Electroglas (EGLS)

Based in San Jose, CA, Electroglas, Inc. (EGLS) is an original equipment manufacturer (OEM) of automated wafer prober systems, test handlers and software used in the back-end process of semiconductor integrated circuit (IC) manufacturing.

The back-end of the manufacturing process takes place after a wafer (usually silicon) has completed the device formation stage, in which multiple copies of an IC device have been constructed on a single wafer. A wafer prober then moves the wafer so that each die's (IC device) electrical contact points are properly aligned with the probe card's pins, facilitating the parametric or functional testing of the device. Parametric testing is done both during and at the completion of the device fabrication process. Functional testing, completed after final construction, determines whether the device meets performance specifications (wafer sorting). Following the wafer sort, the wafer is then cut into individual die. Each die has electrical leads attached and then packaged within an environmentally protective encasement. The purpose of the die package or encasement is to protect the semiconductor device from environmental elements and secure the electrical contacts to the protruding electrical leads. In addition, the encasement acts as a medium through which thermal energy or heat is dissipated from the die. A final test is then conducted on the chip. Wafer probers are used in wafer sorting applications roughly 85% of the time, while the rest are used in parametric testing. Thus most of the testing is done in the back-end of the fabrication process. Each probe card is custom-built for each specific wafer, as well as for the test equipment that accepts the probe card's electronic information. Functionally, this test equipment increases the efficiency of the manufacturing process through the detection and removal of defective semiconductor devices prior to final assembly. The primary challenges facing wafer prober and probe card manufacturers are the transition to larger wafers, the shrinking of device sizes, increasing throughput requirements, and devices running at greater speeds and lower power.

Electroglas' product line includes wafer prober systems for 200mm and 300mm wafers, as well as older products serving the sub-200mm market. These probers are used in parametric and functional testing applications. The company has recently increased the addressable market through an active effort to serve the memory segment. Memory is one of the most pervasive types of chips produced. DRAM (dynamic random access memory) manufacturers are currently using a small quantity of these products. The company extended the product line into the final test handling market segment, as new packaging technologies such as wafer level package (WLP), Known-Good Die (KGD), MicroElectroMechanical Systems (MEMS) technologies, ultra-thin and diced wafers required more sophisticated handlers. This also includes packages in panel or leadframe strip formats such as Chip Scale Packages (CSP) and Ball Grid Arrays (BGA). EGLS recently introduced a couple of test handlers Pathfinder (for wafers on film frames) and Sidewinder (for wafers in strip form) which can be used for very high-speed, parallel test handling in the final testing process. The company's software includes SORTmanager, EGCommander, and GEMTalk 200, which analyze, control and report on sort floor processes, and the Collaborative Process Management (CPM) suite, which creates data regarding process quality, interprets the data and generates reports.

In 2004, the company generated $63 million in revenue, up 40% from 2003. Prober systems and prober parts accounted for 68%, software products 3%, and aftermarket parts and services 29%. In an effort to strategically realign around the core wafer prober and wafer handling businesses, ELGS sold the design for manufacturing software products in July 2003 and the optical inspection product business in October 2003. Geographically, North America generates 37% of sales (up 48%), Asia/Pacific another 34% (up 16%) with the remaining 29% coming from Europe (up 71%). EGLS sells its products to some of the leading semiconductor manufacturers in the world. Its major customers in include STMicroelectronics and Atmel, each with more than 10% share of net sales.

By 2007 the revamped company had $44.6 million in sales, which was virtually flat with 2006 sales. Net sales were down 30% in 2006 from 2004. This decrease was primarily due to a 46% decrease in the volume of prober system sales due to slow customer qualification and acceptance of the new 300mm prober product, partially offset by a 14% increase in average selling prices.

Realignment has been positive

Electroglas has strategically realigned its business around wafer probers. The 2001 slump in the semiconductor industry prompted the company to diversify its product portfolio into new areas, which resulted in losses for EGLS. Current management sold the Design for Manufacturing and Fab Solutions software product lines in July 2003, followed by the Optical Inspection product line in October 2003. The company is now exclusively focused on the wafer prober and strip testing markets.

During 2004, the company developed and introduced several new products the 4090 Micro Plus 200mm prober, the EG6000 300mm prober, and the Sidewinder Strip test and SORT manager test automation software. The 4090 Micro Plus prober system was launched in December 2004 and is capable of handling emerging technologies such as testing fine pitch devices, copper interconnects and low-k dielectrics, as well as enhanced alignment properties and improved automation capabilities. In addition, EGLS has an upgrade kit to the 4090 Micro Plus available for older 4080, 4090 and 4090 Micro prober systems. The company has an installed customer base with over 15,000 wafer probers, of which approximately 3,000 are capable of being upgraded. The upgrade kit is dependent on the configuration of the tool but generally costs around $30,000, which translates into an incremental $90 million addressable market opportunity. IBM, the initial paying customer, has already had 15 systems upgraded. The company reported 21 system upgrades during the March quarter of 2005. In 2005, the sales force targeted large customers with 25 or more systems installed, with an internal goal of selling 100 units per quarter by the August quarter. However, the company badly missed this target during the August quarter since only 4 upgrades were reported.

