U S Semiconductor Industry Sebastian Budijanto Siantoro Chandra

U. S. Semiconductor Industry Sebastian Budijanto Siantoro Chandra Emily Chiang Ambrosio Lina

Industry & Market Analysis

Definition n Materials that has electrical conductivity between a conductor and an insulator n The most common semiconductor materials are silicon and germanium. n Example: Computer chips, both for CPU and memory

Product Categories n Integrated Circuits (IC) n 85% of market n CPU and PC memory (DRAM, SRAM, Flash Memory) n Discrete Devices n Transistors, diodes, resistors n Optoelectrics n LED, Optical coupler, laser diode

Business Models n Fabless n Focus on marketing and product development n Foundries n Manufacture and sell to other companies n Integrated Device Manufacturer (IDM) n 60% of market n Develop, produce and market products n Intel and AMD

Industry Characteristics n Short product lifecycle n Moore’s Law n The number of transistors in IC doubles every 18 months n Increasing R&D expenditure n Development of nanotechnology n Increasing foreign consumption n In 3 rd Quarter 2004, Asia Pacific has nearly 40% market share

Industry Characteristics n Large IDMs start shift to fabless n E. g. Broadcom & Xilinx n Outsourcing production to foundries n E. g. TSM and IBM n More concentrated customer bases n Growth direction parallel to PC and telecommunication industry

Annual Sales

Industry Statistics n Market Capitalization = $ 556 B n Revenue (est. ) = $ 180 B n Financial Ratios n Profitability and management effectiveness

Financial Ratios n Price /Earnings n Price/Book n Current Ratio n Debt/Equity 27. 263 3. 645 4. 007 0. 102

Profitability and Management Effectiveness n Gross Margin n Operating Margin n Net Profit Margin n ROA n ROI n ROE n Yo. Y Qtrly Rev Growth n Yo. Y Qtrly EPS Growth n Dividend Yield 53. 076% 22. 065% 22. 415% 13. 678% 11. 604% 15. 022% 32. 7% 42. 8% 0. 6%

Cost Structure

Leaders by Market Capitalization 1. 2. 3. 4. 5. Intel Corp Texas Instrument Inc. TSM Co. Ltd. Applied Materials Inc. STMicroelectronics NV 21. AMD $ 147. 7 B $ 42. 7 B $ 38. 2 B $ 27. 7 B $ 17. 2 B $ 6. 02 B

Microprocessor Market share Rank Supplier 1 Intel Market Share 81. 90% 2 AMD 15. 10% 3 Other 2. 30%

Flash memory market share Rank Supplier Market Share 1 Spansion 27. 30% 2 Intel 18. 10% 3 ST Microelectronics 12. 30% 4 Sharp Electronics 11. 50% 5 Toshiba 5. 40% 6 Renesas Technology 5. 00% 7 Silicon Storage Technology 4. 50% 8 Samsung 3. 90% 9 Macronix International 3. 50% - All others combined 9. 50% Source: i. Supply Market Analysis (September 2004)

Leaders by Sales (2003 Annual Report) 1. Intel Corp. 2. Flextronics Int. Corp. 3. Texas Instruments Inc. $ 30. 1 B $ 15. 9 B $ 12. 2 B 8. Applied Materials Inc. $ 4. 5 B 10. AMD Inc. $ 3. 5 B

Market Composition

Year 2003 Recap n US Sales = $80 Billion n U. S Market Share = 48% of $163 B n U. S. Jobs = 226, 000 (estimate) n % of Sales Outside U. S. = 73% n R&D Investment = $22. 82 Billion, 14% of Sales (estimate)

Global Market Share

Philadelphia Semiconductor Index (SOXX) – 5 year

SOXX – 2 Year Range

SOXX – 1 Year Range

SOXX & DJI – 5 Year range

SOXX & GSPC – 5 Year Range

Environment n. R&D Developments n. Tariffs and export regulations n. Broadband internet n. Emergence of China

