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Cymer Says: Flash Chip Fury Lives On

The company's results inspire another round of bullishness for the NAND chip sector.

Shares of chipmaking equipment company



surged to a 52-week high Wednesday following the company's better-than-expected financial results and several bullish notes from investors.

In midday trading, Cymer shares were up $5.50, more than 11%, to $54.95.

With the role of NAND flash chips continuing to grow within the semiconductor industry, Cymer's immersion lithography tools used to manufacture the chips appear to be well-positioned to profit from the trend.

"We are not only pleased with the recent quarter, but also what sounds like an acceleration story on immersion lithography," wrote Needham & Co. analyst Robert Maire in a note to investors upgrading his rating on Cymer to a buy. (Needham makes a market in Cymer securities and expects to receive or seek compensation for investment banking services from the company in the next three months.)

The San Diego company nearly quadrupled its first-quarter profit, posting $20.6 million in net income, or 51 cents a share, compared with net income of $5.4 million, or 14 cents a share, a year ago.

Sales of $127.1 million were up 50% from a year ago.

The results, which surpassed analyst expectations, owed to the company's efforts to squeeze efficiencies out of its operations as well as broad-based demand for its variety of semiconductor tools, according to Cymer's executives.

Gross margins in the first quarter were 46%, up from 43% in the fourth quarter.

"We suspect that initiatives within its manufacturing operations and a more streamlined supply chain are just part of the reasons for the improved margin profile," wrote Stifel Nicolaus analyst Patrick Ho in a note to investors maintaining his hold rating on the stock.

Ho also said he believes Cymer has reduced its warranty costs, which he reckoned could provide the greatest leverage to margins in the near term. Stifel Nicolaus makes a market in shares of Cymer.

The company installed 63 new light sources in the first quarter, up 29% from the 49 systems installed in the fourth quarter.

Cymer said demand for its krypton fluoride light sources was better than it anticipated, resulting in the first-quarter top-line upside. And the company said it continued to gain traction with its advanced argon fluoride products, which accounted for 59% of its system revenue in the quarter.

Average selling prices for the quarter declined to $970,000 however, on account of the large mix of less-expensive krypton fluoride products.

Orders in the first quarter rose 13% sequentially to $135.6 million, the highest quarterly level in company history. The book-to-bill ratio was 1.07.

The popularity of new consumer electronic devices, in particular gadgets that use NAND flash memory, is providing significant growth opportunities for semiconductor equipment sales, said Cymer CEO Bob Atkins. The high utilization rate at chip fabrication facilities and recent announcements of capital spending increases by chipmakers such as





Hynix Semiconductor


Micron Technology


also bode well for the industry, he said.

According to a report released Wednesday by industry research firm Gartner, capital expenditure plans for the top 20 chip companies has increased by nearly $6.3 billion since December.

"Of that amount, approximately $4 billion is attributable to memory manufacturers who are responding to increased demand for DRAM and NAND Flash devices," the report stated.

Overall, Gartner forecast that semiconductor manufacturing market will total $38.8 billion 2006, up 14.3% from the year before, compared to its earlier projection of an 8.6% increase.

Several Wall Street firms boosted their estimates for Cymer. Prudential tacked on 10 cents to Cymer's 2007 earnings estimate, due to improved gross margins. Morgan Stanley raised its price target on Cymer shares to $51.50 from $47.

Needham's Maire boosted his fiscal 2006 EPS estimate from $1.56 to $2.27 and his fiscal 2007 figure from $1.96 to $2.75.