Semiconductor Infrastructure Sector Overview

2008 was a particularly bad year for many industries, and for the already failing semiconductor infrastructure industry the recession could not have come at a worse time. Here is a quick discussion of how semiconductor infrastructure stocks fared during the year.

EDA company Cadence has only started to fall this year. The company did make some daring moves during the year by making a hostile bid for Mentor. After that, CEO Mike Fister departed amidst total chaos. Cadence now needs a turn around CEO really badly. The stock, meanwhile, is trading only at $2.75 levels.

Mentor, obviously would be moaning about not having accepted the offer while it was on. The stock has crashed to $5.40 from the $16.00 offered for it earlier this year. At the current share price, it is an attractive buy for Synopsys, which so far appears the strongest of the lot in EDA.

Synopsys is the only EDA player that turned a profit in the recent quarter. The company’s acquisition of Synplicity, a provider of design automation solutions, the launch of innovative products, and constant productivity improvements on existing products make them a vendor of choice for customers who are consolidating and are looking for technically and financially strong vendors. Market conditions are managing to pull the stock down, but it is still doing better than its peers and is trading at $17.81. Now may be a good time for the company to acquire Mentor.

The future is looking bleaker for the already weak Magma, which was trading at $4.41 on Friday, the lowest price since its 2001 IPO. Not only is the company troubled by economic conditions, it is really hurt by the EDA industry’s sick status. While I would like Magma to be acquired by either Cadence or Synopsys, right now, at least Cadence is in no position to do anything for at least a quarter or two.

I have written about the need for the consolidation of EDA and ATE players as the market is not big enough for multiple players. Credence and LTX seemed to realize this and merged earlier this year. The stock is trading at $0.33, indicating that it may not be enough of a consolidation!

Verigy is another ATE manufacturer that has realized the need for M&A. Its merger with Invoys helped it in inserting “testers” into chips. However, Verigy recently announced a very poor Q4, with revenue dropping by 28% over the year to $150 million and losses of $0.60 per share against the previous year’s EPS of $0.52.

Applied Materials, the largest supplier of capital equipment, had earlier acquired Baccini SpA, the Italian supplier of automated metallization and test systems for crystalline silicon and photovoltaic cells, in order to enter this industry. AMAT announced impressive Q4 results in spite of market conditions. Q4 revenues of $2 billion exceeded the market’s expectations of $1.8 billion even though this represented a 17% reduction over the year. EPS of $0.18 also exceeded the market’s expectations of $0.14 and was down 42% over the year. AMAT closed the year with revenues of $8 billion, an 18% annual reduction and EPS of $0.78, a 38% annual reduction.

The leader in yield management and process control equipment, KLA-Tencor continued with acquisitions as well. And earlier this year they acquired Belgium-based ICOS, which supplies machine vision and inspections solutions, to enhance their supply of equipment for visual inspection ICs. Their recently announced Q1 revenues of $533 million beat the market’s expectations of $518 million. However, EPS of $0.32 was $0.02 shy of the Street’s expectations.

Meanwhile, Novellus is not faring well. While the company continues to address cost optimization , the economic conditions are taking their toll. Novellus has announced job cuts and even the chairman has accepted a pay cut for the year. Q3 revenues of $250 million exceeded the market’s expectations of $246 million. EPS of $0.02 was shy of the market’s expectations of $0.04.

As I said earlier, 2009 will be the year when the number of companies in the semiconductor infrastructure industry will drop down to a handful. The industry dynamics alone would have been enough to drive this consolidation, but now, the economic crisis will simply force it to happen faster.