June 13, 2011

The following report is excerpted from THE WALL STREET TRANSCRIPT

06-13-2011 SEMICONDUCTORS REPORT

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JOHN PITZER — CREDIT SUISSE

JOHN PITZER is a Managing Director, Global Technology Strategist, Technology Sector

Head and Semiconductor Analyst for Credit Suisse. He joined the group in March 2000,

and until the end of 2005 he was the semiconductor capital equipment Analyst.

Institutional Investor ranked him number-two Analyst for semiconductor capital equipment

in 2005 and 2004; number-one analyst for 2003 and 2002; and runner-up in 2001. From

2002 to 2005, he was ranked the number one or two Analyst in the Greenwich Associates polls. Prior to joining Credit Suisse, he was Vice President and the semiconductor capital equipment Analyst at

Prudential Volpe Technology Group. He previously was an Analyst at Deutsche Bank Alex.Brown and Needham &

Company, LLC, covering the semiconductor, semiconductor capital equipment and contract manufacturing industries.

Mr. Pitzer holds a B.A. from Harvard University.

SECTOR — SEMICONDUCTORS growth to get from where we were to normal. (ACM806) TWST: What is your coverage in semiconductors? Coming into the 2011, we’re still below normalized lev- Mr. Pitzer: I currently han- els but not by the same amount. So opti- dle the devices. I previously handled cally the cyclical call on semis has been both equipment industry and devices. Highlights harder to buy into. Now, that would But since about 2006, I’ve just been make the pragmatic call to look for John Pitzer discusses his coverage of handling devices. I cover the chips that more stock-specific criteria and don’t the semiconductor industry and some go into PCs, handsets, analog, digital, depend upon the cycle. However, we’re the whole gamut. of the specific names he follows. He kind of making the nonpragmatic call. TWST: What are the major says the global growth of the middle We are saying we believe structurally themes in the space right now? class benefits semiconductor the trend lines are moving higher. So Mr. Pitzer: This is a space companies, as middle class growth our bigger-picture thesis is that this is usually translates into higher demand that’s dominated by where are we in an industry which for the last seven to the cycle call, and there are cyclical for electronic goods. Mr. Pitzer also says nine years has demonstrated a revenue metrics that investors look at to try to the semi content per device is increasing, CAGR of about 5% to 7%. We think with smartphones, automobiles and monitor the health of the industry. You we’re in year two of the market figuring look at things like inventory levels, industrial goods requiring more out that there is a new revenue CAGR semiconductors to perform an ever- how much capex are we spending rela- that’s more like 9% to 11%. increasing number of functions. tive to the revenue we’re generating, TWST: Why is it higher what does year-over-year unit growth Companies include: Intel Corporation than people think? look like, what does unit growth look (INTC); ARM Holdings plc (ARMH); VIA Mr. Pitzer: When you look like relative to long-term trends. One Technologies (2388.TW); Linear Technology back and look at the 5% to 7%, reve- of the issues I think investors are hav- Corp. (LLTC); Avago Technologies Limited nues are always a function of supply ing this year is that relative to normal- (AVGO); NXP Semiconductors NV (NXPI) and demand. On the supply side, for the ized levels at the beginning of 2010 and Apple (AAPL). last seven years this industry has had from most of those metrics, we were structurally too much capacity. And the

well below normalized levels. So opti- reason behind that is, starting about 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted cally you can make a strong cyclical call that there was a lot of 2001 right after the tech bubble burst, the semi industry went ANALYST INTERVIEW — A BULLISH OUTLOOK FOR THE SEMICONDUCTOR INDUSTRY through a manufacturing change to larger wafer sizes. If you look at hear about emerging markets, what you hear is about wage infla- how a semiconductor is made, it’s a square chip, but they’re made tion. That’s a great thing for semis — i.e., you’re starting to see on a round wafer. There are many of these square chips on a single the global middle class accelerate, the growth in the global mid- round wafer. Every 10 years or so, the dle-class accelerate. The reason that industry goes through a wafer size middle class growth is good for transition as a way to improve manu- semis is the middle class buys a lot facturing efficiency. In fact, at the be- “If you look at semiconductors as a of electronic stuff, one. And two, the ginning of this transition, we covered percent of global GDP over time and you middle class also tends to demand semi cap equipment. And as bullish as chart that out, the chart you actually see more services in their economy, and I am now, I was bearish back then. is you go through these waves where the services economy has spent a lot Our call was that the semi cap guys semi content of the economy more on IT infrastructure. The way mispriced the tools. They were giving accelerates and then consolidates.” to think about this is, even if global away capacity too cheaply. And we growth going forward is flat over the saw that the math didn’t work in our next four years versus that 2004-to- models, and we thought we would go 2008 period, the composition of that through a multiyear period of having too much capacity. And in fact growth is better for tech and semis. that’s what’s played out. Now, the bottom-up thesis, just look at a lot of the end The best way to quantify that is a metric that measures the markets that semis go into, and you can actually start to quantify that capital intensity of the industry, which is simply how much capex semi content is going up. The easiest end market to talk about is do you need as a percent of the revenue you’re generating. And back handsets. When you go from a dumb standard feature phone to an before 300 millimeter, the capex-to-rev ratio was about 22%. Dur- iPhone or any other smartphone, the amount of silicon content goes ing the transition, our models were indicating that capital intensity from “x” to about 5x to 8x. So even though you’re selling one unit was going to drop to at least 15%. It actually went down to 10%. At of phone, if it’s a smartphone, you’re selling five to eight more units one level, that’s a good thing because when capital intensity goes of semiconductors, because you’re dealing with more content be- down, your ROI should go up. The negative offset is it’s much cause you’re asking that phone to do more. Now interestingly, I easier to add capacity, hence it’s much easier to screw things up think investors get all that when it comes to handsets, but it’s just as from a supply perspective. And in this case, it was the latter that true in the general economy. If you look at automobiles for example, dominated the former. What’s interesting is we’re now through the it was the fastest-growing end market for semis last year. And not 300-millimeter transition, and the call we started making back in because unit production in autos grew all that much, but because the late 2008 going into 2009 is that capital intensity is absolutely on the semi content going into autos is accelerating. The same thing is true rise. And we think we’re going back to 22%. Today we’re only at with general industrials, things like variable-speed motors, the green 15% or 16%, which means it’s going to be harder to screw up the economy, any sort of smart grid, any sort of factory automation, all supply side. We will eventually succeed, but it’ll take more time and of that stuff needs more and more semiconductor devices. more capital than people realize. TWST: What about the demand side? 1-Year Daily Chart of Intel Corporation Mr. Pitzer: On the demand side, the top-down view here involves a couple of things. First, if you look at semiconductors as a percent of global GDP over time and you chart that out, the chart you actually see is you go through these waves where semi content of the economy accelerates and then consolidates. It’s not in a pre- dictable way, but it’s a pattern we’ve seen repeated over the last 25 years. It’s our view that we’re at the beginning of an accelerated phase for semi content in the economy. Now, the top-down reason supporting that is the fact that global growth is moving towards products that semis are more levered to. What I mean by that is from 2004 to 2008 there was a really big globalization bid in the market, and we were almost looking for ways to get levered to China or to India. And actually tech wasn’t a great way of doing that, in part Chart provided by www.BigCharts.com because what was driving growth back then was tangible infrastruc- ture building. The issue at that time was actually building cities and So part of the call that we were making bottom up is, in- moving a rural population into the city. That’s very good for energy. vestors are underestimating the importance of this semi content It’s good for materials. But tech isn’t all that levered to that, and story. In fact, if you start to run some scenarios, let’s assume that semis are not that levered to it. unit growth in end markets stays flat from here. So we sell no more What’s interesting is, we’re now going into phase two of cars, we sell no more PCs, we sell no more cellphones, but we globalization, where we’ve built those cities. We have moved allow semiconductor content to reach its maximum potential. In people into those cities, and every time you turn on the news and that scenario, you’ve got a 14% revenue CAGR over a five year ANALYST INTERVIEW — A BULLISH OUTLOOK FOR THE SEMICONDUCTOR INDUSTRY period for semis. That’s a low probability scenario, but it helps to Mr. Pitzer: Yes, it is because of the sector as a whole, and quantify the leverage that content can give you. those companies’ positioning within those sectors. But a lot of it is TWST: Is this happening globally? this notion that I think the market just woefully underappreciates how Mr. Pitzer: Because of what’s going on with the global much semiconductor content is growing in the general economy. middle class, yes. In fact, I think the numbers would say that we’ll TWST: What are the most important things you look add more people to the global middle class in the next five years at within the companies themselves? than we did in the last 10. And from 2015 to 2020, that five year Mr. Pitzer: A lot of it is the question of what is the spe- period will add more new people to cific markets they’re addressing. So the middle class than we did in the “Some of the more tactical calls we you’ve got a total available market, prior 15 years. made going into Q1 earnings were based but underneath that there’s a served TWST: You recently com- on the fact that we liked the semi available market. So the question is, is mented on Intel and ARM Holdings. companies that were levered to that a well-served available market or How are those two companies doing? industrials, in part because this content not? Then once you’ve determined Mr. Pitzer: Intel (INTC) story that we talked about earlier. I think that, the real question is what is the had their Analyst Day just before we is well understood and appreciated in end company’s positioning within the mar- commented, so that comment was markets like handsets, but not really ket and is it defensible, because what appreciated all that much in the industrial somewhat event driven. We’ve been makes tech so exciting and sometimes known as the bull on the Intel story. and auto markets.” frustrating is that product cycles here It’s been a difficult call, because are shorter than anywhere else in the there’s a lot of concerns about what’s going on with the traditional economy. So what’s hard today might not be hard tomorrow. PC market relative to tablets. And there are a lot of concerns that TWST: What impact has Apple had on the semicon- there are new different ways to design chips that ARM (ARMH) ductor companies you cover? brings to the table that people are concerned might erode Intel’s Mr. Pitzer: This is kind of an interesting issue. And dominant position. Intel is dominant in PCs, but today if you look at Apple’s (AAPL) valuation to me is very interesting, because it’s market share, the ARM architecture is the dominant architecture for one of the largest-market-cap names in the market, but it’s also smartphones and tablets. one of the cheapest. And people struggle with why doesn’t this TWST: What’s the outlook for Intel? stock perform better. This may come back to the notion of how Mr. Pitzer: I think there are a couple of things that people defensible their position is. Enterprise has to make big decisions underappreciate with Intel. First, relative to the ARM-Intel debate. that last over multiple years, and there is a reluctance to change There’s two things that go into making a good semiconductor. One vendors because that switching cost can oftentimes be very high. is design, how do you design the chip. The other is how do you Consumers can be fickle. It might be one of the reasons why Ap- manufacture a chip. From my earlier discussions about having too ple’s multiple is so cheap. I do give Apple a lot of credit because much capacity over the last seven or eight years, manufacturing over they continue to innovate and bring out best-of-breed products. the last seven or eight years has been very difficult to differentiate What the multiple might be telling you is that the market is con- yourself. But if adding capacity is becoming harder and harder, it’s cerned about the next new thing. going to become a bigger point of differentiation. We think Intel’s relative manufacturing lead over the rest of the industry is stretching 1-Year Daily Chart of Linear Technology Corp. out. We actually think it’s going to be a more dominant lead going forward than it was in the 1990s. Interesting analogy here, in the 1990s there were a lot of design companies that claimed they were going to outdesign Intel. You had VIA (2388.TW), you had Cyrix, you had Transmeta. In many cases, they did have better design. But at the end Intel outmanufactured them. We think there’s a similar phenomenon going on now that Intel — because of this manufactur- ing lead — is accelerating. It will allow them to be more successful in these nontraditional markets of smartphones and tablets. TWST: Who else do you really like right now? Mr. Pitzer: Some of the more tactical calls we made going into Q1 earnings were based on the fact that we liked the semi companies that were levered to industrials, in part because this Chart provided by www.BigCharts.com content story that we talked about earlier. I think is well understood and appreciated in end markets like handsets, but not really appreci- ated all that much in the industrial and auto markets. So the most TWST: Is this a good place for investors right now? levered names there would guys like Linear (LLTC), Avago Mr. Pitzer: I think so. Going back to the earlier point I (AVGO) and NXPI (NXPI). made that we’re more midcycle than early cycle, and that’s worry- TWST: Those calls are because of the general trends? ing investors — if I’m right about the structural normal lines or ANALYST INTERVIEW — A BULLISH OUTLOOK FOR THE SEMICONDUCTOR INDUSTRY trend lines going higher, I think investors can’t be worried owning in 1993, was a government, Latin American studies major, came to stocks now. I think the catalyst that starts to get people more excited Wall Street in 1993 as an Associate in Research, kind of learned on on a tactical basis is by probably August, September, you’re going the job and have been doing it ever since. to start to see year-over-year comparables start to accelerate again. TWST: Thank you. (LMR) Right now, we’re on a decelerating mode. We’re not going go to negative, but if we start to see year-over-year comparables start to Note: Opinions and recommendations are as of 05/20/11. reaccelerate, that’s the catalyst to get some of the more near-term- minded investors back involved in the group. But I’ll tell you, in JOHN PITZER early 2010 we put out a target on the stock index of 500 when the Managing Director stocks were under 300. We hit 470 earlier in the spring, and I still Credit Suisse think 500 is an easy price target, back now down around 434 today. 11 Madison Ave. TWST: Please tell us about your background and how (212) 325 2000 you got involved in the semiconductor space. (212) 325-6665 — FAX Mr. Pitzer: My background is I graduated from Harvard www.credit-suisse.com ANALYST INTERVIEW An Overview of Semi Manufacturing Equipment

MEHDI HOSSEINI — SUSQUEHANNA FINANCIAL GROUP LLLP

MEHDI HOSSEINI joined Susquehanna Financial Group LLLP in August of 2010 as the

Senior Analyst covering the semiconductor manufacturing — capital equipment,

foundries, outsourced assembly/test — and clean tech sectors. Prior to this, Mr. Mehdi

was a Senior Vice President at FBR Capital Markets where he led FBR’s semiconductor

manufacturing and clean tech research. He started his research career at CIBC Oppenheimer

in early 1999, before joining SoundView Technology Group in mid 2000 to focus on the semiconductor manufacturing and EDA sectors. In addition to his equity research experience, Mr. Mehdi has more than five years of direct industry experience in the semiconductor industry, having worked at National Semiconductor

Corporation in multiple capacities. Mr. Mehdi earned his B.S. and M.S. in electrical engineering from the University of

Florida, and his MBA from the Tepper School of Business at Carnegie Mellon University.