R&D Developments n Increase in R&D funding by Congress n $5. 6 billion for NSF (increase of 5%) n 20% projected increase in 2005 for nanotechnology n $12. 6 billion for Department of defense (increase of 12%) n R&D tax credit and Equipment depreciation tax reforms

Tariffs & Export Regulations n Elimination of semiconductor tariffs in 2002 n SIA is lobbying for PTA (President Trade promotion Authority) n Negotiating free trade agreement in Latin America and Asia Pacific

Broadband Internet n Availability of broadband benefits US economy by hundreds of billions dollars n High Tech Broadband Coalition won over FCC in deregulation of broadband.

Emergence of China n 3 rd largest market share for semiconductor products n Predicted to be 2 nd highest in 2010 the U. S. n Subject to WTO regulations n Anti-dumping law n Patent, standard, and quality enforcement n Trading and investing regulations

Industry Forecast

Development for industry sectors n PC industry n Projected 14% growth n Technological advancement n Telecommunication n Projected 14 % growth n Increase use of wireless telecom products n Consumer products n Projected 30% growth n Increase use of digital technology

Consumer Products

Advanced Micro Devices Inc. (AMD)

Company Overview n Founded in 1969, based in Sunnyvale, California n Global supplier of integrated circuits (IC) n Personal, network computer, and communications n Facilities in US, Europe, and Asia

Mission Statement n Purpose n “We empower people everywhere to lead more productive lives. ”

Executives Date joined Hector de J. Ruiz, Ph. D. Chairman of the Board, President and Chief Executive Officer January 2000 Dr. Bertrand Cambou Executive Vice President and CEO, Spansion January 2002 William T. Edwards, Ph. D. Senior Vice President and Chief Strategy Officer January 2004 Thomas M. Mc. Coy Executive Vice President and Chief Administrative Officer January 1995 Dirk Meyer Executive Vice President, Computation Products Group 1996 Patrick Moorhead Vice President, Global Marketing, Microprocessor Business Unit, Computation Products Group 2000 Iain Morris Senior Vice President, Personal Connectivity Solutions Group 2004 Henri Richard Executive Vice President, Worldwide Sales and Marketing April 2002 Robert J. Rivet Executive Vice President and Chief Financial Officer 2000 Marty Seyer Corporate Vice President and General Manager, Microprocessor Business Unit, Computation Products Group 2002 Fred Weber 1995

Products Overview n Microprocessors n Desktop PC n AMD Athlon 64 FX, AMD Athlon 64, AMD Athlon XP, AMD Duron. TM n Mobile: n AMD Athlon 64, AMD Athlon XP-M n Servers & Workstation: n AMD Opteron, AMD Athlon MP n Flash Memory n Spansion memory, Multi-chip packages n Personal Connectivity Solutions n AMD Geode, AMD Alchemy. TM

Competition n Microprocessor n Intel n Flash memory n Intel, Samsung, Toshiba, ST Microelectronics N. V. , Sharp Electronics Corporation, Renesas Technology, Silicon Storage Technology, and Macronix International n Personal Connectivity Solutions n Hitachi, Intel, Motorola, Inc. , NEC Corporation, Toshiba, Transmeta, and Via Technologies

Strategic Partners n Formed FASL LLC (now Spansion LLC) with Fujitsu Limited n Design, produce, and market flash memory products n Agreement with IBM n Jointly develop new logic process technology n Formed AMTC and BAC with Infineon Technologies AG and Dupont Photomasks, Inc. n Constructing and operating advanced photomask facility

Sales and Marketing n Distribution: n Direct sales force n Third party distributors n Avnet Inc. accounted for 13% of 2003 consolidated net sales n Fujitsu Limited accounted for 13% of 2003 consolidated net sales n Independent representatives n International sales n 80% of net sales in 2003 n 73% of net sales in 2002 n 67% of net sales in 2001

Sales and Marketing (cont) n Expanding to China n Regional headquarter n Established relationship with OEM in China n Pricing n AMD sells to distributors under terms allowing the distributors certain rights of return and price protection on any inventory of our products held by them.