In 2004, industry wide 300mm wafer prober sales exceeded 200mm sales for the first time. Approximately 2,000 300mm wafer probers were sold in 2004 and 2,600 were sold in 2005 according to VLSI, an industry consultant. The EG6000 300mm wafer prober was officially introduced in January 2005, and is currently being sampled at several sites. Management acknowledged being slow to market with a competitive 300mm product. However the company feels they have a superior product than the competition. Electroglas linear motor designs and advanced features provide better throughput and yield improvement by being faster at indexing, better in disturbance reduction, better in thermal agility and microtouch.

Strong back drop

According to VLSI, the market for probers in 2008 should be approximately $800 million, with the majority of sales moving to 300mm. The second source supplier opportunity remains, especially given the fact that many wafer manufacturers have yet to fully ramp up 300mm fabrication lines. The EGLS sales force is targeting 10 to 12 large customer accounts with the potential to purchase 25 to 100 EG6000 wafer probers, which are evenly split between North American, Asia/Pacific and European regions. These accounts are mainly integrated device manufacturers (IDMs), though some assembly and test contract manufacturers are also included.

The EG6000 continues to ramp positively. Having taking in 10 orders this quarter, they have booked 30 to date and taken in revenue on 2/3 of them. Management reported 3 more are in evaluation (similar to test runs before buying) and 3 due to start in future quarters.

On January 16, 2008 EGLS announced that Broadcom Corporation purchased the Electroglas EG6000 for engineering development and qualification of new device silicon wafers.

On April 14, 2008, Electroglas announced that Amkor Technology has entered into a Volume Purchasing Agreement for Electroglas EG6000 300mm wafer probers. Electroglas revenue from this agreement will be in the multi-million dollar range over the course of this 12 month agreement.

On July 10, 2008 EGLS announced that Freescale Semiconductor has qualified the Electroglas EG6000e for engineering development and characterization of new semiconductor processes. This purchase followed an extensive engineering evaluation where detailed electrical characteristic analysis of leading edge semiconductor process was made possible by the EG6000e's very low noise and extended temperature range capabilities.

Shutting down Sidewinder

Electroglas decided to close down the Sidewinder business, which was previously expected to drive growth in the strip test market. We view this as a big positive, as the company's revenue from the Sidewinder was much lower than its expectations. Only two units were ever sold, and you would have to go back several quarters to find revenue from this product. Management reported an expected savings of $400 thousand per quarter.

Shedding non-core assets

Management expects to turn profitable by increasing revenue from new products and lowering the operating expense base. The current breakeven point requires a quarterly revenue level of about $19-20 million. (this will soon be at the $14-15 million level) The company has been liquidating assets in an effort to fund operations until sales of the new products gain sufficient traction. In December, the firm liquidated its Cascade Microtech position for $6.5 million. On January 5, EGLS closed the sale of the San Jose campus to IDT for $28 million. The company is relocating to a smaller facility nearby that is expected to produce $0.5 0.6 million in quarterly savings.

Having completed transferring its manufacturing operation to Flextronics, EGLS expects to see sequential increases in gross margin and net profit during fiscal year 2009.

Competitors are entrenched

The firm's two major competitors' combined market share has surged to an estimated 85%, while Electroglas' share has dwindled to 8%. The decline was mainly attributable to the company lagging its peers in the rolling out of an upgraded 200mm product and a high volume 300mm product for new next generation fabrication lines. Electroglas has since introduced a new 300 mm wafer probe system as well as an improved 200mm system with an upgrade option that management expects will win back some market share. However, the overriding concern is regarding the firm's ability to successfully market these new products and win back market share from its dominant competitors.

Delays could not have come at a worse time

Delays have caused serious problems with EGLS over the past several quarters. While delay in these 300mm evaluations may be considered normal, the company witnessed additional delays due to control system problems within the equipment. At the July 10th 2006 conference call, management agreed that EGLS had done a poor job of testing the design. On two of these three jobs, EGLS was invited back. The company that did not invite them back claimed that they did so for internal reasons.

Serious concerns over cash burn

The company continues to run at a loss even after shedding non-core assets and restructuring, though the current breakeven point has been lowered to approximately $18 million in revenue. Last year EGLS used $20 million to run its operation. In fact, the company has been profitable only one quarter over the past three years on a pro forma basis. We are extremely concerned about the current level of cash burn. The cash burn rate has recently improved $2-3 million per quarter to $1-2 million.

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