SECTOR — SEMICONDUCTORS equipment or provide services used to make semiconductor chips. (ACM807) TWST: You cover semiconductor capital equip- What is a semiconductor chip? If you just take your iPad or iPhone, ment and clean energy companies. inside those gadgets there are many tiny Are the two related? Highlights chips that make the iPhone work the Mr. Hosseini: No, they are way iPhones work. These chips are pro- not entirely related. Some may try to Mehdi Hosseini offers an overview of his duced in a very sophisticated, very cap- draw the comparison, but we believe coverage of the semiconductor capital ital-intensive ways. How capital that semi cap industry is a cyclical one equipment sector, and he discusses some intensive is the process? It costs billions but with more innovation. Clean tech is of his favorite stock picks in the sector. He of dollars to build a factory that churns one that is evolving, though the amount says innovation in the sector is currently out the components, which are the chips of R&D is relatively much less than it accretive rather than revolutionary, and that go into the iPhone. The reason it is is in the semi manufacturing. Addition- he says barriers to entry are high. so expensive to build such factories is ally, clean tech and, specifically, solar Companies include: Yum! Brands (YUM); because there’s a lot of intellectual are commoditized. There is very little Apple (AAPL); Applied Materials (AMAT); property and innovation that has to go intellectual property in solar, but there Varian Semiconductor Equipment into making these chips. In my opinion, is a lot of intellectual property in semi- Associates (VSEA); Teradyne (TER); it has been the innovation in the manu- conductor manufacturing that has Taiwan Semiconductor Manufacturing facturing of the components or the chips helped with the introduction of new Company (TSM); NVIDIA Corporation that has enabled, over the past 20 to 30 consumer electronics like the iPhone (NVDA); Qualcomm (QCOM); Broadcom years, the introduction of personal com- and tablets. On the other hand, clean Corp. (BRCM); Intel Corporation (INTC); puters, then handsets, then game con- tech has yet to find a way to innovate Texas Instruments (TXN); Lam Research soles, and now iPhones and tablets. since R&D budgets are so small. And Corporation (LRCX); Novellus Systems Without those innovations in manufac- when there is R&D, clean tech has yet (NVLS) and National Semiconductor turing, such consumer electronic gad- to be able to scale and commercialize it. Corporation (NSM). gets could not be mass produced at TWST: When you say affordable prices. Those innovations “semiconductor manufacturing,” cost money, and the companies that I

what does that mean? cover under the semiconductor manufacturing label are the ones 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted Mr. Hosseini: That means companies that either make that provide such innovations. Some of them innovate and develop ANALYST INTERVIEW — AN OVERVIEW OF SEMI MANUFACTURING EQUIPMENT equipment, a tool, that is used in the factory. Some of them innovate curve already. Over the next two to three years, we only expect mar- manufacturing processes that are used in running such equipment. ginal improvement to the equipment. Nonetheless, the research and It’s not like a pastry shop, or it’s not a very low-tech car industry. development done today is more focused on what happens to the When you are making these semicon- semiconductor manufacturing beyond ductor chips, there are literally thou- three years, when the laws of physics sands of steps. As a comparison, in the “The barrier to entry in the start to change. We expect another car industry, there are hundreds of semiconductor manufacturing is very wave of innovation by then, as the steps. So it’s a factor of several- hun high, because these companies that existing equipment and processes dred more steps in manufacturing of make the equipment or provide the would need to change to overcome the these components or chips, which processes have been around for 30 limitations of physics. makes it more complicated to create years. They have spent billions of dollars TWST: Is innovation in the the product compared to the manufac- in innovation. They are now dominant in manufacturing area going to be more the sector.” turing process of other industries. accretive than revolutionary then? TWST: Where are most of Mr. Hosseini: Exactly. But the companies that manufacture the to add to that thought, that means the equipment located? barrier to entry in the semiconductor manufacturing is very high, Mr. Hosseini: Most of the companies that make the equip- because these companies that make the equipment or provide the ment are actually based here in America. We are talking about the processes have been around for 30 years. They have spent billions manufacturers of the equipment, not manufacturing of the chips. On of dollars in innovation. They are now dominant in the sector, and the other hand, most manufacturers that purchase equipment are lo- it prohibits any competition in the manufacturing of the chips be- cated in Asia. Let me give you an analogy. Think of a pizza joint. cause all the initial developmental investment has already been You can find a Pizza Hut (YUM) even in remote areas of China, and done. They will have to spend more on development, but it’s- start there is also Pizza Hut in Paris. But the ovens used in those Pizza ing from a higher base. It’s not like a Chinese company could start Huts are made by only one vendor, and that vendor is based in the from scratch, even if the Chinese government decides to fund such U.S. There are hundreds of these outlets that use the oven, but the companies. You can’t easily duplicate or copycat what these com- oven itself — which is the most critical part of making a pizza — is panies are doing. It takes decades to become competitive in this made by only one company. In the semiconductor manufacturing space. And it’s too late for a brand new company, even with a lot of industry, most equipment used to make the chips are made in U.S., funding, to come in. The barriers to entry are very high. but the factories that make these semiconductor chips are located for the most part in China, Taiwan or Korea. The innovation is done here 1-Year Daily Chart of Teradyne in the United States, and then companies in China, Taiwan or Korea buy the equipment, buy the processes and then they make the chips. TWST: When we look at something like an iPhone, we all see how innovative it is. But the credit goes not only to the iPhone itself or the chips within it, but also to the equipment manufacturers that paved the way for the innovation. Mr. Hosseini: Obviously, Steve Jobs in Apple (AAPL) was ahead of everybody else to think of the iPhone concept. He created something that looks good while offering several different functions. An iPhone is a cell phone. It accesses the Internet. It plays music. It is a camera. He was revolutionary in terms of think- ing of integrating of multiple gadgets into a simple hand-held de- vice. When it comes to actually making the iPhone, those little chips Chart provided by www.BigCharts.com inside the iPhone could not have been made without the advanced equipment used in semiconductor manufacturing factories. TWST: Will there be consolidation in the space? TWST: Is the capital equipment sector undergoing Mr. Hosseini: That’s a debate. This is an area where revolutionary changes right now? you’re going to get differences of opinion. Some believe that there Mr. Hosseini: No, we have gone through the revolution- is more consolidation coming. I disagree. Some may point to recent ary part already. And that’s why the industry is now mature and very examples, such as Applied Materials (AMAT) announcing the ac- much a cyclical one. The changes now happening are at the Steve quisition of Varian Semiconductor (VSEA) at a very steep pre- Jobs level, where companies are figuring out how to put together mium. I would counterargue that just because Applied Materials these chips together to provide innovative consumer electronics. bought Varian Semi it doesn’t mean that it was a rational and a Obviously, the manufacturing part of it has to continue to evolve and good business decision, or that it necessarily means we are going to improve, but we are not in the early part of that change. The manu- see more of that. I think the industry has already matured and al- facturing portion has matured. They have to continue to improve, but ready consolidated. There is no more value created by M&A. These the industry is not at the early stage. It has gone through the learning companies are sitting on a lot of cash. So sometimes there is an in- ANALYST INTERVIEW — AN OVERVIEW OF SEMI MANUFACTURING EQUIPMENT vestor group that says you have to go use your cash, you have to go Broadcom (BRCM) and others on a contract manufacturing basis. purchase companies because you have to do something with that Why do I like them? I like Taiwan Semiconductor because over cash you have. That doesn’t mean this is the right thing to do. I thinkthe past 10 years it has become a leading manufacturer of semicon- equipment companies should give some of the cash back to inves- ductor chips. What does that mean? Well, companies like Apple tors by giving out dividends. The rest should be focused on invest- need Taiwan Semi to make their chips for them. Companies like ing in the future. As I said above, the industry will in a few years Broadcom and NVIDIA rely on Taiwan Semi for making the reach the limit of semiconductor chips, since they don’t have any man- physics, and new types of equipment ufacturing capability. would need to be introduced. This re- “The industry will in a few years reach Taiwan Semi, over the past quires investment today to enable an- the limit of semiconductor physics, and 10 years, has been investing so much other wave of innovative equipment new types of equipment would need to and innovating so much in the manu- in three-years time frame. be introduced. This requires investment facturing process that they have be- TWST: Why was the today to enable another wave of come a leading high-tech merger unwise? innovative equipment in three-years manufacturer. They are not that far time frame.” Mr. Hosseini: When you from Intel (INTC). Intel has histori- merge with another company, you get cally been viewed as a company that access to the other company’s cus- is years, if not decades, ahead of com- tomer list. You get access to the intel- petition because of innovation. Intel lectual property. You can also realize synergies by removing and Taiwan Semi are not competitors, but they share one thing. duplicate costs and duplicate positions. So you get an opportunity They both are the best in making semiconductor chips. Intel makes to grow your revenue faster and also reduce the cost so that your the chips that they sell themselves. They make the key components profitability improves at even a faster rate. That’s the basic nature that go to the computer. Taiwan Semi makes the chips for a diverse or the reason for a merger. group of customers from computing, communication and consumer The equipment companies over the past 10 years have end markets. Essentially, Taiwan Semi is nearly as capable as Intel, resized their operation by reducing the fixed cost and by moving but with a much diverse customer list. manufacturing to low-cost regions and employing temp workers.

And they have done this to better cope with the current cyclical 1-Year Daily Chart of Taiwan Semiconductor Manufacturing Company nature of the industry. Thus, mergers right now won’t really result in significant cost savings since companies are already lean. Addi- tionally, since the industry is already consolidated, there are no synergies among different products. Putting all together, we don’t see meaningful revenue nor cost synergies to help rationalize M&A in the capital equipment industry. TWST: So you’re almost competing with yourself. Mr. Hosseini: Right. Another important factor impact- ing the industry is that customers have also consolidated. There used to be many manufacturers in the U.S., Europe, Taiwan and China making chips. They all needed to buy equipment from U.S.- based equipment companies. Well, currently most chips are made either in Taiwan, Korea or China. Many semiconductor manufac- Chart provided by www.BigCharts.com turing factories in U.S. and Europe have either closed, gone bank- rupt or adopted a manufacturing outsourcing strategy. This has resulted in a significant reduction in the number of semiconductor TWST: What is it about Taiwan Semi that allowed manufacturers. For example, in the late 1990s, the top 20 semi them to position themselves so well? manufacturers accounted for about 70% of all equipment pur- Mr. Hosseini: They have been adding innovation since chase. This mix has risen to about 90% as of 2011, given the early on, back in early 1990s, when they’ve started to recruit the consolidation among semiconductor manufacturers, which is ad- best Ph.D.s, the best brains from TI (TXN), from Intel, from all versely impacting the equipment companies. of these other companies. And at the same time, they also were TWST: Who do you like within your space right now? making investments in their products. They’ve spent billions of Mr. Hosseini: I like two companies. One is a small- to- dollars in R&D and purchasing the most leading-edge equipment mid-cap company, Teradyne — ticker is TER — and which makes for their factories. That R&D and investment in their factories the equipment used to test the chips. The other company is Taiwan over several decades has enabled them to pull away from competi- Semiconductor, ticker TSM, a large-cap based in Taiwan, and tion. Early on, we talked about how this is all about innovation which is a contract manufacturer. Taiwan Semi buys equipment and that the barriers to entry have gone up dramatically. It’s -be from the likes of Applied Materials and Teradyne, and makes the cause Taiwan Semi has been investing billions of dollars for de- chips for others like NVIDIA (NVDA), Qualcomm (QCOM), cades, and now it’s time to benefit from those investments. ANALYST INTERVIEW — AN OVERVIEW OF SEMI MANUFACTURING EQUIPMENT

TWST: What about Teradyne? phone, but also behind chips and the manufacturing of chips. Mr. Hosseini: Teradyne is a leading company that sells Mr. Hosseini: It’s very scientifically driven, and it kind testing equipment. I like them because they have already had a cor- of intimidates people. It is my job to dumb it down by making it rection in their incoming orders late last year, so that comparison easy, simple and quick to understand. Unfortunately, some of the becomes — the second half of 2011 is relatively easier versus 2010. key details are set aside as we try to make it simple for investors Teradyne is also a net share gainer that can help it grow faster than TWST: For investors, do you need to be technical to industry average. Some of the other equipment companies that I invest in this space? cover, like Lam Research (LRCX) and Novellus (NVLS), they are Mr. Hosseini: No, it’s part of my job to hold their hand. just beginning to see weakness in their business. Teradyne went TWST: Thank you. (LMR) through this 12 months ago, and they are now coming out of it. TWST: How did you become a semiconductor Analyst? Note: Opinions and recommendations are as of 05/26/11. Mr. Hosseini: I was recruited by National Semiconduc- tor (NSM) in the early 1990s after obtaining my master’s degree in MEHDI HOSSEINI electrical engineering to do nothing but R&D. But only after a few Analyst years I realized I wanted to utilize my technical and analytical edu- Susquehanna Financial Group LLLP cation and experience to venture into the investment field. The sell- 401 City Ave. side Analyst career attracted me, and what gets me very excited Suite 220 about doing this is that this industry is very dynamic Bala Cynwyd, PA 19004 TWST: The general public and many investors don’t (610) 617-2600 always realize how much innovation goes not just behind a smart- www.sig.com ANALYST INTERVIEW Auto & Industrial Sectors Drive Semiconductor Demand

STEVE SMIGIE — RAYMOND JAMES FINANCIAL, INC.

STEVE SMIGIE joined the Raymond James Financial, Inc. technology group in August

2001; he covers the analog and communications semiconductors sector. Mr. Smigie

has been cited twice as a top semiconductor stock picker in Investor’s Business Daily,

is quoted frequently in numerous press publications and appears on Bloomberg

Television and Radio. Before joining Raymond James, Mr. Smigie worked for Needham

& Company, LLC, where he spent four years working in investment banking and equity research. Mr. Smigie earned a bachelor’s with honors from Bucknell University and an MBA from Duke University’s

Fuqua School of Business.