Miscellaneous n Intellectual properties n 5, 900 patents and 2, 000 pending patents n Employees n 7, 400 non-unionized employees (AMD) n 6, 900 partially unionized employees (FASL LLC) n Restructured in 2001 and 2002

AMD’s Demand Expectations n Worldwide demand for PC microprocessors will increase in 2004 n Replacement cycle for older PC system n Lower-priced PC system n Enhanced product features n Improved economic condition

Goal n Microprocessor n Increase market acceptance n Flash memory n Increase market acceptance n Personal Connectivity Solutions n Continue provide cost-effective product

Financial

Financial cont’d

Financial cont’d

Financial cont’d

Financial cont’d

Company Snapshot As of Nov. 5, 2004 Market Capitalization Close Price (As of November 5, 2004 16: 04 ET) 52 Week High 52 Week Low $6, 016, 830, 000 $17. 09 $18. 50 $10. 76 Shares outstanding -basic -diluted 354, 348, 000 417, 576, 000 Price to book value -basic -diluted 2. 36 2. 78 Current book value -basic -diluted $7. 24 $6. 16

Stock Performance (1 yr)

Stock Performance (2 yr)

Stock Performance (5 yr)

Balance Sheet Analysis Book value per share Price to Book ratio Current Ratio Quick Ratio Debt to Equity Ratio Asset Return ROA ROE Q 3 2004 2003 2002 2001 $6. 16 2. 78 1. 6198 1. 1913 1. 8320 0. 1740 0. 0062 0. 0170 $7. 03 $7. 21 10. 69 1. 9971 1. 5167 1. 9095 0. 1374 -0. 0107 -0. 1126 1. 6759 1. 3324 1. 3144 0. 1187 -0. 0574 -0. 5281 1. 7909 1. 5013 0. 5855

Income Statement Analysis Gross profit margin Net profit margin Operating margin RD&E SG&A EPS -basic -diluted Price to earning -basic -diluted Q 3 2004 2003 2002 2001 0. 4046 0. 0354 0. 0552 0. 4605 0. 4032 0. 3387 -0. 0780 -0. 0663 0. 7148 0. 4927 0. 2193 -0. 4831 -0. 4543 1. 3800 1. 1331 0. 3346 -0. 0150 0. 4999 0. 4762 $0. 1234 $0. 1050 -$0. 7912 -$3. 8063 -$0. 1822 138. 46 162. 75 -$21. 60

Value Drivers n Research and development n Market share of Spansion Flash memory n Semiconductor demand expectations

Analysts Recommendations Current 1 Month Ago 2 Months Ago 3 Months Ago Strong Buy 5 5 5 7 Moderate Buy 0 0 Hold 12 12 12 11 Moderate Sell 2 2 Strong Sell 3 3 Mean Rec. 2. 91 2. 75 (Source: MSN Money)

Recommendation n Analysis: n Too much debt n No clear business plan n Intense competition n Conclusion n Sell

Applied Materials Inc. (AMAT)

Company Overview § Established in 1967 § The world’s largest supplier of products and services to the global semiconductor industry (develop, manufacture, market, service) § One of the leading information infrastructure providers § Subsidiary: AKT Inc. & Etec Systems Inc. § Hasn’t declared or paid cash dividends

Top Competitors n Tokyo Electron n Nikon Corp n KLA-Tencor Corp n ASLM Holding N. V. n Canon Inc. n LAM Research

Sales Comparison Note: Intel Corp (13% of 2003 Net Sales)

Management Overview § Michael R. Splinter, CEO Joined April 30, 2003. 30 years in the industry; 20 years with Intel § James C. Morgan, Chairman of the Board of Director Joined 1976 § Nancy Handel, CFO & Group VP Joined 1985. Named CFO October 2004 § Franz Janker, Senior VP Sales & Marketing Joined 1998

