Analyst Explains Wall Street to ITC

Electronic News, Nov 5, 2001 by Jeff Chappell

BALTIMORE--Wall Street doesn't necessarily see that there is truly a link between design and test, but it recognizes the importance of this link and will reward those companies that can establish that link.

That's the conclusion of Sue Billat, a senior analyst and managing director at investment banking firm Robertson Stephens Inc. Billat has worked in the industry for 27 years, most recently for Ultratech Stepper Inc. as a senior vice president of marketing before joining Robertson Stephens in 1996. She delivered the keynote address at this year's International Test Conference here.

From the Wall Street perspective, chip-testing companies are facing two big issues these days: their customers' time-to-volume and the cost of test. Chipmakers tell Billat that they only make a profit on semiconductors within the first six to nine months of production, Billat said. As for test costs, she acknowledged that some in the test industry question those complaints, but ultimately what matters is the perception of the industry's customers.

"I'm not uncomfortable with people who say the price is too high...at some point it becomes a deterrent," Billat said. "When the cost gets too high, companies are dodging and weaving...and this presents an opportunity."

Particularly during a downturn such as the current one, more engineering resources can be devoted to these two problems, she suggested. As for which companies will enjoy Wall Street's attention, obviously it will be the ones that can do just that.

Billat suggested that those companies that can address both problems -- time-to-volume and cost -- will get the nod from analysts and investors.

"The companies that can move from working in series to working parallel will be rewarded on Wall Street," Billat said.

While many industry executives bemoan the seeming fickleness and vagaries of Wall Street, Billat told those gathered that Wall Street analysts are more perceptive and knowledgeable than they might think. Analysts recognize that, historically, when semiconductor capital spending exceeds 30 percent of revenue, another cycle is poised to occur.

"They run for the hills because they know a downturn is coming," she said.

And whether they like it or not, Wall Street sees test OEMs as the canaries in the cyclical semiconductor coal mine. Analysts look to the back-end to gauge what will happen in the front-end.

"Whether that's true or not, that's the Wall Street view," Billat said. This is why stock prices for a company such as Teradyne Inc. will peak close to that of its bookings, while stock for a front-end company such as Applied Materials Inc. will peak months before its bookings do, she explained.

Wall Street also applies different values to different segments of the semiconductor equipment market. When analysts hear things from chipmakers such as test is a necessary evil of producing semiconductors, analysts question if test companies will enjoy the growth peaks that front-end equipment suppliers do. Also, back-end companies have not grown like front-end OEMs have. Wafer-process equipment companies' growth has outstripped that of test companies since 1998 and throughout the last cycle, Billat said.