SECTOR — SEMICONDUCTORS stantial changes in the amount of semiconductor content. This is (ACM802) TWST: What companies do you cover in the semi- particularly true in auto, where the amount of semiconductors in conductor space? the car is growing fivefold or more. We are in a phase where cars Mr. Smigie: I primarily han- are being radically transformed. A dle analog semiconductors. The largest lot of systems are shifting from me- Highlights company in my coverage would be chanical or electromechanical sys- Texas Instruments (TXN), which is tems to semiconductor-based Steve Smigie offers an overview of his buying National (NSM). I also cover systems. For example, it may be a coverage of the semiconductor industry, Linear (LLTC), Maxim (MXIM), water pump, a hydraulic system or a and he discusses trends driving growth in ADI (ADI), and companies like Fair- power-steering system that is now the sector. Demand for semis is burgeoning, child (FCS), International Rectifier shifting over to semis. So you have he says, as cars and white goods (IRF) and Diodes (DIOD). I do Inter- got pretty significant changes in the increasingly incorporate semiconductor sil (ISIL) and Power Integrations car overall. But then you’re also technology because of rising metal prices (POWI) — those types of companies. seeing a lot of new features in the and stricter energy efficiency standards. TWST: What are the key cars that benefit semiconductors. Mr. Smigie also discusses macroeconomic investments and trends you are look- All the sensors impact the semi headwinds in the sector. ing at in the semiconductor sector? area. You have rain sensors, low- Companies include: National Semiconductor Mr. Smigie: I think what’s pressure tire sensors and just about Corporation (NSM); Texas Instruments really interesting in the space right every other kind of sensor you can (TXN); Linear Technology Corporation (LLTC); now are the auto and industrial mar- think of. We are also seeing a lot of Maxim Integrated Products (MXIM); Analog kets. Traditionally, when you think stuff being put in the car in terms of Devices (ADI); Fairchild Semiconductor about semi companies, you focus on safety features such as cameras, like Corporation (FCS); International Rectifier IT or information technology/comput- rearview cameras that are going to Corporation (IRF); Diodes (DIOD); Intersil ing. Then we saw consumer electron- be mandated for new cars that rely Corporation (ISIL); Power Integrations ics start to become pretty important on semiconductors. You will have (POWI); Intel Corporation (INTC); Semtech over the last several years. That spilled semiconductors if you are putting a Corporation (SMTC) and Microsemi over into the smartphone category, and camera in your display to help you Corporation (MSCC). both smartphones and tablets continue see the rear of the car. Then you to be pretty important in that consumer have all the other features in the car, electronics area. such as an MP3 player, a GPS and other items. That said, what I think is even more exciting in my space There are a number of things going into a car now that are 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted right now is really auto and industrial, where you’re seeing sub - pretty significantly changing the automobile. Some of the stuff is ANALYST INTERVIEW — AUTO & INDUSTRIAL SECTORS DRIVE SEMICONDUCTOR DEMAND beneficial in that it gives you better performance. And some of the more efficiently around that time? Maybe they will offload it. In that changes are in the drivetrain or electromechanical systems, and way the utility, for example, won’t have to build out as much peak those also take a lot of weight out of the car. That helps the car’scapacity, because people will come up with better ways or more ef- move towards energy efficiency standards. ficient times of the day to use their power. So there is a lot of stuff TWST: You said another exciting area is the industrial like that coming out that’s really pretty exciting. side. What’s happening with that area? TWST: Do you think the market for semiconductors is Mr. Smigie: Yes, industrial is another important area good right now? right now. A number of those products that are making the car more Mr. Smigie: I believe so. My companies have been put- exciting also apply in certain instances ting up record revenues and record to the industrial market. It does de- profits because a lot of these indus- pend somewhat on what you want to trial-type markets carry much higher call the industrial segment. Industrial “My companies have been putting up gross margins. So I think it’s been is kind of a catch-all category. Some- record revenues and record profits good. That is somewhat dependent thing that really straddles industrial because a lot of these industrial-type on the macroeconomy. And that’s and consumer might be the white markets carry much higher gross been not great obviously. But it goods markets, which includes things margins.” seems to be steadily improving and like washing machines, clothes dryers, certainly on the positive side, with air conditioners. In those items you China, Brazil and the other emerging are seeing new systems to replace the markets coming out. That’s created a copper and iron used to create some lot of demand for these products, and sort of motor to make the device operate. You are seeing a shift to that’s definitely been our key in keeping these guys going here. variable-speed motor solutions, which are five times more energy Generally speaking, I think things are headed in the right direction efficient, and that’s pretty significant. Energy efficiency is some- — obviously in fits and starts here now — but generally I think thing that many people have thought about, not just from a con- we are going in the right direction. sumer perspective, but also from a government perspective, where One thing that is a little bit of a challenge is you’ve seen governments are mandating certain energy efficiencies in consumer the price of gold go up, and that is a meaningful input cost for a items. In addition to that, oftentimes they work better with the new lot of these companies that use the gold wire for the chips to vari- systems, so your wash cycle damages your clothes less or your ous boards, basically. If the cost of gold has gone up quite a bit, freezer does a better job of freezing the ice cream or whatever it is. it’s really forced the companies to figure out other ways to take Then, as you’ve seen, the rise in the price of copper and other met- costs out to offset that. Or to just start to shift to copper, which als like that, it’s made some of these new solutions more cost com- although that’s going up, it’s still less expensive that gold. Another petitive. Additionally, the cost of semis has come down in the past option is to switch to some other metal, but that’s been a signifi- few years. You’re at a point where the cost of a semiconductor solu- cant problem. Obviously they have higher oil prices, which cre- tion is affordable. And you’ve got similar costs with metal, but ates the higher freight costs, and obviously that would impact much better energy efficiency with the semi, so there are a lot of every company out there. But that impacts margins somewhat. So reasons to switch over. some of the rising cost of those inputs, particularly gold, have On the industrial side, smart metering is becoming a big been a little bit of a negative on the space. market, and it will become even more significant. There are a couple of key pieces to smart metering. One issue is that now, when the 1-Year Daily Chart of Diodes company checks your meter, the guy comes to your house and checks your meter. Instead of doing that, we are going to have a smart meter that feeds information back to the utility through some sort of power line communication or some sort of RF communica- tion. That means the guy doesn’t have to come out to the house, so you save money there. And it also makes for more accurate metering. Then within the home — you only see it on a small scale now, and I think it will take some time to roll out — people are able to connect their devices to some sort of internal system that measures how much power consumption is used for each device. So the consumer can put a figure out, “Hey, what do I need to use less of if I want to save energy?” Also with the smart metering, it is giving utilities the ability to do tariffing or charging different prices depending on the Chart provided by www.BigCharts.com time of the day the consumer uses the energy. So they might see everybody comes home from work between 5 p.m. and 7 p.m., and TWST: How are the stocks doing? energy usage goes way up. So what do I charge people at those high- Mr. Smigie: Generally speaking, stocks have been moving up peak times that may force people to figure out ways to use energy in my space fairly nicely and have had pretty nice returns. Starting ANALYST INTERVIEW — AUTO & INDUSTRIAL SECTORS DRIVE SEMICONDUCTOR DEMAND back from the financial bust, the general direction has been a pretty which was a very meaningful positive increase in revenue and meaningful move upwards. Again, you have maybe a two- or three- gross margin for those guys and helps them dominate the satellite month period where they back off a little bit and then start resurging. market. Those guys consistently deliver, and there is not a lot of In general, my names, anyway, have been moving up pretty nicely. I seasonality in that business, which is in contrast to a consumer think the Semiconductor Index stocks having been doing fairly well. company, where you might see variations quarter to quarter. Those As I mentioned, I think industrial is becoming pretty important for are some of the names I like right now. my space, but you do still see it react to a lot of the PC issues. And TWST: Is this a good space for investors to be looking at? lately there have been some negative data points on PC. Some of the Mr. Smigie: I believe so. I mean there are always going data points seem like they’re weakening, but then the companies to be minor ups and down here and there. But I think, generally report good numbers, like Intel speaking, the trend is going to be up (INTC). But then continued data “There are some very solid trends out from here. If you look at the year- points to PC softness. So that’s onethere: tablets, smartphones, increased over-year growth rates in the Semi- area, in addition to some near-term industrial applications, increased conductor Industry Association data concern on inventory, that is going to semiconductor-related content — typically as you start to see those weigh on semi stocks. However, the increases in cars, medical devices year-over-year growth rates start to general direction has been up. becoming more portable so that you accelerate — it is typically a good, can have it in the home instead of TWST: Who are your fa- positive indicator of stock perfor- having go to the hospital to use those vorite picks right now and what is it mance. It looks to me like the current devices. All these things will continue about those stocks that you like? to drive semiconductor growth.” year-over-year growth rates have Mr. Smigie: I like Fair- started to reaccelerate, so that should child Semiconductor (FCS) and Di- be encouraging as well. As long as the odes (DIOD), Semtech (SMTC), ADI (ADI), and Microsemi economy is generally heading up, that’s always going to be good for (MSCC) are sort of my top picks right now. Fairchild, which is my semiconductor-type companies. favorite pick right now, has a nice gross margin leverage story There are some very solid trends out there: tablets, smart- where they’ve significantly increased their gross margin over previ- phones, increased industrial applications, increased semiconductor- ous peaks, as they have been mixing in a better set of products. And related content increases in cars, medical devices becoming more they’re the least expensive name in my space. Diodes continues to portable so that you can have it in the home instead of having go to be one of the best executors out there, doing a great job of deliver- the hospital to use those devices. All these things will continue to ing, and has a very savvy CEO. With regard to ADI, I think they’ve drive semiconductor growth. Maybe overall, as an industry, semi- got very strong franchises in the converter space, and they continue conductors are becoming large. And obviously as you hit the law of to leverage their expertise there. They have a new CFO who has large numbers, that makes it more difficult. But that doesn’t mean been in the position a couple of years now, but he has been pretty you can’t find companies that are exposed to strong growth markets instrumental in helping to restructure the margins there, and they that are going to have outperformance. had a significant uptick in margins with his help. Semtech is a very interesting story. They’ve got some 1-Year Daily Chart of Fairchild Semiconductor Corporation great secular drivers there. They are tied to the rollout of 40- and 100-gigabit-per-second Ethernet, where obviously there are all these carriers out there are trying to handle all the demand on them for data and video, and so you’re seeing some of the long-haul net- works start to deploy the 40-gigabit-per-second Ethernet. You’ve got roughly a quarter of Semtech’s business levered to that, which is a very high-growth market right now. Then they’ve got another big chunk of their business — 40% of revenue — in the area called protection, which is basically sort of like mini surge suppressors. What’s really exciting now near term is that you’re seeing all these new tablets and smartphones come out. And most of those have touch screens and need a lot of protection devices on those tablets and smartphones to keep you, as a person, from discharging the Chart provided by www.BigCharts.com electricity in your body to the touch screen and damaging the de- vice. You have to put protection around that to keep that from hap- pening, so they are leveraging that. TWST: You mentioned the macroeconomy and that a Finally, I like Microsemi, which is a very steady story. certain amount of semiconductor growth depends on it. Is there It has a lot of military and aerospace-type applications, somewhat anything else on the horizon that could derail the outlook for of a different mix from a lot of the other guys. They’ve been gen- the semiconductor companies? erally executing well. They have been out there doing some really Mr. Smigie: I’m sure there is something out there that can very good acquisitions. One recent significant one was Actel, come up. I mean, you’re seeing a little bit of PC weakness overall. If ANALYST INTERVIEW — AUTO & INDUSTRIAL SECTORS DRIVE SEMICONDUCTOR DEMAND it continues to be pretty negative, that’s not helpful to semis. I guess working in this space for 15 years now. I would say that the gold price going up, which we talked about, TWST: Thank you. (LMR) could be something that may negatively impact the sector. If that continues to go up, that’s a real hit to the gross margins, and peopleNote: Opinions and recommendations are as of 5/13/11. watch gross margins of semiconductor companies pretty closely. TWST: Would you tell us about your background and STEVE SMIGIE how you became a semiconductor Analyst? Vice President, Equity Research Mr. Smigie: I started at a firm called Needham & Com- Raymond James Financial, Inc. pany, which has a very strong position in the tech area, and I did 880 Carillon Pkwy. investment banking there for about four years. Then I spent a couple St. Petersburg, FL 33716 of years at business school at Duke getting my MBA. Then I came (727) 567-1000 to Raymond James as a semi Analyst, which I have been doing for (800) 248-8863 — TOLL FREE the past 10 years. So I guess I got into the sector and have been www.raymondjames.com ANALYST INTERVIEW Consumer Trends in the Semiconductor Space

RAJVINDRA GILL — NEEDHAM & COMPANY, LLC

RAJVINDRA GILL joined Needham & Company, LLC, in 2008. Previously, Mr. Gill was a

Senior Associate at Jefferies & Company, Inc., where he covered large-cap enterprise storage

and communication equipment companies. Prior to Jefferies, he was an Associate Analyst at

Credit Suisse, covering large-cap IT hardware companies across multiple sectors: PCs,

printers, hard disk drives, enterprise storage, servers and distributors. Before moving to Wall

Street, he spent five years at Lucent Technologies Inc., where he was Business Development

Manager, Product CFO and Corporate M&A Manager. Mr. Gill received undergraduate degrees in finance and information technology from George Washington University and a Master of Science in finance and management from Babson College.

SECTOR — SEMICONDUCTORS first one, which is the major theme, is around the proliferation of (ACM803) TWST: What is your coverage within the semicon- capacitive touch interfaces across the mobile handset industry and ductor space? adjacent markets. In our view, capacitive touch will be the predomi- Mr. Gill: I cover 14 companies. They include some con- nant interface for consumer electronics over the next several years, sumer semiconductor companies, as and any mechanical interface where well as what I call specialty memory there are buttons or styluses will even- Highlights companies. In terms of consumer semi- tually be replaced with the touch conductors, these are semiconductor screen. So that’s something we are Rajvindra Gill discusses leading trends companies that are exposed to the PC looking at. It’s a huge unit market- op driving semiconductor demand. He says market, the mobile handset market and portunity in the handset space. We’re touch screens will soon become the the consumer electronics market. Then looking at about 400 million handsets predominant interface in consumer on the memory side, I cover companies in 2011. We expect that particular mar- electronics and demand for lower-energy involved with specialty memory versus ket, just in the handset market, to grow semis is already increasing. Mr. Gill says commodity memory. at about 50% to 60% unit CAGR over home networking, mobile broadband and TWST: What do you mean the next four to five years. automotive are driving demand for semis. by “specialty memory”? The second theme is around Companies include: Cypress Semiconductor Mr. Gill: Specialty memory is home networking. Basically, the idea Corporation (CY); Atmel Corporation highly specialized memory that goes around home networking is that every- (ATML); Synaptics (SYNA); Entropic into things like routers and base stations thing in the home is going to be con- Communications (ENTR); Broadcom and switches in the communications in- nected to everything else. So users are Corporation (BRCM); Zoran Corporation dustry. They have longer design cycles demanding increased connectivity in (ZRAN); CSR PLC (CSR.L); Silicon Image than regular memory chips. They store devices. That means your TV will be (SIMG); TranSwitch (TXCC); Verizon higher-bit-level data, and they are seen networked with your set-top box, your Communications (VZ); AT&T (T); NVIDIA as more accurate versus commodity PC and your mobile phone. They are Corporation (NVDA); Qualcomm (QCOM); memory. These are the things that you all going to be connected to each other, OmniVision Technologies (OVTI); Advanced normally think of when you think of and all these devices are going to re- Micro Devices (AMD); Intel Corporation computer memory, like flash memory quire very advanced video processing. (INTC) and Adobe Systems (ADBE). that goes into handsets or into portable They’re going to require some sort of media players. connectivity, whether that’s through an TWST: Within consumer and specialty memory, what Ethernet, wireless or different standards within the home, such as