Firm Objective To be the leading supplier of semiconductor fabrication solutions worldwide-through innovation and enhancement of customer productivity with systems and service solutions. AM’s long-term growth strategy requires continued development of new manufacturing products

Operating Costs

(2003 Annual Report) § Gross margin: $1, 604, 455 (35% of net sale) § Research, development and engineering: $920, 618 (20. 6% of net sale) § Marketing, selling, general and administrative: $625, 865 (14% of net sale)

RD&E Investment (% of Revenue)

Products Overview § § § § Chemical Vapor Deposition (CVD) Chemical Mechanical Planarization (CMP) Electrochemical Plating Epitaxial and Polysilicon Deposition Inspection Implantation Manufacturing Execution Systems (MES) software Mask Pattern Generation, Etch, and Inspection systems Metrology Physical Vapor Deposition (PVD) Plasma Etching Rapid Thermal Processing (RTP) Systems to make Flat Panel Displays (FPDs) Wet Cleaning

Financial Highlights

Financial Highlights

Financial Highlights

Financial Highlights

Financial cont’d

Net Sales by Region Note: 58% to Asia

Bookings by Region

Business Trend

As of Nov 5, 2004 Market Capitalization (000) $7, 641, 271 Close Price $16. 28 52 Week High $25. 62 52 Week Low $15. 36 Price Change - 5 Day 1. 1% Price Change - 4 Week 0. 4% Price Change - 26 Week -12. 8% Price Change - 52 Week -35. 5% Price Change - YTD -25. 7%

AMAT Stock Price (1 yr)

AMAT Stock Price vs. SP 500 (4 yr)

AMAT vs. Industry (return) AMAT: US S 5 SEEQ: IND

Summary Balance Sheet (unaudited)

Balance Sheet Highlights (2003 Annual Report) n Cash, Cash Equivalents, and Short-term investments total $5. 5 billion (53% of total assets) n Total liabilities total $2. 2 billion(21% of total liabilities and shareholders equity) n Retained Earnings total $5. 8 billion (56% of total liabilities and shareholders equity)

Cash & Revenue Trend

Summary Income Statement (unaudited)

Analysis of Financial Statements (Nov 5, 2004) n Enterprise Value: $21. 61 billion n Revenue: $7. 03 billion n Gross profit: $1. 60 billion n Market Cap: $27. 65 billion n Beta: 2. 305 n Price to book value of equity: 3. 03 Data Provided by Reuters

Analysis of Financial Statements Cont’d n P/E: 30. 78 (Estimated EPS $0. 53 for 2004) (EPS negative in year 2003) n EPS: 0. 26 (Q 3, 2004) n ROE: -1. 9% (2003 Annual Report) n Shares outstanding: 1, 698, 233, 000 n Free Cash Flow: $536, 474, 000 (2003) ($0. 32/share) n Cash Flow from Operation: $801, 754, 000 (2003)

Value Drivers n Research and Development n Strong Cash Flows n Dominant Player in the industry

News Metron Technology N. V. , a leading global service provider of marketing, sales, service, and support solutions to semiconductor materials and equipment suppliers and semiconductor manufacturers, had entered into a definitive agreement pursuant to which AM would acquire the worldwide operating subsidiaries and business of Metron.

Cont’d Q 1’ 05 n Revenue: $62. 7 million n Gross margins: 21. 8% n Net loss: $0. 6 million

Fair P/E Raito Using Graham’s model: P/E Ratio: 22. 68 P/E Estimate (2004): 30. 78 Slightly overpriced

Recommendation HOLD § Cash Flow; Debt § Rebound (New Orders increase to $2. 46 B, Net Sales increase to $2. 24 B) § Industry expectation § P/E Ratio § Return vs Industry § Acquisition § 2004 Final Report

Intel Corporation (INTC)

Background n Incorporated in California in 1968 (rise of the computer age) n World’s largest semiconductor chip-maker n Currently, most of their products are sold or licensed worldwide. n Two lines of business: Chip (IC) Manufacturing, and Communications and Computing.

