digesting what they bought last year. The general forecast is that the spending on all types of equipment by chip manufacturers could be down twenty to twenty-five percent in calendar 2008. Varian should do better than that because we will continue to gain some market share in 2008 and we will continue to grow our service business. I think we probably won’t achieve the same type of top line as we did the year before because of the industry down draft.”
CEOCFO: Please tell us more about the service businesses and the importance of customer service in your company. Mr. Halliday: “Varian is actually great at customer service if I do say so myself. We have been voted number-one for customer support and service in our whole industry of semiconductor capital equipment for the last ten out of eleven years. I think the reason for that is we have defined service relatively broadly. Not only is it supporting our equipment but also it is shipping equipment that is up and running and in production upon uncrating it within two-and-a-half days sometimes. This is record performance for equipment, which is as complex as ours. The other reason we do well is we broadly define support and customer service as providing upgrade paths for our customers. What we aggressively do is try to come up with upgrade products, which we can sell to our installed base, which is win/win. It is a win for us in that upgrades have good gross margins and it’s a win for our customers because they get higher yield and more productivity with very little incremental investment. Therefore, if you think of our customer model it costs about $3 billion to build a chip manufacturing plant or fab. Ion implant in total is only about a hundred million dollars in that fab. If the implant bay is the gating item for production, a small upgrade investment can leverage their whole $3 billion investment and get increased throughput for the whole fab. In summary, we support our equipment broadly and successfully, we get new equipment up and running right away and we provide upgrade products to our customers that are of high value. Those three things together have resulted in us becoming number one in terms of customer support in our whole industry. I think it is win/win for the customers; they get a lot of support and upgrade products. The service business has been a good business for Varian. It was over a $215 million business in fiscal 2007 and we are hopeful we can grow it another ten percent this year. It tends to be a relatively profitable business as we sell high-value upgrades and spare parts which are very valuable to our customers.”
CEOCFO: Has the investment community been paying attention? Mr. Halliday: “I think so. Varian stock has done very well. Varian used to be part of Varian Associates, which was split into three separate public companies; Varian Semiconductor, which is my company, Varian Medical and Varian Inc., both of which are on the west coast; we are based in Gloucester Massachusetts. Varian Semiconductor went public on April 2nd 1999 at a stock price of $11.38 a share at a total market cap of about $330 million. With a good industry background the stock got up to $58.00 last August, which is more note worthy because we had split the stock twice in the last two or three years so that if you adjusted for the splits the stock was 2.25 times $58.00 which was about $130.00 a share up from $11.38. Therefore, the stock has done well; it has been off this year because of the overall industry. There is a lot of interest in the Varian story on the road. The stock is off this year because of a downdraft in the industry, but as soon as the industry recovers and the excess capacity is worked off Varian, stock should perform well. I think people understand the story pretty darn well.”
CEOCFO: In closing, why should potential investors be interested and what might people miss about the Varian story that they should understand?
Mr.
Halliday:
“Qualitatively, Varian is a different company than it used to be. Our
customers rather than looking at implanters as a commodity product have
decided that implanters are highly differentiated and that has driven
significant market share for Varian. They also look at Varian specifically
as a very creative company and they are bringing new problems to us and
saying would you solve this chip problem with an implanter. This will drive
up our total available market. Those types of high-value problems and the
solutions that we provide translate into a lot of economic value for the
company. The second thing that translates into a lot of economic value for
the company is we design all of our products around a common platform. We
have a very clever common architecture, which we call our
VIISta™
platform that drives down our R&D costs as a percentage of sales, provides
better pricing leverage and helps us to bring new products to market faster.
That translates into a lot of P&L leverage from the revenue line, the gross
margin line and the R&D line. Varian is solving high value problems for
customers. This creates lot of economic leverage and combined with our
product architecture drives high value returns to investors. As I look out
over the next couple of years for Varian, we are going to solve a lot more
of those problems for customers and have a chance to really increase the
operating leverage of Varian and create significantly higher investor
return.” |
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“Qualitatively, Varian is a different company than it used to be. Our customers rather than looking at implanters as a commodity product have decided that implanters are highly differentiated and that has driven significant market share for Varian. They also look at Varian specifically as a very creative company and they are bringing new problems to us and saying would you solve this chip problem with an implanter. This will drive up our total available market. Those types of high-value problems and the solutions that we provide translate into a lot of economic value for the company.” - Robert J. Halliday |
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