are the important investment themes now? multimedia over coaxial cable. Essentially, when all these devices 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted Mr. Gill: I’m probably looking at about four themes. The are connected, it creates a lot of opportunities for the semiconduc- ANALYST INTERVIEW — CONSUMER TRENDS IN THE SEMICONDUCTOR SPACE tors that are supplying into that market. Additionally, we are seeing home-networking theme? video driving up the attach rates for WiFi. Mr. Gill: Within home networking, the leader right now The third theme we’re looking at is around what we call is Entropic Communications (ENTR). We don’t cover Entropic, mobile broadband. This includes all the mobile devices, whether but it is one that we’re looking at closely. Broadcom (BRCM), they’re smartphones, tablets or portable media players that are con- Zoran (ZRAN) and CSR (CSR.L) are also important players in this necting to the Internet. And you need mobile broadband connec- space. Silicon Image (SIMG) is probably a higher priority one. tions to link these devices. Mobile is going to overtake fixed They will play with this home networking theme. Silicon Image broadband connections, including DSL and cable modems. So supplies transmitter chips — what is called mobile high-definition you’re seeing access speeds increase link — to mobile phones that enable as we go from the EDGE network to “Mobile is going to overtake fixed the seamless transfer of uncom- 3G to HSPA, and then eventually the broadband connections, including DSL pressed video and audio to DTV LTE networks, what you call the and cable modems. So you’re seeing through an active or passive cable. fourth-generation network. That’s access speeds increase as we go from TranSwitch (TXCC) is another one going to create a significant amount of the EDGE network to 3G to HSPA, and that we would focus on. They all have opportunity for semiconductors with then eventually the LTE networks. . . . different types of roles in this home the rollout of LTE networks around That’s going to create a significant networking theme. With respect to amount of opportunity for the world, and the requirements are Silicon Image, basically they’re on semiconductors with the rollout of LTE going to be more around processing your mobile phone to connect your networks around world.” video conferencing and video data. So TV. So you can transfer data from they are backhaul data modems. There your mobile phone to your TV, and are a lot of companies that are about to emerge on the semiconduc- TranSwitch is developing something similar. tor side from that major trend. TWST: Does the videoconferencing subtheme have TWST: What is the fourth trend? different leading names? Mr. Gill: The last one is a subtheme within LTE. It’s Mr. Gill: I would say that would be the third and fourth more about the trend of video conferencing and video calling, theme. The third theme would be mobile broadband, and then the because we think the next application for the deployment of these subtheme would be the deployment of LTE networks. These are fourth-generation networks is going to be video conferencing. With Long Term Evolution networks, or what we call fourth-generation our coverage universe, that creates the need for primary and second- networks. One of the big applications of the 4G networks that are ary cameras on devices you are using for video calling. And they coming out of Verizon (VZ) and AT&T (T) is going to be the abil- require very high-quality camera sensors. There are a lot of names ity to do video conferencing and video calling over a cellular net- within each of those spaces that are going to be benefiting from work. You saw the massive growth of data over the last five years, each of the different trends. So within the touch trend, we think the text messages, e-mail, surfing the Internet over your mobile device standouts are three main names, Cypress (CY), Atmel (ATML) and or with your smartphone, your tablet. The next application is going Synaptics (SYNA). We cover all three. to be sending video applications that require massive amounts of TWST: What sets Cypress, Atmel and Synaptics apart bandwidth, massive amounts of processing of the video. from other players in the touch space? Mr. Gill: They are the market leaders and the dominant 1-Year Daily Chart of Cypress Semiconductor Corporation players right now in the touch space. There are not a lot of players in the market right now, and those three probably control maybe 90% of the market, split fairly equally among the three. I think that the main characteristics of these companies that give them the edge are around the accuracy of the controller, the precision of it and the fact that very low power is needed for the controller. When you buy a handset with a touch screen phone, it generates a lot of power when you touch your finger on the sensor. You need very low-power controllers to reduce that power frequency. You also need the ability to scale. So the product cycles in the handset market are very short. Every nine to 12 months, new phones come out, and there are many different models that come out in between the major phone Chart provided by www.BigCharts.com launches. There are probably 20 to 30 different models, and they’re all sourcing different components. So you have to have a lot of scale. You have to have the ability to deliver the product on a timely One player we like in that particular segment is NVIDIA basis with high quality. These are all different features that Cypress, (NVDA). We have a “hold” on NVIDIA right now, but that’s a Atmel and Synaptics are good at. We prefer Atmel and Cypress theme they’re going to play into.Qualcomm (QCOM), which we over Synaptics because they have a better business model. don’t have a rating on and don’t cover, is another player there. TWST: Which companies are best positioned in the What we would see as more of a derivative player of LTE is Om- ANALYST INTERVIEW — CONSUMER TRENDS IN THE SEMICONDUCTOR SPACE niVision (OVTI). OmniVision provides camera sensors for mobile We think it could get worse in 2012 as Intel and AMD fully ramp phones and tablets, and I think when you see more LTE deploy- their integrated graphic efforts. They’re more of the mainstream ment, you’re going to see both front and back cameras, kind of market. We started to see these growth rates start to decelerate at what you see in the iPhone 4 now. And OmniVision is the primary the most recent earnings call. supplier of both those cameras, and they supply very high-quality The second thing that I’m worried about is more around cameras. Their cameras have image sensors that can capture light the professional graphics business. That’s been flat over last year. In very effectively. They’re very thin, so addition to selling graphic cards for they don’t take a lot of space in the the gaming consumer segment, they handset. They process the video at a sell graphic cards to the enterprise. “A lot of companies benefit from the very fast 60 frames per second. These are automotive companies, automotive trend. They have not Two other trends we received a lot of focus from the Adobe (ADBE), building companies, haven’t yet discussed are the- automoinvestment community, but it is a very CAD systems. If you’re going to engi- tive and industrial semiconductor big theme, and it’s a a big driver of neer or build a building, you need to area. For example, with automotive, increased semiconductor material. The simulate it using NVIDIA’s very increasingly there is more semicon- good thing about this sector is that high-end graphic cards. That is their ductor content in cars now to drive there are very long design cycles.” professional workstation business, as electronics. Infotainment systems, we call it. That has been roughly flat navigation systems, are becoming for over a year. We think they peaked more advanced. They are becoming out to revenue last year. I’m worried 3D. In terms of the interface, you have more semiconductor con- that business might not grow as much in 2011 and 2012 or can’t get tent controlling parts of the engine, and that is a big theme that is better than what it had been in the past. going on somewhat under the radar. You’ve seen a lot of compa- TWST: Who do you like right now? nies benefit from the automotive trend. They have not received a Mr. Gill: In terms of top picks, we like OmniVision. lot of focus from the investment community, but it is a very big OmniVision is primarily exposed to a multiyear secular trend in theme, and it’s a a big driver of increased semiconductor material. proliferation of the image camera sensors in smartphones, both for The good thing about this sector is that there are very long design primary cameras and secondary cameras. Also, there is an increas- cycles. So if you get designed into an automotive or industrial ing mix of 5-megapixel and 8-megapixel camera phones, so these product, you’re designed in for four or five years or so. phones are going to have to have that type of quality. I would es- TWST: You mentioned a couple names you don’t timate that 5-megapixel and above sensors account for only 15% cover and don’t have ratings on, but you look at them closely. of the overall 1.3 billion handset market, and we expect 5-mega- Are you thinking of adding them to your coverage? What pixel and above sensors to double over the next two years. There makes you decide to add a name to your coverage? is a big trend going on there. Mr. Gill: We start with identifying themes, where we think the big themes are going on in the industry and then we look 1-Year Daily Chart of OmniVision Technologies at who we think the leaders are within those themes. There we look at other company-specific things, such as whether there is margin expansion, whether they have a competitive position. And then we look at valuation — is it an expensive stock or is it a cheap stock? The last thing we would look at is whether it is well covered by a lot of analysts. We’re looking at a different angle on the story to create value in the investment community, because we have more of a holistic approach to the space than say XYZ analyst from another bank. It’s kind of how we look to expand coverage. TWST: You said you have a “hold” on NVIDIA right now, but that it is well positioned to benefit from current trends. Why do you have a “hold” rating? Mr. Gill: I think one of the main reasons is that growth Chart provided by www.BigCharts.com rates in their core business, graphic cards, are decelerating. That business is still about 50% of their sales. Actually the growth rates Within that trend there is also this technology transition for graphic cards have declined, and in some years, decelerated that’s happening. So you have a technology transition from what we since 2007. And when we look out to 2012, 2013, we think the call front-side sensors to back-side illumination sensors. These are market for discrete graphics — standalone graphic cards — is higher-quality sensors. That’s increasingly becoming popular probably going to shrink. That’s mainly due Intelto (INTC) and among the handset OEMs. The iPhone 4 is a perfect example. With AMD (AMD), which are coming in with integrated graphics so the iPhone 4, they really made a big deal about the great high- you can buy a computer that will have the same graphic function- quality camera sensors in the phones so you can do video recording ality on the CPU. That’s a problem that’s going to be prolonged. in high definition, you can take good-quality images. So you’re ANALYST INTERVIEW — CONSUMER TRENDS IN THE SEMICONDUCTOR SPACE going to see an increase in other OEMs also that incorporate these for stocks that are countercyclical, meaning they’re going to grow new back-side illumination sensors. That’s the trend, number one. even if we’re out of the cycle. What that means is they’re going to Number two, their gross margins are going to be expanding over the grow even if demand starts to slow down, and we’re seeing a next couple of years. That’s primarily due to rising ASPs for the buildup of inventories. company, and there is a mix shift of these higher-priced 5- and TWST: Is there anything else you’d like to add? 8-megapixel sensors. And then they’re reducing a lot of the cost in Mr. Gill: Just to reiterate what we said a minute ago, the their sensors. As a very key valuation, the stock is trading around 10 main things when we look at in the industries are those four traits: times earnings, whereas we think it should be trading more closely countercyclical stocks, stocks that have individual product cycles, around 15 times earnings. We see this stock around the $50 type of stocks that have good high growth, stocks that have cheap valuation level, and the stock is currently around $34. So we can see another and are showing margin expansion. I think that’s how we would 15 bucks worth of upside for these guys. have highlighted them, and then we focus on themes and top picks I would say that is more broadly true about the semicon- within those themes. ductor industry. I think the way we look at the semiconductor indus- TWST: Thank you. (LMR) try, we look at stocks that are more countercyclical, stocks that are more focused on individual product cycles and their growth stories. Note: Opinions and recommendations are as of 05/23/11. So we look at which companies have big products that are coming out or are tied to big trends. We look at what the valuation is, be- RAJVINDRA GILL cause we’re very focused on valuation. And the last is, are these Senior Analyst companies expanding gross margins? So we don’t want to be buy- Needham & Company, LLC ing stocks that we think have peaked out in margins. We don’t think 445 Park Ave. there’s much room to grow in a company likeIntel , for example. New York, NY 10022 We think margins will be coming down for them and others as (212) 371-8300 well. And they are in a very tight, cyclical PC industry, which we (212) 751-1450 — FAX think is going to shrink. So within that framework we’re looking www.needhamco.com ANALYST INTERVIEW GARP Stocks in the Semiconductor Space

BRENDAN FURLONG — MILLER TABAK + CO., LLC

BRENDAN FURLONG joined Miller Tabak + Co., LLC, in October 2002. Mr. Furlong published a technology strategy newsletter for Miller Tabak for three years, and he then transitioned to technology research sales. In March 2008, he returned to formal research for Miller Tabak covering semiconductor components and equipment. Prior to joining

Miller Tabak, Mr. Furlong worked at two New York-based hedge funds, where his focus was on the technology sector.

He focuses his analysis in the entire hardware food chain, from equipment OEMs to semiconductors, contract manufacturers and distributors. Mr. Furlong earned a B.A. and M.A. from Trinity College Dublin in Ireland, and he holds an associate’s degree in civil engineering, also obtained in Ireland.

SECTOR — SEMICONDUCTORS under coverage fall into that GARP category, with reasonable valu- (ACM800) TWST: What do you cover within the semicon- ations and a the good story behind them, basically. ductor space? TWST: What are the major issues in the space? Mr. Furlong: I cover semiconductors, components and Mr. Furlong: Because semiconductors have become equipment. Some of my names are such a huge industry, they have be- Intel (INTC), Corning (GLW), Highlights come a cyclical business. I think that Avnet (AVT), Arrow (ARW), Avago the cyclical nature of semiconduc- (AVGO), Fairchild Semi (FCS), Brendan Furlong offers an overview of his tors now explains why the valua- Xilinx (XLNX), Altera (ALTR) and coverage of the semiconductor sector. Mr. tions in these stocks are much less Microchip (MCHP). Arrow and Furlongs says the leading theme for the sector than they were in previous cycles. Avnet are not traditional semicon- is growth at a reasonable price. The industry Ten, even five years ago, these ductor companies, but they are dis- has overcome the growth stage and has become stocks were trading with 18, 20 mul- tributors of semiconductors, so that cyclical, he says, and multiples have compressed tiples — and now they are trading is why I cover them. SLAB (SLAB) to reflect the new nature of the space. Mr. 13, 14, 15 multiples. My view is that is a digital semiconductor company. Furlong also discusses his “buy”-rated stocks the reason for the multiple compres- Avago, Fairchild and Microchip and the reasons behind his selection. sion is because they have been are in the MCU and analog space. Companies include: Intel Corporation (INTC); priced more like cyclical stocks than Xilinx and Altera are in PLD space. Corning (GLW); Avnet (AVT); Arrow growth stocks. Intel is microprocessors. So I cover Electronics (ARW); Avago Technologies TWST: Is that because a mixture of distributors and digital Limited (AVGO); Fairchild Semiconductor the semiconductor industry as a and analog companies. (FCS); Xilinx (XLNX); Altera Corporation whole has become so enormous TWST: You cover a (ALTR); Microchip Technology (MCHP); and widespread? broad range. Are there themes Silicon Laboratories (SLAB); Samsung Mr. Furlong: Yes, be- within the space? Electronics (005930.KS); Motorola Mobility cause the size of the industry has just Mr. Furlong: There is Holdings (MMI); Nokia Corporation (NOK); become so big. About 20 years ago, kind of a unifying theme under most Apple (AAPL); Skyworks Solutions (SWKS); semiconductors were a new growing of my coverage. I would say semi- RF Micro Devices (RFMD); TriQuint industry. Now it is a big industry conductors, and the semiconductor Semiconductor (TQNT); Analog Devices with a lot of large numbers in terms distributors for that matter, are in the (ADI) and Linear Technology Corp. (LLTC). of products, end users and produc- category of growth at a reasonable ers. It is such a huge industry that it’s price. I don’t think that semiconduc- hard for it to be in the growth phase tors in general are a growth industry anymore. So it is more of a anymore, because its hard to see just how much more growth there growth, cyclical industry. That makes me a GARP investor, which can be. I know some analysts believe there are still some growth Copyrighted material: For reproduction permission contact Wolfrath (212) Kenneth 952-7400 stands for growth at a reasonable price. Most of the stocks I have stocks within the universe of semis, which I would agree. But even ANALYST INTERVIEW — GARP STOCKS IN THE SEMICONDUCTO R S P A C E if there are a few individual growth stocks, it is certainly not the handset manufacturers don’t use a distributor because they order in norm in the universe anymore. The overriding theme in my opinion, such bulk that they receive it directly. They don’t need a distributor from an investment standpoint, is that the whole semiconductor in- to handle any intermediate process. So the industrial end markets dustry has turned into a cyclical business. are comprised of smaller companies. They aren’t mom-and-pop TWST: What are other important trends in the space? shops by any means. But compared to somebody like Samsung Mr. Furlong: There are probably at least three important (005930.KS), Motorola (MMI) and Nokia (NOK), these compa- trends right now in terms of semis. One is obviously the evolution nies are very small, making industrial widgets. They order in small of the handset from a plain old phone to a smartphone. The smart- quantities. They need to go through the distributors, so that’s pri- phone industry grew 40%-plus CAGR marily where distributors are benefit- last year, and will certainly grow at the ing. Because the industrial markets same pace this year and again next “The second big trend is that the are doing so well right now, the dis- year. This is obviously a huge growth industrial markets have come rolling tributors are also doing quite well. position for semiconductors, or at back after the recession. The industrial TWST: Who do you like least for any semiconductor company markets are phenomenally strong right right now and why? playing in the smartphone market. now, both in the U.S., which is kind of a Mr. Furlong: I’ll start off The second big trend is that surprise, and Europe. That’s helping a with the smartphone trend, if you the industrial markets have come roll- lot of semi companies, particularly the will. My play on that is Avago. analog semiconductor companies.” ing back after the recession. The in- AVGO is the ticker. Roughly 40% of dustrial markets are phenomenally their business is in the handset mar- strong right now, both in the U.S., ket. They sell power amplifiers. They which is kind of a surprise, and Europe. That’s helping a lot of semi have a proprietary technology called FBAR filter. This filtering companies, particularly the analog semiconductor companies. technology is proprietary for them and is giving them an advantage The third important theme is the rebound in the data center/ in the market and helping them to gain market share. They are very communications equipment area. The whole cloud computing and well positioned, particularly as the industry is moving to LTE, virtualization in the enterprise is driving communication equipment. which is 4G. They have just gotten into the Apple (AAPL) iPhone, This also sort of ties in to the first trend, the smartphone trend. People the CDMA version. They are likely to get into the iPhone 5. So they are having trouble getting all the data they want on their cell network are very well positioned. That’s my play on the smartphones. The because of capacity constraints. There is a lot of spending going on in competitors in that specific camp include names like Skyworks wireless equipment. The carriers are trying to increase that capacity, (SWKS), RFMD (RFMD) and TriQuint (TQNT), none of which I so there is a lot of communication equipment spending, both on the cover. TriQuint is probably the nearest competitor, because they carrier side and on the enterprise side. have their own filter technology. Skyworks and RFMD don’t. So I’m riding in the Avago horse, if you will, in that space. 1-Year Daily Chart of Arrow Electronics Then in the industrial end markets, I have “buys” on both Arrow and Avnet. Basically because, “A,” the industrial markets are coming back. And “B,” they’re showing tremendous leverage. They have huge leverage in the model. So part of the reason to be bullish is that the bottom-line leverage is tremendous in the model. So that’s why I’m particularly bullish on both those stocks. TWST: Are there any other specific reasons why you like those companies? Mr. Furlong: Each of those companies dominates their particular markets. After Arrow and Avnet, there really isn’t any- where else to go. There are a bunch of distributors in Taiwan, but Arrow and Avnet pretty much dominate the market. They are reasonably similar companies, by and large, although there are

