KLA-Tencor (KLAC)

San Jose California-based KLA-Tencor Corporation (KLAC) is an original equipment manufacturer (OEM) of process diagnostics and control (PDC) equipment used within the semiconductor manufacturing industry during the fabrication of integrated circuit (ICs) or chips. The firm is the clear leader in the PDC tools market. The company supplies tools that provide inspection and metrology (measurement) information on both wafers and photomasks (reticles). The company's comprehensive portfolio of products address each major PDC subsegment: photomask (reticle) inspection, wafer inspection/defect review and metrology.

The company has a dominant position in photomask (reticle) inspection and it is the flagship product line with more than an estimated 70% market share. As part of the device formation process, photomasks are used to control the precise deposition of materials to the wafer. Photomask (reticle) inspection tools are used to measure the quality of the photomask (reticles) quality, which is increasingly important as physical design dimensions on a wafer are shrinking. This segment accounted for approximately 10% of revenue. KLA is the dominant player in the wafer inspection/defect review tools market. The wafer inspection market can be subdivided into: optical patterned and unpatterned wafer inspection, patterned e-beam and defect review. These wafer tools are used to detect defect pattern and particle defects as well as the corresponding characterization. This information is used in detailing the performance degradation due to the defects. Wafer inspection accounted for approximately 43% of sales. Metrology tools are used to gather critical dimension measurements of the wafer and process dimensions such as film thickness, lithography overlay, and surface profiling. Metrology accounted for approximately 36% of sales. The yield enhancement software, data storage and services areas contributed the remaining 11% of revenue.

KLA-Tencor's leading customers include Intel, Samsung and Taiwan Semiconductor. Intel was KLAC's biggest customer, contributing 11% of company sales. Approximately 31% of its revenue was generated in the U.S., 15% in Europe and Israel, 20% in Japan, 19% in Taiwan, and 15% in other Asia-Pacific countries.

The company's market leadership and high intellectual property content will enable it to capitalize on the improving fundamentals of the semiconductor industry. Leading semiconductor manufacturers all over the world are adding capacity and KLAC has an extensive client base from which to capture new business. Recently, Japan has been very strong, with Sony, Toshiba, and NEC all increasing orders. Chinese, Korean, and Taiwanese foundries are also expanding capacity. Even Europe is showing signs of recovery. This broad-based demand on top of the firm's already substantial backlog should drive strong revenue and earnings growth in the year ahead.

Dominant Position

KLA-Tencor's long-term prospects are solid as well. Although the semiconductor equipment business is characterized by extreme volatility, the industry should continue to grow at a double-digit annual pace as electronic applications proliferate. Due to the dominate position in some PDC segments the company has been able to secure industry leading margins. KLAC's sales and earnings have been a bit more stable than most of its peers since it is necessary to have PDC equipment on every fab line.

The firm's diverse customer base is another strength. KLA-Tencor is not overly dependent on a particular customer or geography. This is a good thing since strong demand in international markets (particularly Asia) is currently offsetting somewhat sluggish demand in the U.S. Orders from both Intel and Texas Instruments have been slow to pick up.

Outgrowing the industry

KLA-Tencor will outgrow the market in calendar '07 as we'll grow revenue in the range of 15% to 20% compared with an industry CapEx growth rate of around 5%. It looks very hard to predict calendar '08. We believe we are well-positioned to continue to outgrow the industry as a result of the increased challenges of 45 nanometers and based upon new markets that we have entered during calendar '07.

During calendar '07 KLAC entered six new markets, both organically and through M&A activity which increases it's potential available market by more than $700 million.

Order Disruption

Orders for the September quarter were $482 million down 32% from the June quarter. September has historically been a difficult period for bookings of KLA-Tencor.

This first quarter seasonality was compounded by a general end market weakness, which resulted in timing delays for some orders and certain logic and DRAM customers during the last few weeks of the quarter. Some of these or those who currently shifted into next year. In addition during last week of September KLAC found that they were not able to reach final terms with a few customers, and as a result these orders did not close in September and shifted to December.

Read full report on Kla-Tencor Corp

Company overview provided by

Company Products/Services/Markets:

Enter Company Products/Services Here

Strategy:

Describe Key Aspects of Company's Strategy Here

Competitors:

Enter Competitors Here

Industry Trends and News:

Enter Industry Trends and News Here

Acquisitions, Divestitures, Major Transactions, Spin-offs :

Enter Acquisitions, Divestiures, Major Transactions, Spin-offs Here

Management – Pros & Cons, Changes:

Enter Management - Pros & Cons, Changes Here

Buy Rationale:

Enter Buy Rationale Here

Sell Rationale:

Enter Sell Rationale Here