Litho subsystem supplier: Not all gloom and doom - Capital Equipment - according to xtraction Systems Inc

Electronic News, July 29, 2002 by Devon Kinkead

Like so many chip market suppliers, Extraction Systems' growth prospects can be closely linked to increasing chip factory capacity utilization rates.

However, our sole focus area-- that is, providing comprehensive molecular contamination control to lithography tool vendors--gives us a unique perspective on the semiconductor supply chain, allowing us to anticipate waves of change roughly nine to 12 months ahead of time, or about as long as it takes to build a stepper.

This perspective tells us the market outlook is better than expected, but not entirely trouble-free.

First, the good news is that we are beginning to receive increasingly optimistic 12-to 24-month forecasts from some major customers, which should help with production and facility expansion planning.

Wafer fab utilization is improving and, most notably, leading edge chip manufacturing processes using deep UV lithography (0.18-micron design rules and above) are sold out at the industry's top foundries. IC demand is also improving, reportedly because of communications chip demand. Moreover, chip sales are no longer on the decline; most analysts now forecast flat chip sales this year.

Second, lithography subsystem suppliers are reporting promising news. Extraction pays attention to these suppliers because they provide useful data points in calibrating our internal sales forecasts. We follow companies such as Cymer Inc., the major supplier of DUV lithography light sources, which is reporting double-digit percentage revenue growth quarter-to-quarter. In addition, Extraction's own revenue performance is well ahead of plan because of continued strength in filter sales. Near-term visibility has improved; our backlog has increased; and we are on target to meet or exceed our market share goal by year's end.

Finally, while it seems the market is stabilizing, with the prospects for a strong rebound insight, we do expect a pause in factory utilization toward the end of the year, as projected by industry analysts.

Here's why: Because electronic systems producers are the customers for chips, it makes sense that their sales would move together; and they do, until 2002 when electronic system sales and chip sales moved in opposite directions (see chart above). It could be that chipmakers are selling more chips to non-U.S. electronic systems producers for Asian markets, especially China. U.S. electronic systems consumption looks flat, at best (based on the graph). Worldwide GDP growth is predicted to be between 2 percent and 4 percent this year, about one-half the 2000 figures. About $20 billion in gray market electronic systems inventory exists, which would tend to slow new system production.

When taken together, we believe these factors will mean that the current recovery in chip sales and bookings is probably short-lived, with a true recovery coming after real and significant GDP growth takes up the slack in the supply chain. Long term, the baby boomers will drive GDP growth and the chip and chip equipment business; I don't see us going back to pen and paper any time soon.

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Devon Kinkead is co-founder and CEO of Boston-based Extraction Systems Inc.