Chart provided by www.BigCharts.com some individual company-specific things. Right now, Arrow is doing a little bit better. I guess the third leg to the Arrow and Avnet story is that TWST: What about semiconductor distributors? How they tend to do acquisitions. Both of them have been very good in are they doing? acquiring companies at good valuations, and that they can turn into Mr. Furlong: The distributors are doing great because being very accretive in terms of EPS. Recently, Arrow has done distributors are leveraged to semiconductors, obviously, but pri- some acquisitions that have had much higher gross margins and op- marily to the industrial end markets. So they are not really lever- erating margins than the existing Arrow business. And that’s lending aged to the consumer markets. They are not leveraged to the PC more revenue and growth in operating margin leverage. So Arrow is market or the handset market, because most of the handset OEMs doing particularly well at the moment with some of the acquisitions. get shipped directly from the semiconductor maker. The PC and TWST: Do you have any other favorites? ANALYST INTERVIEW — GARP STOCKS IN THE SEMICONDUCTO R S P A C E Mr. Furlong: I also have a “buy” rating on Fairchild industry have been straight up since the bottom in March of 2009. Semi. FCS is the ticker. It’s kind of riding the industrial trend, so So last year the industry grew 30%. And historically anytime the they have high industrial exposure. They are very broad-based ana- industry grow to 30%, it’s overheated and you will get a correc- log semiconductor company, which sells into everything — PCs, tion. So we had a bit of inventory correction at the end of 2010, so handsets, industrials, everything. So they are doing very well in the stocks got hurt in the middle of last year. There was a bit of an smartphones, and they are doing well in industrial. The company has inventory correction, and the stocks came roaring back. So the big transformed itself to some extent. They are riding the end-market risk or the big fear out there is that things may be overheated again wave of handsets and industrials, plus they have gotten into the auto in terms of cycle, but I don’t think we’re overheated. But that’s end markets, where they weren’t really strong before with some new possibly why some of the multiples aren’t going higher. But hav- products. They are showing strong gross-margin improvement. So ing said that, stocks are trading 13, 14 times. Your risk on the basically, it’s a product story and a gross-margin story. So the gross downside is limited. I think people are waiting for anybody who margin is leading to EPS leverage, and the company is doing very missed the run, are waiting for a pullback in some of these names well. It had been considered in the past as a second- or third-tier so they get involved. So I think if we get a scare in the economy analog company. It’s not considered in the league of ADI (ADI) or or whatever, I think there is an underlying bias to be buying these Linear (LLTC), for example. But with the transformation in its busi- stocks, if you get a 10% pullback type of thing. ness model, people are finally catching on that it’s a good story. So TWST: Do you have to be technical to be able to invest they have the product story and the margin story. And that’s what’s in the space? leading to upside in terms of pretty good growth. Mr. Furlong: I don’t think you have to be technical. I am Then I guess the last stock would touch both communica- not a techie by any means. I think you just have to understand the tions and industrial. For the communications end market — both on business trends and you have to understand the business model of the the wireless and on the enterprise side, and also on the industrial companies. Then you have to be very aware of the cycle. You have to side — it is Xilinx, XLNX. Roughly 80% of their revenue is into be very aware of the business cycle for these stocks, and that’s what communications and industrial end markets. they ultimately tend to trade on. It doesn’t matter if you have the best TWST: Is there anybody else worth mentioning? chip if handsets roll over and go off a cliff, right? So you have to have Mr. Furlong: I guess my other “buy”-rated stock, some understanding, but you don’t have to be an engineer. briefly. I am positive on is Silicon Labs, SLAB. They’ve had some TWST: What is your background and how did you get problems in the last year. They’ve a couple of their product lines involved in semiconductors? that have gotten hurt, and it’s been a drag on the top line, but that’s Mr. Furlong: I’m not an engineer. I have a double major close to bottoming out. They they have MCU and timing products. in economics and business. I’ve been covering these stocks for 15, So again, it’s back to the communications and industrial theme. 16 years. So it’s more of knowing what’s going on — from my They have a nice exposure with their timing business to the com- perspective, anyway — in the industry and knowing the trends, munications end markets. And then in their MCU business they being aware of potentially the hiccups in the cycle. have a nice exposure to industrial. Then the third part is they came TWST: Is there anything we haven’t covered? Would out with a new silicon TV tuner, which has basically gone from you like to add anything else? zero to $60 million this year. That may even double next year. It Mr. Furlong: No, I don’t think so. I think we have pretty looks like the number is probably going to be at least $100 million much covered it all. We’ve gone through it all. next year. So they are doing particularly well. The stock is stuck TWST: Thank you. (LMR) around $43, $44, because last year there were some execution is- sues with some products that drag on the top line. But I think that’s Note: Opinions and recommendations are as of 05/13/11. nearly done, and I have a $50 price target. So I think the stock is going to continue to do pretty well here. BRENDAN FURLONG TWST: You said valuations are pretty good right now. Analyst Is this a good space for investors to look at? Miller Tabak + Co., LLC Mr. Furlong: Yes. It’s a little bit of a tough question 331 Madison Ave. right now. The business trends are pretty strong, as I’ve indicated New York, NY 10017 across the trends that are going on, and I don’t think those trends (212) 370-0040 are going to go away anytime soon. So I think it’s a multiyear op- www.millertabak.com portunity there. The problem is, to some extent, the stocks and the e-mail: [email protected] ANALYST INTERVIEW Key Investment Themes for Communications Semis

AALOK SHAH — D.A. DAVIDSON & CO.

AALOK SHAH rejoined D.A. Davidson & Co. in March 2008, after spending a year

focusing on communications and consumer components as an Analyst for Credit Suisse

and earlier for Pacific Crest Securities. He received an honorable mention in Institutional

Investor’s 2003, 2004 and 2005 All-America Research Team semiconductor and data

networking categories. Mr. Shah has also been ranked in the top five for semiconductor

research in The Wall Street Journal’s annual Best on the Street survey. Mr. Shah graduated cum laude from Washington University in St. Louis with a B.A. in economics and biology; he later attended the graduate program at the London School of Economics and Political Science.

SECTOR — SEMICONDUCTORS themselves, especially with tablets ramping up and everything else. (ACM805) TWST: What is your specific coverage within the So it is kind of an interesting period. Most companies semiconductor industry? took this opportunity, maybe not to completely blame the Japanese Mr. Shah: I follow most of the communication semicon- disaster for what is happening, but at least to use it as a potential ductor companies. That generally means cause for caution going into the summer companies that are mostly wireless fo- period. All that is to say we thought cused, more like the Qualcomms Highlights guidance for Q2 was a little more muted (QCOM) of the world and the food chain than it is in normal cycles. around Qualcomm. Aalok Shah discusses key investment TWST: In your opinion, is TWST: What is the big-pic- themes within the semiconductor it because of the earthquake or ture status for the communication industry. He says semiconductor something else? semiconductors right now? How is demand for smartphones will pick up Mr. Shah: No, I think there’s their market doing? How are the later this year in time for the holidays, actually something else going on out stocks doing as a group? and he says semiconductors used in there. I think it is a combination of Mr. Shah: It’s kind of a tricky cloud computing will see increased things. I think the earthquake definitely time in the sector at the moment. It’s also demand as well. Mr. Shah says had some impact on the supply chain, a very strange time, actually, because this valuations in the space have come down but I actually think there is probably is the first time that the communication since 2010, and he says stocks are something a little bit more going on semis are not following normal seasonal becoming increasingly attractive. there, something that we should be patterns. And some people are blaming Companies include: Qualcomm (QCOM); watching for. My own personal take is this behavior on the Japanese disaster, and Apple (AAPL); Nokia Corporation (NOK); that we came out of Q4 running a little some people are saying, “Well, you know, Broadcom Corp. (BRCM); Samsung bit too hot in the sense that we built too it could be something of a more macro Electronics (005930.KS); HTC Corporation many phones out there, and sell-through problem. Maybe there is a slowdown in (2498.TW); Avago Technologies Limited was not as strong as people thought it handset sales going on right now, and (AVGO); Hewlett-Packard Company was. And so I think we’re burning off maybe there is some inventory in the (HPQ) and Agilent Technologies (A). inventory right now. channel that needs to be burned off.” TWST: Is that situation Overall, the bottom line is that I don’t going to improve as we move into the think we have a very clear picture, even after those last earnings calls, second half of the year? What does the second half look like? of what exactly is going on and what the reasons are for what is hap- Mr. Shah: In my group, historically what happens is

pening. Some companies are taking this as a time to reset expecta- people build phones during the late Q2, early Q3 time frame for sales 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted tions and to make sure that people don’t get way too ahead of that will happen for the holiday season. So you will see a lot of new ANALYST INTERVIEW — KEY INVESTMENT THEMES FOR COMMUNICATIONS SEMIS phones that come to market for the holiday season, and you will start Everything we do is going to be connected to somewhere else. Either to see a lot more orders for chips going into Q3 for the builds for Q4. we are tracking or being tracked, or we’re going to get our music I think that will still happen this year. I still believe that. But the from one central location or something else. It isn’t going to be that question is really what the end-market demand looks like now. Over- everything is located on a single device. It’s more of a situation all, I think it’s going to be a little bit more tepid than we were hoping where your device is going to connect to some other device or server for at the beginning of the year. that has the information. It’s going to TWST: Is that a result of be streamed to us, or it will come to us some lessening of the initial enthusi- “Smartphone growth continues to be in some other way. But it won’t be asm over smartphones? pretty strong, not necessarily here in stored directly on our device. Mr. Shah: Yes. There is re- North America and Europe, but in TWST: Are you concerned emerging countries. In those countries, about anything in the sector? ally nothing that’s so incredibly unique you still have 3G adoptions increasing, out there that people are willing to say, Mr. Shah: particularly in India, China and Latin Yes. I’m a little “Hey, I need to break my contract and America. Those are the real growth concerned about pricing. ASPs have go get a new phone right now.” areas right now.” not really fallen in my group for the TWST: What are the key last two years because of smartphone investment themes you’re follow- growth. Now we are getting to a point ing right now? where the consumer doesn’t want to Mr. Shah: More than anything else, we’re still looking pay more than $200 for a phone. And so somebody has got to sub- at things that are driving smartphone growth. Smartphone growth sidize the cost over $200. Typically, a smartphone like Apple’s continues to be pretty strong, not necessarily here in North Amer- phones will cost $500 to $600, so somebody has got to pay the dif- ica and Europe, but in emerging countries. In those countries, you ference. The carriers, who have been carrying that, are saying they still have 3G adoptions increasing, particularly in India, China and can’t do that long term, so we’ve got to find a way to get a cheaper Latin America. Those are the real growth areas right now. China phone. That means asking the OEMs to make a cheaper phone for has now completed, for the most part, the infrastructure buildout the customers, and I think that pressure is going to lead the compo- for 3G, and so now we’re just waiting for the subscribers to come. nent vendors to reduce their pricing at some point as well. And I That has been a little bit slower than we expected, but it’s picking think that’s just starting to hit the mainstream because these phones up. So we’re seeing that take place right now. are now becoming so similar. I think guys like Apple (AAPL), and anyone still related When you look at an Apple phone versus a Samsung to that vertical, will still do well. But we are seeing a shift. The tra- (005930.KS) phone or an HTC (2498.TW) phone, really there is not ditional handset players like Nokia (NOK) are falling down a little that much difference between them on the features side. Yes, you do bit in terms of share, and that’s why I think in part they’re moving to have iTunes with Apple, and you have other things like that. But at the Windows Phone operating system and trying to create a phone the end of the day, an Android-based phone is an Android-based that maybe isn’t completely unique. That’s probably unlikely to hap- phone. There is really no differentiation there. So the only thing that pen now, but is at least kind of a big name that you can actually go will come down to it is — I think, at some point — price. And that’s and say, “Hey, we’ve got a phone solution with a good ecosystem going to be something that drives consumer pricing down. In fact, I behind it.” But really, the key to growth right now is the emerging think that at some point, we will get smartphones for free. markets in terms of the adoption of 3G handsets, and that’s still com- ing. We’re still in the very early stages of that, I think. 1-Year Daily Chart of Broadcom Corp. TWST: Taking all that background into account, who are your favorite picks in your universe right now, and why do you like them? Mr. Shah: I like Broadcom (BRCM) quite a bit right now. The reason I like Broadcom is they have a focus on delivering the connectivity solutions within phones — things like WiFi, Blue- tooth, GPS, FM radio. They can do it all in what they call their combo chipset solutions, and they have almost 90% market share in that space. I think that will still continue to thrive. I think that in anything mobile related you’re going to need these types of chip- sets. Whether that mobile device is a tablet or a smartphone or even a regular phone, you’re going to see more and more connectivity devices. So I like that name a lot. Chart provided by www.BigCharts.com The other name that I like a lot is Qualcomm. I like that name because of the nature of growth in handsets and tablets. I think we’re going to see a world where everything has something con- TWST: Would you please tell us about your career? nected back to either the cloud or whatever it may be. I hate to use Mr. Shah: I became a Senior Analyst about 12 years ago. the word “cloud,” but I think that’s something that’s happening. I was with Pacific Crest, and then after that with Credit Suisse. And ANALYST INTERVIEW — KEY INVESTMENT THEMES FOR COMMUNICATIONS SEMIS for the last three years, I have been with D. A. Davidson. seem to be doing very well right now, and they have been doing TWST: When we spoke last year, you said you were well actually over the last year a and half. Auto sales continue to mixed on the sector. Is that still your position? be pretty strong. This is a company that has very good gross mar- Mr. Shah: Yes, that is still my position. This is kind of gins, and it’s a name that I think a lot of investors don’t know yet. an interesting time, as I said. When we last spoke, everything was So I probably want to bring that up a little bit. going up at the same time. This seems to be a little more of a time TWST: With all its strengths, why is it off the radar? where you start to need to focus on the winners and losers. And so Mr. Shah: It was a spinout of HP-Agilent, as I said, and it I think that what’s going to happen here now is we are starting to was bought by a private-equity consortium, KKR and Silver Lake. see the winners excel and the losers really start to fade slowly And now and those guys have been selling stock. They owned 80% away. When people say it’s a stock-picker’s market, I don’t know of the stock at the time of the IPO, and they have been withdrawing if that’s a right idea. But anything you are starting to see — guystheir position here for the last two years and half, I guess. Now they who have strong market share and are tied to the right customers are down to about 20% of their total ownership. This company hasn’t — those are the guys you want to be invested in. So my approach been that vocal yet. They are still in the pretty early stage from a real is, you look at the guys who are gaining share in the handset space IPO perspective. They haven’t really been around that long. And be- like Apple and Samsung. Those are the guys you want to be tied cause of the big private ownership for a long time, it’s hard to really to, I think, at the end of the day. get a lot of sponsorship around this name. But now I think they are TWST: What about valuation? Are the valuations going to start to hit people’s radar screens a little more. pretty solid? TWST: You mentioned the auto and industrial markets. Mr. Shah: Valuations have come down even since the last Most readers know what the auto market is, but what makes up time we spoke. So valuations have come back into check, I think, the industrial market in terms of the semiconductor space? for lot of these names. We are not seeing the crazy 20 to 25 multi- Mr. Shah: Sensors, lots of sensors going to lots of differ- ples on these stocks on an earnings basis anymore. It’s more like ent devices, medical equipment. You see a lot in heavy machinery between 10 and 15 times for high-quality companies. Valuations are test areas, factory automation. That’s really where you are starting starting to get a lot more attractive right now. to see more and more semiconductor growth — in those sets of TWST: Generally speaking, will we have a better idea devices where you need to have a lot of temperature sensors, of the sector’s direction by the end of Q2? gauges. It’s about the move to automation more than anything else. Mr. Shah: I think so, because we will have a better feel- TWST: Thank you. (LMR) ing of what the impact of Japan really is. People use that as a little bit of an excuse, I think, and that should now be behind us. So vis- Note: Opinions and recommendations are as of 05/18/11. ibility should be better. And these macro concerns people have, hopefully those should have washed out by then. AALOK SHAH TWST: Is there anything else you would like to add? Senior Vice President & Senior Research Analyst Mr. Shah: One other company that I would think about D.A. Davidson & Co. a little bit is a company called Avago (AVGO), the company that 2 Centerpointe Dr. has spun out of HP (HPQ) and Agilent (A) and is kind of off the Suite 400 radar for a lot of people still. What’s unique about them is they are Lake Oswego, OR 97035 a pretty diversified company. About 40% of business is wireless. (503) 603-3000 And then they have a pretty big business in the industrial and au- (800) 755-7848 — TOLL FREE tomotive segments, and also into wireline communications. One (503) 603-3090 — FAX of the trends that we are watching is that industrial and automotive www.davidsoncompanies.com ANALYST INTERVIEW

Key Themes in Analog & Mixed-Signal Semiconductors

TORE SVANBERG — STIFEL, NICOLAUS & CO., INC.

TORE SVANBERG joined the Stifel Nicolaus Research Team in connection with Stifel's

acquisition of Thomas Weisel Partners LLC in July of 2010. Mr. Svanberg joined TWP in

October 2007, bringing more than 10 years of semiconductor stock expertise to his

analog, mixed-signal and specialty semiconductor stock coverage. Previously, he was

a Managing Director and Senior Analyst at Piper Jaffray, where he covered analog and

Asian semiconductor companies. Before that, he followed analog and European semiconductor companies at Robertson Stephens. In 2002, Mr. Svanberg was named a "Best on the Street" analyst by The Wall Street Journal for his coverage of the semiconductor industry. He received a B.A. degree in international relations from Franklin College in Switzerland, and an M.A. in international policy studies from the Monterey

Institute of International Studies in Monterey, Calif.