Business Profile n Provide key components for networking and communications infrastructure technology. Communication Components n Design and provide products with faster processor performance and improved capabilities. Microprocessor n Mission: Become the preeminent building block supplier to the Internet economy

Major Products n Microprocessors, chipsets, boards, flash memory, application processors used in handheld devices, cellular baseband chipsets. n Networking and communications products, optical components and network processing components, embedded control chips

Major Customers n Computer system, cellular, telecommunications and network communication equipment manufacturers (OEMs) n PC and network communication product users (retail, reseller, OEMs) n Other manufacturers

Geographic Revenue (millions) Americas Asia-Pacific Europe Japan Q 3 2004 Q 2 2004 Q 3 2003 $1, 799 (21%) $4, 014 (48%) $1, 886 (22%) $772 (9%) $1, 956 (24%) $3, 661 (45%) $1, 665 (21%) $767 (10%) $2, 168 (28%) $3, 266 (42%) $1, 683 (21) $716 (9%)

Product Revenue (millions) Q 3 2004 Microprocessor $5, 928 Chipset, Motherboard and other $1, 210 Flash $ 638 Q 2 2004 Q 3 2003 $5, 751 $5, 719 $1, 023 $1, 140 $ 587 $ 389

Operating Segment (millions) YTD 2004 Architecture Business Revenue $20, 937 Income $ 8, 586 Communications Group Revenue $ 3, 663 Income $ (596) Other Revenue $ 11 Income $ (760) YTD 2003 $18, 481 $ 6, 633 $ 2, 893 $ (681) $ 26 $ (981)

Market Analysis n Wi-fi phenomenon – Intel’s PRO/Wireless 2915 ABG adapter. Supports three Wi. Fi standards: 802. 11 a, b, and g (these are the standards for the average home user) n Rising handheld industry – increasing demands on handheld digital device (cell phones, PDA’s) capabilities with more powerful processors

Management n Andrew Grove-Chairman n Founder n Craig Barret-CEO n Came in 1974. Voted into BOD in 1992. n Paul Otellini-President n Came in 1974, became president in 2002. n Andy Bryant-CFO n Joined Intel in 1981. Became CFO in 1994. n Sean Maloney-(ITC) Gen Mgr n Joined Intel since 1982. Became head of ITC in 2001.

Price History (1 year) Last price as of Nov. 7, 2004: $23. 360

Intel vs. Industry Returns INTC: US S 5 SECO: IND

Revenue vs Income chart

Cash Flow Statement Highlights

Fundamentals n Outstanding Shares: 6, 323. 00 Million n Earnings Growth Rate (quarterly): 29. 3% n Market Cap: $ 147, 705. 3 Million n ROE: 15. 389 n Trailing P/E: 20. 437 n Last Dividend Reported: 0. 04 cash n Dividend Yield: . 685 n Year estimated EPS: $ 1. 11

Financial Model: • FCFF= CF(operations)-Exp(C)+ Interest *(1 -tax rate) – 2003: $ 8, 004. 54 (in millions) or $ 1. 21 /share – 2002: $ 4, 569. 84 (in millions) or $. 69 /share – 2001: $ 1, 712. 42 (in millions) or $. 25 /share

Recommendation P/Etrailing * FCFF = 20. 43 * $1. 21 = $ 24. 72 • Therefore. . Since last price is $ 23. 36, BUY!

The Fisher Approach § Company has had a stable operating structure (ratio of revenue-income stayed consistent) § All the head managers and officers have been with the company for at least 22 years. § Majority of revenue come from Asia-Pacific Region which has steadily increased. **Prospects look promising. Assuming no unforeseen circumstances, buy and hold for the long run.