SECTOR — SEMICONDUCTORS can go through them one by one. The first one that I'm very focused (ACM801) TWST: You cover both analog and mixed-signal on right now is what we call energy efficiency. Here we are looking semiconductors. What are the primarily at the power management space, differences between the two subsectors? where you have companies delivering Mr. Svanberg: The key Highlights power management solutions that help difference is that mixed signal is defined devices save a lot of power and a lot of as a combination of analog and digital. If Tore Svanberg provides an energy. And that can be in the form of chips you look at any design circuitry that overview of his coverage of analog that go into power supplies or it could be in contains some analog technology and and mixed-signal semiconductors. the form of new markets like LED lighting, some digital technology, it's mixed signal. He shares his top stock picks and for instance. Right now, if you look at I don't cover any digital companies. outlines key themes in the space. energy consumption globally, 25% of that Digital is defined as those that are Companies include: Microchip consumption comes from lighting, but exclusively digital. Intel (INTC), for Technology (MCHP); Intel Corp. lighting is also the one area that hasn't seen instance, is a digital company because it (INTC); Texas Instruments Inc. any meaningful innovation, and technology deals exclusively with digital components. (TXN); Linear Technology Corp. over the last 50 years — until when We also view someone like a Microchip (LLTC); Maxim Integrated Products companies started developing more LED- (MCHP) as a digital company. Companies Inc. (MXIM); Silicon Laboratories type technology. like Texas Instruments (TXN), Linear Inc. (SLAB); MaxLinear, Inc. (MXL); What's good about LED is that the Technology (LLTC) and Maxim (MXIM) Hittite Microwave Corp. (HITT); lights themselves are much more pleasant are traditional analog companies, and Power Integrations Inc. (POWI); on the eye as opposed to fluorescent lights. then more mixed-signal companies would Ford Motor Co. (F); Microsemi They are certainly much more energy be companies like Silicon Labs (SLAB), Corp. (MSCC); LinkedIn Corporation efficient. They can be as much as 40%, MaxLinear (MXL) and Hittite (HITT). Class A Co. (LNKD); Intersil Corp. 50%, 60% more energy efficient, meaning TWST: What are the key (ISIL) and Apple, Inc. (AAPL). you save a lot on power and energy bills investment themes you are looking at when you use these types of lights. Even the

right now in analog and mixed signal? life cycle of an LED bulb is significantly 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted Mr. Svanberg: There are a few investment themes, and I longer than what a fluorescent light bulb would be. So there are a ANALYST INTERVIEW — KEY THEMES IN ANALOG & MIXED-SIGNAL SEMICONDUCTORS lot of advantages to LED lighting. Obviously, there are other areas content on their phone or laptop or even on a TV. What that means within the energy efficiency area, I'm just highlighting LED lighting is basically, the introduction of more broadband home-networking as another subsegment within this big energy efficiency theme type devices where you can access all of these contents seamlessly where semiconductors are helping on any given device in the home. devices or society in general save more That can mean a lot of different power and more energy. things. First of all, you have cable There is another subsegment set-top boxes that need more and within energy efficiency, which is “Wi-Fi technology is not strong or more channels because now you are robust enough to handle a lot of automotive. There are a lot of handling not just straight cable streaming-type content sharing between developments going on in the area of channels, but you're handling more devices, especially when it comes to HD battery-driven cars. That can also be movies. So companies are working on data and video because obviously extended to battery-driven mopeds, improving that speed as well. That's the you want to make sure your set top- battery-driven scooters, all sorts of second trend that we are pretty excited box can even be Internet enabled. So light vehicles, buses and taxis and so about right now.” there is definitely some innovation on and so forth that are starting to be going on there. driven by batteries. And there is a lot The infrastructure itself of semiconductor innovation that goes within your home is also getting on in that area. innovation. Today, most of the TWST: Does “vampire power” fall into this category broadband connectivity in your home is in the form of Wi-Fi, and as well? sometimes Wi-Fi technology is not strong or robust enough to Mr. Svanberg: Yes, vampire power is basically a term handle a lot of streaming-type content sharing between devices, that was introduced by one of the companies that I cover, Power especially when it comes to HD movies. So companies are working Integrations (POWI). They introduced that term to define the on improving that speed as well. That's the second trend that we are power adapters that we plug into the walls. If you look at the pretty excited about right now. adopter, it has got two pins and you can almost view that as teeth The third one, which is a little bit more straightforward that are sucking the blood or, in this case, the power and energy and easier to understand, is automotive. I talked a little bit before from the wall. The reason they call it a vampire is because you about battery-driven cars, but there is also just a lot of electronic plug those things into the wall and even when you are not content growth in cars these days. Maybe a few years ago, only charging your devices, they are still consuming energy. Let's say luxury cars would have things like in-car displays and also some you have a cellphone charger and you plug it into the wall, even security and safety features, but now all those things have been when you are not charging that phone, it's still using electricity, coming as check mark items for all cars. You probably have even which obviously means it's draining your electricity bill even seen some Ford (F) commercial lately where there is technology in when you are not using it. there that helps the car to self-park. Obviously, all those things are coming about thanks to semiconductor technology. There are 1-Year Daily Chart of Power Integrations Inc. parking sensors, there are proximity sensors, obviously the in-car display itself is becoming more of a computer and that is on its was to handling media, GPS and even imaging. I know in Japan, for instance, you even have TV broadcast on your display in the car. TWST: Do semiconductor companies provide components for multiple sectors or are they focused on a single type of end market? Mr. Svanberg: It really depends on the size of the company. Smaller companies tend to target a specific trend in one area. In the energy efficiency area, Power Integrations, for instance, is a company that's exclusively focused on that area. Then in the home broadband networking space, for instance, you have a company called MaxLinear who is very much focused on tuners Chart provided by www.BigCharts.com for all these new channels that are coming about in set-top boxes and gateways in your home. Then there are diversified companies TWST: What's the next theme in the space you are like Linear Technology, for instance, who will be benefiting from looking at? several of these trends. Automotive is probably the one area that Mr. Svanberg: The next trend is what I call home they benefit the most from because they've put a lot of R&D efforts broadband networking. What's very timely about that trend is the in there, but they also benefit from energy efficiency. It really convergence between PCs, handsets and TVs. What that basically depends on the size of the company. And the smaller ones obviously means is that today, everybody is starting to accumulate more and are driven by one or two particular trends, whereas the bigger ones more multimedia content and they want to be able to access that tend to target five, six or seven different trends. ANALYST INTERVIEW — KEY THEMES IN ANALOG & MIXED-SIGNAL SEMICONDUCTORS

TWST: Is the landscape changing at all? Are we seeing multiple my companies get is about six, seven times sales. I think, consolidation in this space? in technology, investors are much more hungry for Internet-type Mr. Svanberg: Yes, absolutely. There has been quite a bit IPOs and not as hungry when it comes to semiconductor IPOs. So of consolidation already in the last decade. But I would say, in the those are three reasons why we're not seeing as much as we did a last 12-18 months, we've seen a lot of decade ago. But don't get me wrong, public companies buying private we are seeing semiconductor IPOs companies. There has definitely been happen, just not at the same pace as more consolidation than we've seen in they did 10 years ago. “I think there's a lot of hunger instead the past, public companies buying TWST: When we spoke in the Internet, social networking-types private companies. There have also last August, we were talking about space. I'm sure you saw this recent IPO been a few public deals. What's very of LinkedIn (LNKD), trading at 20 times the sector as a whole being hit by interesting about the last two large sales. The highest multiple my the recession, but things were public deals that we've seen, one was companies get is about six, seven coming back. So how are they TI buying National, the other one was times sales.” doing now? Microsemi (MSCC) buying Actel. Mr. Svanberg: Basically, And in both instances, both stocks we've gone full cycle. Things really were up the next day. Usually, for the collapsed with the recession, and then acquirer, the stock tends to sell off the things started sort of coming back I next day because you're paying a premium, it's a deal that's possibly would say in spring of 2009. And from spring 2009 through spring dilutive to your earnings, and then there are all these synergy risks 2010, you had this really steep curve back upwards. Since then, it's and things like that. But in both cases, both stocks went up the next been growing more in line with the markets. There was a little day, and I think that's a sign that the investment community is really correction in Q4 of last year, which was more of a lead-time welcoming this consolidation a lot. correction, where if you look at the first half of 2010, a lot of OEMs had basically tried to get as much inventory as possible. Then there 1-Year Daily Chart of Microsemi Corp. was a digestion period in the second half of last year, and now things are actually very normal. So now I would say things are starting to grow more in line with end demand and in line with seasonality. Once the Japan earthquake happened, that certainly caused some renewed instability in the supply chain. But, except for that isolated event, I would say that things have sort of to a normalized environment. TWST: Looking at specifics in your space, who are your favorites right now and why? Mr. Svanberg: I would point you to three different companies. The first one is tied to the energy efficiency trend that I mentioned before, and that's Power Integrations. Everything they do has to do with saving energy and saving power. It's interesting Chart provided by www.BigCharts.com because this company went public back in 1997, but back then, nobody really cared about energy efficiency. Now, almost 15 years TWST: Are we seeing more IPOs? Are private later, the world does care. So I think they have seen a very steep companies entering the public market? acceleration in design activity. And, in fact, I think a lot of Mr. Svanberg: We're not seeing as much as we did customers are now coming to them asking them to make their maybe a decade ago. Going back to what I said before, there has products more green or energy efficient. Power Integrations makes definitely been more and more consolidation, there have been products that go to power supplies, so they prevent what we public companies buying private companies. I think there's a few discussed when we talked about vampires, but they also sell into reasons why that has been happening. First of all, going public has some new markets within the energy efficiency area, like LED become more expensive. There are a lot of things that you have got lighting. So they probably have the highest share today of do as far as accounting and legal requirements in order to be a semiconductors that go into LED lights. public entity, so that's one thing. The other thing is that the public The second company we like a lot right now is a company valuations levels are not as attractive as they used to be. So if you called MaxLinear, the ticker is MXL. They are a beneficiary of the have a choice of going public or selling to another company, trend of home broadband networking space. They develop what we sometimes the latter is preferred. The third reason could also be that call the tuners, and in this case, these are RF silicon tuners, pretty the public markets in general are not as hungry about semiconductor difficult technology, but they've come up with some pretty appeal as they use to be. I think there's a lot of hunger instead in the differentiated and even disruptive technology to take a quite a bit of Internet, social networking-types space. I'm sure you saw this recent share in that market. On the one hand, they are gaining share from IPO of LinkedIn (LNKD), trading at 20 times sales. The highest incumbent vendors in the cable set-top box market, and they are ANALYST INTERVIEW — KEY THEMES IN ANALOG & MIXED-SIGNAL SEMICONDUCTORS also benefiting from the trend that I mentioned earlier, more and the next two to three years. So from our perspective, the investment more video and more and more data going into devices, especially community has not fully appreciated what types of returns this set-top boxes. The company went public about a year ago, and they company can generate over time. The corporate community is more basically did not do as well last year because there was a push out in tune to what they've been doing. of a key technology trend for them, which is DOCSIS 3.0. And TWST: Is the analog and mixed-signal space a good DOCSIS 3.0 is a technology standard place for investors right now? for high-video, high-data rate set-top Mr. Svanberg: I think boxes. That standard is now finally “Because they've good cash flow this space is always a good place for moving into the market, and we think generation, they also do things that investors, and the reason I say that MaxLinear will benefit from that. investors really like — they pay is because if you look at other parts The third company I like is a dividends, they do buybacks, they really of technology, you can't find as company called Hittite Microwave, return a lot of cash back to the many companies that are as the ticker is HITT. They benefit from investors. So while analog/mixed signal diversified or as profitable as really high-end RF technology, whether may not be perceived as a sexy space in analog/mixed-signal companies. that's wireless base stations or technology or not even an area with a Because they are diversified and so lot of excitement, I think traditional microwave backhaul equipment, radar profitable, these companies have value investors are really excited about systems, fiber optics. They are a key very, very impressive cash flow cash flow metrics.” beneficiary of wireless infrastructure, generation. And because they've whether that's commercial, things like good cash flow generation, they 3G or 4G towers, or in the military area also do things that investors really where they also have some very good design traction. What I like — they pay dividends, they do buybacks, they really return a really like about this company is that they participate in some lot of cash back to the investors. So while analog/mixed signal may markets that are very difficult to add value in, and therefore they not be perceived as a sexy space in technology or not even an area also deliver some very impressive profitability. So their gross with a lot of excitement, I think traditional value investors are really margin is in the 70s, operating margins are sort of 45%-ish, so excited about cash flow metrics, so they really like this space. As very, very strong business model. you can tell from what I said earlier, there are still a lot of different trends out there for these companies, so there will be also some 1-Year Daily Chart of Hittite Microwave Corp. growth for the market. That said, the growth has not what it used to be. I mean, 15 years ago when I first started covering the space, the growth rates were maybe 15%, 20%, 25%, and the growth rates now are more like 10% to 15%. But, to me, that's still reasonable and attractive for companies that generate the types of profitability metrics that they do. TWST: One thing I think that can scare of investors about semiconductors is it is a technical space, and they don’t really understand it. Do you have to have technical knowledge to be an investor in this space? Mr. Svanberg: Not only is semiconductors a difficult space to understand, but analog/mixed-signal semiconductors is even more difficult to understand. I have done this now for almost Chart provided by www.BigCharts.com 15 years, and sometimes I'm frustrated because I feel like I'm preaching out to people that don't understand exactly what these TWST: You recently commented on Intersil. What is companies do. I think there are a lot of investors that are attracted happening with them that made you comment? to these business models and especially the profitability levels of Mr. Svanberg: The reason I commented on them is these companies, but they shy away from investing in them because because when Texas Instruments bought National Semiconductor they just simply don't understand exactly what they do. If you then so the media and investment community were looking for other take that a step a further, some of these companies have 40,000 potential companies that would be willing to sell or would be take- different products. You want to understand what a few products do, out candidates. We identified Intersil (ISIL) as a company that is in but it is extremely difficult to understand what 40,000 different a similar vein as National Semiconductor and has struggled to products do. These are very, very complex, large and diversified grow their top line the last couple of years. Because they've companies, and sometimes it's very difficult for investors to struggled to grow the top line, the multiple is kind of depressed, it's understand exactly what they do. kind of low. They've definitely spent a lot of money in R&D in the TWST: Are there any issues out there in the next year last three to four years. In fact, they've even made some of their own to 18 months that you think are going to impact this space? acquisitions, and the reason that's attractive to a potential buyers is Mr. Svanberg: Prior to the Japan earthquake, I was that it has R&D that could potentially generate some returns over telling clients that I thought the current environment was pretty ANALYST INTERVIEW — KEY THEMES IN ANALOG & MIXED-SIGNAL SEMICONDUCTORS boring. What I mean by boring is that things were very normal. We but I think it's accelerating. When you talk to digital companies like have gone through the recession, then we came back to the trend Intel, they had a huge new technology launch yesterday in San line, a lot of the secular drivers were in place, but we were just Francisco where they came out with a new transistor that's a three- moving along, tracking in line with seasonality. Then all of a sudden dimensional transistor. When they came out with that, they did not the earthquake happened and at that point, things changed. So the only talk about size and performance, but they really, really stressed one think that I'm obviously monitoring now is what type of impact power performance or power usage. So power usage or energy that's going to have on my companies. We know that there is already efficiency, I think, is becoming the number one item on anyone's some impact, whether that's on the supply side or on the demand agenda in technology. And obviously that's an area that I really keep side, so that's certainly one area. a close eye on in next 12 to 18 months. The other area that I'm keeping a close eye on is this whole TWST: Thank you. (LMR) tablet market, because I think there is a new technology category out there in tablets. But I also think there is a lot of exuberance about Note: Opinions and recommendations are as of 5/5/11. what that market means to a lot of different companies, because obviously so far, the only real successful tablet company has been TORE SVANBERG Apple (AAPL). Yet, everybody else is coming out with their own Analyst version of the tablets, and I simply don't know how successful all of Stifel, Nicolaus & Co., Inc. them are going to be. If you look at my companies and the ones that 501 N. Broadway benefits from the tablet market, the question is whether the St. Louis, MO 63102 excitement is real as opposed to maybe a fad. (314) 342-2000 The last thing that I'm really keeping an eye on is this (314) 342-8476 — FAX whole energy efficiency trend. This started already a few years ago, www.stifel.com ANALYST INTERVIEW Nano Manufacturing Prospects in Semiconductors

DANIEL HEYLER — BANK OF AMERICA MERRILL LYNCH (ASIA PACIFIC) LTD.

DANIEL HEYLER is Managing Director, Bank of America Merrill Lynch (Asia Pacific) Ltd., and Global Coordinator of the Bank of America Merrill Lynch semiconductors research team. He joined Merrill Lynch in June 1999 as the firm’s regional semiconductors Analyst based in Taipei. In January 2009, Bank of America acquired Merrill Lynch, becoming the bank’s wealth management division. Mr. Heyler covers 20 Asian semiconductors stocks and works closely with

Eiichi Katayama to coordinate pan-Asian tech research. Mr. Heyler’s team was ranked number one for technology semiconductors in the 2011 Institutional Investor All-Asia Research Team survey. Prior to joining Merrill Lynch, Mr.

Heyler worked for Gartner Group as an Asian technology Analyst and for Dataquest Inc. as a semiconductors Analyst based in Silicon Valley. Mr. Heyler received his MBA from Northwestern University’s Kellogg Graduate School of

Management in 1999 and his bachelor’s degree from Bowdoin College in Brunswick, Maine. He is fluent in Mandarin

Chinese and is currently based in Hong Kong.

SECTOR — SEMICONDUCTORS smartphones, which are increasingly moving the world away from (ACM810) TWST: What do you cover central desktop computing to mobile in the semiconductors space? and cloud computing — and that Mr. Heyler: I am the Global Highlights plays very well into this ecosystem. Coordinator at BofA Merrill Lynch for So that positions the group for above semiconductors, but my direct cover- Daniel Heyler discusses the prospects for 10% average annual growth in sales age would be all the nonmemory semi the semiconductor industry. He says there over the next five years. Secondly, we companies in Asia. That would be will be increased demand for semis and think we are going to see increased foundry; outsourced semi assembly producer consolidation, and he is bullish on continued consolidation, because and test, OSAT; and fabless IC design foundry and OSAT. Mr. Heyler shares some there are going to be fewer players companies. A few companies that fall of his top picks in the space and the reasoning capable of delivering the technology into these sectors would include behind his selection. required to succeed in the business TSMC (TSM), UMC (UMC), ASE Companies include: United Microelectronics requiring both scale and technology. (ASX), SPIL (SPIL), MediaTek Corporation (UMC); Advanced So you have both consolidation of (2454.TW) and Spreadtrum (SPRD). Semiconductor Engineering (ASX); Mediatek manufacturing to fewer players, cou- Basically, most of the U.S. semi com- (2454.TW); Spreadtrum Communications pled with accelerating growth, which panies use the foundries and OSAT for (SPRD); Intel Corporation (INTC); Samsung positions the group, we think, manufacturing as well. Electronics (005930.KS); STMicroelectronics strongly for a nice reacceleration of TWST: Broadly speaking, NV (STM); Semiconductor Manufacturing growth after deceleration for several what are the key investment themes International Corp. (SMI); Taiwan years. you are looking at right now? Semiconductor Manufacturing Co. Ltd. TWST: What about the Mr. Heyler: The invest- (TSM); Apple (AAPL); Micron Technology shorter-term cycle call? What does ment themes we’re looking at: There (MU); SanDisk Corp. (SNDK); Asseco South that look like? is a near-term cycle call, and then Eastern Europe SA (Public, WAR:ASE); Mr. Heyler: The short-term there is our longer-term structural call. Siliconware Precision Industries Co. Ltd. cycle call is driven by supply growth, Our longer-term structural call is very, (SPIL) and Microsoft Corporation (MSFT). demand and inventory cycles. After

very bullish on foundry and OSAT, turning positive in September 2010, 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted driven by effectively mobile-media devices — including tablets and we turned cautious in April due to overly aggressive inventory ANALYST INTERVIEW — NANO MANUFACTURING PROSPECTS IN SEMICONDUCTORS growth, excess capacity and overly high Street expectations for 2H is the largest supplier to Apple (AAPL). contribution from tablets. Investors have expected the Japan quake to TWST: Within your coverage, are there certain types of digest semiconductor inventory, but instead it’s caused the supply semiconductors that are better positioned right now than others? chain to add to already high levels. Since supply growth has not been Mr. Heyler: The semiconductor industry is a very adjusted, we think utilization declines in 3Q11 and 4Q11. broad industry. Each sector is different and has different drivers. TWST: You mentioned consolidation because there are Memory is a standard commodity that moves on prices and has going to be fewer companies that can deliver the level of technology relative volatility on supply and demand. So that sector is prone markets need. What is happening with the technology that is mak- to high volatility. Logic IC is extremely broad-based across wire- ing it more difficult to deliver? line communications for infrastruc- Mr. Heyler: To be success- ture. Telecommunications equipment ful in the business, there are really “Right now, we like the memory sector. . is rich in semiconductor content. three factors. There is technology, but . . There is a greater capex discipline and The mobile markets are poised for also scale and customer partnerships. very strong growth in NAND memory, 15% to 20% growth driven by two Fabs now are simply so large that which is really the mass storage needed factors, an increased need for low- most companies aren’t big enough to in the mobile devices that are connected power processor power in mobile even fill a 12-inch wafer facility. Al- to the Internet and downloading a lot of devices and huge wireless-connec- content that needs to be stored. And most all nonmemory companies are tivity growth as these devices need that information, it gets stored now in a fabless or fab-lite and need a foundry to communicate with each other. NAND memory chip.” to deliver scale, technology and cus- There’s also a slew of sensor- and tomized support. Technology is defi- location-based components that will nitely a challenge as always, with boom. Then all across the various ever-finer miniaturization. The upcoming 28-nanometer node in sectors, you see the foundries and the OSAT sector as the provid- logic is one of the challenging nodes that requires a high-k metal ers of most of these chips. gate to reduce power leakage. So even though Abu Dhabi is support- ing GLOBALFOUNDRIES with capital, execution in scale and 1-Year Daily Chart of Taiwan Semiconductor Manufacturing Co. Ltd. technology is hugely challenging. We estimate that nine manufacturers will move to the 28-nanometer size, so that leaves several IDMs — Intel (INTC), Samsung (005930.KS), STMicro (STM) — and a few foundries — TSMC, GLOBALFOUNDRIES, UMC and potentially SMIC (SMI). So that’s really a pretty narrow group of manufacturers outside memory. Intel is fantastic in making CPUs, but we don’t think its operations and business model is optimal for the highly segmented mobile media IC market. TWST: You mentioned the earthquake in Japan. How significant has its impact been on the sector? Mr. Heyler: Hardest hit has been automotive electronics, but that should recover by 4Q11. Most electronics companies claim Chart provided by www.BigCharts.com minimum impact. But oddly, we see 2Q11 growth that is well below seasonal. At the same time, we see semi companies ordering aggres- TWST: One of the companies you said is well posi- sively from foundries due to concerns about wafer and IC substrate tioned is TSMC. Is that stock still in a good situation? availability in 2H11. Mr. Heyler: TSMC, we think, is in an excellent position to TWST: Are the Asian and U.S. markets closely tied to benefit from the high-growth areas, particularly mobile media and each other? wireless. On top of that, it’s the leader right now in these technologies. Mr. Heyler: It definitely is a global market for semis. With its scale, technology and tier-one customer base, it should cap- Much of the growth, though, has been driven out of Asia Pacific due ture the largest share of these markets from the manufacturing side. to low penetration of electronics. The rapid growth in smartphones TSMC also has the potential to build a business with Apple by late is going to be a key driver out here going forward. In terms of the 2012. Apple is a company that designs a product with a very clear industry, structurewise we find that the U.S. still dominates in semi- idea of the features and price points it wants to create within its elec- conductor design. And Intel still dominates in microprocessors, and tronics systems, so Apple needs a lot of customized service that Intel Micron (MU) is still a major player in memory. But in logic manu- may not be set up or willing to provide. facturing, Asia dominates. TSMC and UMC are major providers of TWST: Generally speaking, what sectors do you like the logic devices, which is a much more custom-based manufactur- right now? ing service-oriented business, which has catered well to economies Mr. Heyler: Right now, we like the memory sector. In the of scale and low-cost manufacturing. In memory, Korea dominates memory area, we’ve seen significant cuts in capital spending. There but is closely tied to its U.S. customer base. Samsung, for instance, is a greater capex discipline and very strong growth in NAND ANALYST INTERVIEW — NANO MANUFACTURING PROSPECTS IN SEMICONDUCTORS memory, which is really the mass storage needed in the mobile de- note that in the PC sector, most of the value went to Intel and Mi- vices that are connected to the Internet and downloading a lot of crosoft (MSFT) and a few leading PC companies. But I think, in the content that needs to be stored. And that information, it gets stored mobile media area there will be growth across a lot more compa- now in a NAND memory chip. Also, NAND is starting to be used nies, because the markets will be much more segmented to meet the more in data centers, which increases access times and lowers desired features, user experience and price. For instance, the verti- power consumption. The leaders there are Micron and Samsung in cal markets will require corporate specific applications that may not memory, and SanDisk (SNDK). need the most advanced processors, or some devices may be input TWST: What are the most important criteria to you devices that require a lot of memory. The range of scenarios is end- when you look at stocks? less, while the PC has very much been a one-size-fits all market. I Mr. Heyler: I think investors underestimate the impor- think it’s a very exciting time for the semiconductor industry. In tance of the business model, especially integrity and customer rela- addition to mobile access to content either through 3G/4G or cloud tionships. Of course, there is technology and there is scale, but computing, you have a wave of chips that will allow devices to particularly in semiconductor-content manufacturing, there is a lot communicate with each other, which will be tremendously useful, of information that gets exchanged between the supplier and the especially around the home. customer. The fact that TSMC, UMC, ASE or Siliconware can TWST: Please tell us about your background. How provide service to competitors at the same time is a strong statement did you become a semiconductor Analyst? of the tests that have been developed over a long period of time. Mr. Heyler: I was born and raised in Silicon Valley, so it And also it’s an understanding of the business model and an under- was natural. But since I learned Mandarin in college and in Beijing standing of the technologies of each customer and their require- in the late 1980s. I was first relocated to Asia by my employer the ments. So it is a very service-driven business that I think is mid 1990s. After finishing my MBA at Kellogg in 1999, I joined underappreciated. Merrill Lynch in Taiwan and then relocated to Hong Kong. TWST: Should investors be looking at semis to put in TWST: Thank you. (LMR) their portfolios at this time? Mr. Heyler: I think so, because the semiconductor indus- Note: Opinions and recommendations are as of 05/23/11. try has really lacked a killer application for some time. The PC drove growth of the semiconductor industry in the 1990s. That was DANIEL HEYLER the direct result of the standard operating system called DOS, cou- Managing Director pled with the x86 Intel CPU architecture. We had massive com- Bank of America Merrill Lynch (Asia Pacific) Ltd. moditization and unit growth of PCs that drove cost down and made 15/F Citibank Tower it so that a lot of people could afford PCs, from corporate to 3 Garden Rd. emerging-market consumers. Smartphones and tablets, I think, will Central, Hong Kong go through this process again, which will drive again chip perfor- 852-2536-38880 mance and content per device, coupled with strong unit growth. But 852-2536-3789 — FAX ANALYST INTERVIEW Semiconductor Mobile & Cloud Computing Trends

BETSY VAN HEES — WEDBUSH SECURITIES

BETSY VAN HEES comes to Wedbush Securities most recently from Caris & Company,

Inc., and Cowen Group, Inc., where she was the Lead Analyst covering consumer,

communications/storage, memory and PC semiconductor companies. Previously, Ms. Van

Hees worked as a Senior Research Associate at WRHambrecht + Co. and Jefferies &

Company, Inc. Prior to moving to the sell side, she was the Principal Industry Analyst at

iSuppli Corporation covering the memory market, and she worked in various sales/ marketing management positions at Advanced Micro Devices, IBM and Toshiba America Electronic Components, Inc.

Ms. Van Hees earned a B.A. from the University of California, Los Angeles.

SECTOR — SEMICONDUCTORS across all devices like DTVs, set-top boxes, DVD players, com- (ACM804) TWST: What do you cover within semiconductors? puters, gaming systems and smartphones driving increasing de- Ms. Van Hees: I cur- mand for server performance as rently cover consumer, communi- Highlights the burden increases with more cation and memory IC companies. networked devices accessing TWST: What are the Betsy Van Hees discusses mobile and cloud storage and running applications major themes in each of the cat- computing trends in the semiconductor industry. off the cloud. egories you look at? She says the two trends will drive demand for TWST: How will this Ms. Van Hees: We be- semiconductors used in wired and wireless affect semiconductors? lieve two very pervasive trends infrastructure buildout, mobile devices, Ms. Van Hees: We are positively impacting consumer interconnectivity of home media, and servers entering what I like to refer to as communication and memory ICs in with increased performance for hosted the lazy hazy days of summer, 2011 and beyond are mobile and applications and virtual storage. Ms. Van Hees where semiconductor stocks typi- cloud computing. We believe these says companies currently have good valuations, cally fall out of favor with inves- two trends will drive growth and and she discusses an “outperform”-rated stock tors, as this tends to be a seasonal demand for, one, wired and wireless and the reasons behind the rating. lull for technology. However, as infrastructure buildout; two, mobile Companies include: Atmel Corporation (ATML); we move towards the end of sum- devices like smartphones and tab- Cypress Semiconductor Corporation (CY); mer, investor sentiment picks up lets; three, interconnectivity of Integrated Device Technology (IDTI); OmniVision as we have several catalysts in home media; and four, servers with Technologies (OVTI); SanDisk Corp. (SNDK); the fall and winter, with the first increased performance for hosted NetLogic Microsystems (NETL); Micron catalyst being back-to-school applications and virtual storage. Technology (MU); SMART Modular Technologies driving consumer electronics de- We expect the additional (SMOD); Qualcomm (QCOM); Texas Instruments mand, followed by Christmas and bandwidth required by the grow- (TXN); National Semiconductor Corporation then Chinese New Year. And re- ing number of mobile connected (NSM); Samsung Electronics (005930.KS); gardless of how challenging the devices, such as smartphones and Renesas Electronics Corporation (TYO:6723); economy is, Christmas always tablets, to be a catalyst for contin- Toshiba Corporation (TYO:6502) and Advanced comes driving considerable de- ued wireless infrastructure build- Micro Devices (AMD). mand for a wide breadth of con- outs as service providers upgrade sumer applications — and in to 4G technology from 3G, and 3G turn, strong demand for semicon-

technology is deployed in emerging markets. We also expect ductors, particularly consumer and memory ICs. 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted growth in connected home devices with seamless connectivity TWST: How does increased demand for consumer ANALYST INTERVIEW — SEMICONDUCTOR MOBILE & CLOUD COMPUTING TRENDS items like mobile devices impact the memory space? We believe the trend to cloud computing will likely be a Ms. Van Hees: Memory, particularly NAND Flash, is significant positive for Integrated Device Technology due to its impacted because it has become a very big staple in many consumer enterprise computing leadership in DDR3 Gen 2 memory inter- electronics. NAND Flash is used in a host of consumer applications, faces, PCIe Gen 3 switching, PCIe-interface SSDs and signal integ- whether it’s embedded within the ap - rity products. We believe continued plication like the iPhone or it’s remov - cloud computing growth will also able storage in the form of a flash “We upgraded SMART Modular to an benefit NetLogic Microsystems memory card, USB drive or solid state ‘outperform’ rating from a ‘neutral’ at (NETL), a leading supplier of multi- drive for PCs. the end of January. . . . As we looked core processors for the adoption of TWST: So consumer de- into the longer-growth trends for SMART more intricate IPv6 addresses, and vices and memory are related? Modular, we believe that they would Micron Technology, as cloud com- benefit from the cloud computing Ms. Van Hees: Yes, we think puting will require servers to have trends, particularly with the company’s higher memory gigabyte require- so. For example, let’s take a look at the solid state storage drive products.” emerging category of tablets. This is a ments to support virtualization. significant demand driver for NAND TWST: You issued some Flash. We are also seeing increasing comments on SMART Modular gigabyte content of NAND Flash in smartphones, solid state drives, Technologies in April. Why did you issue the comment? flash memory cards and USB drives. We also have DRAM that’s used Ms. Van Hees: We upgraded SMART Modular (SMOD) in a variety of consumer applications like PCs, smartphones and tab- to an “outperform” rating from a “neutral” at the end of January. lets. While PCs are a very big consumer item, PC demand — and in The main near-term catalyst behind the upgrade at the time was our turn, DRAM demand — is also being driven by corporations, as com- belief that the DRAM market had bottomed out. DRAM pricing panies upgrade their old notebooks and desktops. was at its low and poised to recover. So as DRAM pricing improved and demand trends improved, we believed SMART Modular 1-Year Daily Chart of SMART Modular Technologies would benefit from these trends. And as we looked into the longer- growth trends for SMART Modular, we believe that they would benefit from the cloud computing trends, particularly with the com- pany’s solid state storage drive products. Following our upgrade, the stock had a considerable move to the upside. And on April 26, 2011, the company announced that it had entered into a definitive agreement to be acquired by Silver Lake Partners and Silver Lake Sumeru for $9.25 in cash per share. TWST: Generally speaking, what challenges will the memory and the consumer semiconductor companies face? Ms. Van Hees: The challenge that the semiconductor market has had throughout the last several decades has been the challenge of keeping supply and demand in balance. We’ve gone through several iterations of demand outstripping supply. Then we Chart provided by www.BigCharts.com have a significant buildout of supply, demand trend softens and we go into an oversupply situation once again. It has been a vicious TWST: Who is best positioned to take advantage of cycle in the past, particularly for memory, with some significant these trends within your group? peaks and significant valleys. Ms. Van Hees: There are several names in our universe I think what’s different moving forward versus what it was that we believe are very well positioned to take advantage of the like over 10 years ago — for example, when we had the Y2K build- mobile and cloud computing trends. We believe tablet and smart- out, that was followed by this huge inventory correction — is that phone growth to likely be a significant positive for Micron Technol- today it is just so incredibly expensive to build a brand new state-of- ogy (MU), who we think has a leading technology and strong the-art mega fab. You’re talking about billions and billions of dollars position in mobile DRAM, NAND and NOR flash markets. We be- of capital investments. I believe the cost to build a state-of-the-art lieve tablet and smartphone growth will also benefit Atmel Corpo- fab today is about $6 billion. So today the stakes are much higher ration (ATML) and Cypress Semiconductor (CY), leading than it was 10 years ago, as you have such a significant amount of suppliers of capacitive touch sensing products; Integrated Device money involved. Given that the costs are so exorbitant, what we are Technology (IDTI), a leading supplier of Serial RapidIO for content seeing is a lot of partnerships. For example, Micron and Intel cre- in base station deployment; and OmniVision (OVTI), a leading sup- ated IM Flash partnering together to build out several NAND Flash plier of CMOS image sensors enabling picture and video capabilities fabs; and then you have SanDisk and Toshiba who have also part- for front- and rear-facing cameras. We also view tablet growth as a nered to share the cost of building NAND Flash fabs. I think what long-term positive for SanDisk (SNDK), as we expect the company we have today is a much more cautious and measured view from to continue to develop its burgeoning OEM business model. companies because the costs are so high to build these mega fabs. ANALYST INTERVIEW — SEMICONDUCTOR MOBILE & CLOUD COMPUTING TRENDS

That is why we don’t expect to see big swings in the semiconductor of the location of the earthquake and the impressive resiliency of the cycle of oversupply and then undersupply. What we may have is a supply chain, to date we’ve seen minimal impact. few months or a quarter or two of oversupply, because demand TWST: Please tell us about your background and how trends could be running a little bit high and then demand softens. But you got involved in the semiconductor sector. given the limited amount of supply that is coming online today, Ms. Van Hees: I started my career in the semiconductor coupled with the efficiencies of the supply chain versus 10 years ago, industry. I worked at Toshiba (TYO:6502), IBM Microelectronics we believe any inventory correction will be quick and shallow. (IBM) and AMD (AMD) in various sales and marketing positions. TWST: Is M&A going to be an important issue in I had an opportunity to work for iSuppli, an independent provider this space? industry research. And while I was working at iSuppli, I started in- Ms. Van Hees: Oh yes, I think we will continue to see terfacing with Wall Street, talking to firms and to analysts like my- M&A. We’ve seen some very interesting M&A over the last several self. I thought it would be an interesting move in my career if the months. For example, Qualcomm (QCOM) just finished their ac- opportunity presented itself. And it did, so I took it. I made the leap quisition of Atheros for about $3.1 billion in cash. There’s just so and transitioned from an Industry Analyst to a Sell-Side Analyst. much cash on the balance sheets of semiconductor companies. And This was a very hard and grueling change. Although I had extensive what can you do with your cash today? You can’t earn any interest semiconductor industry background, I didn’t have any finance in the bank. And to grow your business organically is very challeng- background. So needless to say, I had a lot to learn. Thankfully I had ing. While there have been some surprising acquisitions — such as a couple of fantastic mentors along the way. While Wall Street Texas Instruments (TXN) acquiring National (NSM), for example hasn’t been easy, so far it’s been one heck of a ride. — there are still a lot of semiconductor companies, whether they are TWST: Is there anything else you’d like to add? private companies or whether they are public companies, with syn- Ms. Van Hees: I think that one of the things that investors ergies not yet recognized. So we think the M&A spree that we have seem to be concerned about is that the semiconductor cycle has seen has a lot of legs left in it. peaked, and that we could be heading into a period in the cycle TWST: What about valuations in the memory and where we’re going to start to see pricing and gross-margin pressure consumer space? Are the stock valuations good right now? negatively impacting companies’ earnings and revenue growth. Ms. Van Hees: We think valuations are very attractive That may be true for certain companies, depending upon what space right now, especially in the memory names like Micron Technol- they are in and who they are competing with. But as we look at the ogy. There appears to be a lot of concern from investors that we’re overall semiconductor space, I believe that we remain in a strong going into an oversupply situation in the back half of the year for period of growth. Demand trends appear to remain healthy, espe- DRAM and for NAND. Although we do have several NAND fabs cially in the emerging markets. We have a lot of burgeoning applica- that are coming online from Micron/Intel, SanDisk/Toshiba and tions like tablets and some pretty pervasive trends. We talked about Samsung (005930.KS), we also have multiple applications, such as a couple of those trends, mobile and cloud computing. With supply tablets, SSDs for PCs and enterprise and smartphones, where giga- and demand appearing to be in balance, and several robust demand byte content is going up. And we believe unit demand plus in- trends ahead, we think the semiconductor cycle remains healthy and creased gigabyte content will be strong enough to consume those far from over. additional bits that are coming on line. TWST: Thank you. (LMR) TWST: Would you say the Japan earthquake im- pacted supply significantly? Note: Opinions and recommendations are as of 05/24/11. Ms. Van Hees: The earthquake and subsequent tsunami was so tragic, with so much life that was lost, and there is no ques- BETSY VAN HEES tion that the fabs in the near vicinity were hurt. Renesas (TYO:6723) Analyst is one Japanese semiconductor company that seems to have been hit Wedbush Securities very hard by this tragedy. But if you look at the majority of semi- 1000 Wilshire Blvd. conductor fabs, they are located in the southern part of Japan. If the Los Angeles, CA 90017 earthquake had occurred below Tokyo, it would have been probably (213) 688-8000 been pretty devastating to the semiconductor industry. But because www.wedbush.com COMPANY INTERVIEW Aetrium Inc. (ATRM)

JOHN J. POLLOCK has served as President of Aetrium Inc. since October of 2009, as a Director since March 2010, as COO since August of 2010 and as CEO since January 2011. Mr. Pollock has more than 15 years experience with Aetrium in the semiconductor capital equipment business, including serving as General Manager since December 2001. Prior to joining Aetrium he held key management positions at BF Goodrich Aerospace for seven years and technical positions at Control Data’s disk drive Division Magnetic Peripherals for five years. Mr. Pollock holds a B.S. in electrical engineering and an MBA from Ohio University.

SECTOR — SEMICONDUCTORS 1980s, with our first single-site Gravity Test Handler. We now (AVB604) TWST: What is Aetrium Inc.? provide support in 14 countries worldwide, with typically 15 to 20 Mr. Pollock: Aetrium is a leading provider of test and active customers per year. In 2010 we maintained a strong critical handling solutions to the world’s semiconductor and electronic mass in our organization and accelerated product development, component industries. To meet the industry’s growing demand for spending 19% as a percent of revenue on R&D. We are definitely increased test efficiencies and new testing capabilities, we design seeing a return on our investments, and in 2010 we nearly doubled and manufacture production-based test handlers and reliability our revenue over 2009, growing 88%, consistent with our testers used by the semiconductor industry to test integrated circuits, industry’s growth after two years of double-digit decreases in or ICs, MEMs and other electronic components. Our first product is worldwide spending. We currently have six demos in process, our Gravity Test Handler, which automates the process of testing which we are very excited about, as our customers are evaluating computer chips and is ideally suited for parallel testing of analog our performance against existing vendors or evaluating new devices, which are typically used in automotive, computer, laptops, technical capabilities. These demonstrations provide us the cell phones and television applications. It has historically represented opportunity to broaden our customer base and thus have the approximately 65% of our annual revenues. Our Gravity Handlers potential for increased revenues going forward. give us a competitive advantage with the world’s shortest index time TWST: Within the semiconductor industry, where for gravity handlers, coupled with significantly improved uptime. does Aetrium fit in? Are you a back-end or a front-end company, We’ve increased our customers’ productivity by evolving from what space do you play in? single-site testing to eight-site testing, and we continue to provide Mr. Pollock: We serve the back end of the semiconductor this productivity while addressing the changes in semiconductor capital equipment industry. Our Gravity Handlers provide capacity device packaging technology. addition to semiconductor manufacturers of primarily analog Our second product is our Reliability Tester Product, integrated circuits. Our Reliability Tester provides the capability to which addresses reliability life analysis for new materials, wafer verify the life of an integrated circuit where new technology is being line width shrinkage down to 22 nanometers and below, and wafer deployed. The reliability test market cycle can be independent of level packages, including the newest packaging of 3D stacked die. and vary significantly from semiconductor production cycles. These modules have historically represented about 15% to 20% of TWST: Would you tell us about the markets for our annual revenues. Reliability test is actually a destructive test products using Aetrium’s technology and what trends have you done at wafer level to predict the life of computer chips. We’ve noticed in the industry that are driving your growth? continued to add new test capability, adjusting to the technology Mr. Pollock: The trend of globalization of electronics is changes in semiconductor materials, as well as reduced geometries driving a huge demand within electronics, and consumers are and changes in processes. We are a process-driven company, being driving this globalization now more than the business enterprise. ISO 9001 certified and 5S compliant. Our net sales by region for our Take cell phones, for example. It’s forecasted that 1.5 billion cell products have historically been approximately 80% in Asia, 15% in phones will be manufactured in 2011 alone. And also, the the U.S. and 5% in Europe. We currently have no debt and ended increasing demand for global mobility has created something of a our first quarter with approximately $7.8 million in cash. paradigm shift. For example, laptops surpassed desktop computers TWST: It’s been about three years since we last in 2009, and the mobile “always connected” social environment spoke with Aetrium. Bring us up to date. What’s been that we are in continues to drive innovation in semiconductor happening recently? technology and packaging. All of these global trends are driving 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted Mr. Pollock: The roots of the company go back to the more semiconductor units each year, and many of the applications COMPANY INTERVIEW — AETRIUM INC. are rich with analog devices that account for almost half of all IC We have the fastest index time in the world and at a very good value units manufactured. This is a key trend for Aetrium, as analog — and that is how we take market share from our competition. devices are typically packaged in a form factor suited to our There are two main competitors when you look at our Gravity Handler product lines. In addition, the desire for smaller, Reliability Tester. One is an Israeli company and one is a Japanese cheaper electronic devices drives changes in semiconductor company. We primarily compete against the Israeli company technology — a key trend for our reliability tester products, as the worldwide. The key to Aetrium’s competitive position with recipes for the design of chips continue to change, which drives Reliability Testers is our flexibility and our capability to acquire new requirements for reliability testers. massive amounts of data quickly for our customers to analyze and thus predict the life of integrated circuits designed under their new technology processes. ”Our gravity products focus on analog TWST: You were recently appointed CEO and you semiconductor manufacturers around the certainly have a strong history with this company, having world — companies like NXP, ON Semi, served previously as the COO. As the Chief Executive Officer, Analog, Maxim and Intersil. There’s been some what is your vision for Aetrium? Where do you personally recent consolidation activity in this space focus your attention and what are your priorities for the next with Texas Instruments’ potential acquisition 12 months? of National Semiconductor, and ON Semi has Mr. Pollock: The long-term vision is still to focus the acquired SANYO.” company on capital equipment in the semiconductor industry and continue to be one of the leading suppliers in this maturing industry. This will require us to continue to ask ourselves how we TWST: What does the customer landscape look like at can best provide solutions to our customers — not just products. I this point? Has there been much consolidation? How does your focus most of my attention on the growth of the company. I spend technology support and enable your customers’ growth? a lot of time with our customers worldwide, our technologists Mr. Pollock: As I mentioned, our gravity products focus within the factory, and within the industry looking at new products on analog semiconductor manufacturers around the world — and trends. This must all be done while operating our business companies like NXP, ON Semi, Analog, Maxim and Intersil. with a disciplined execution following our ISO 9001 and 5S There’s been some recent consolidation activity in this space withmentalities. Our priority is planned profitable growth that can be Texas Instruments’ potential acquisition of National Semiconductor,recognized by investors. We intend to achieve this growth by and ON Semi has acquired SANYO. We currently serve three of the continuing to expand our customer list through product evaluations top 10 analog manufacturers, and we are focused on growing that at new customers, performing multiple evaluations at the same number. Outsourced assembly and test companies, commonly time. Successful completion of these evaluations and gaining new referred to as OSAT in our industry, include companies such as customers is our key to growth. Amkor, STATS, Unisem, UTAC and Carsem, to mention a few. TWST: Are there any opportunities for M&A activity? Many of these companies currently are users of our Gravity Test Mr. Pollock: Acquisitions have played a role in our Handlers. Our Gravity Handlers provide increased productivity and history, and we’ve been an opportunistic acquirer. We continue to efficiency during the test process of chips. monitor industry trends in semiconductor packaging and Our Reliability Tester provides the capability to assess semiconductor technology, looking for a unique technology or a the life of chips as the new technologies are deployed, and focuses product line that would be complementary to our existing products. on semiconductor wafer fabs in foundries around the world — Right now our focus is on organic evolution in the capability of our companies like Intel, Samsung, Texas Instruments, TSMC and existing two product lines. GLOBALFOUNDRIES. We have equipment at all of the top five, TWST: If we were speaking 12 months ago, what were eight of the top 10, and 16 of the top 20 semiconductor the company’s goals and objectives at that point and how did manufacturers worldwide. you do? TWST: What’s the competitive landscape like? Why Mr. Pollock: With regard to our Gravity Test Handlers, would a customer choose your products over someone else’s the goal a year ago was further evolving our octal-site testing for tools? What’s your advantage? greater equipment productivity and helping our customers reduce Mr. Pollock: On each of our product lines, we have the overall cost of test. We met our goal of successfully releasing strong competition. There are three main competitors with our our new Gravity Handler, the VMAX. We are currently completing Gravity Handlers, two German-based companies and one Japanese a very lengthy evaluation at our largest customer, we’re preparing company. Larger U.S. companies own the two German companies an additional evaluation at a top 10 analog semiconductor that have internally complementary and competitive product lines. manufacturer that is new to us in the third quarter, and we have In this industry, the majority of customers often insist upon a dual- goals of adding additional evaluations at additional top 10 analog sourced strategy when it comes to their respective vendor selections, semiconductor manufacturers in the second half of this year. in order to keep the equipment industry competitive over the long For our Reliability Testers, our goal was expanding our term. However, the real key to Aetrium’s competitive position in capabilities in response to continuing geometry shrinks in wafers, as Gravity Handlers is we deliver a very strong technical performance. well as new package technologies such as 3D stacked die. We COMPANY INTERVIEW — AETRIUM INC. successfully released one new reliability test module and we’re Mr. Pollock: Fundamentally, we’ve maintained a very looking to release a second new module in the second half of this strong balance sheet throughout our history. We possess the year. We currently have four evaluations at top semiconductor necessary working capital to quickly ramp our production in manufacturers, and we have goals of additional evaluations in the upswing cycles like the one we’re in. We have strategically focused second half of this year with our new second module. our R&D spending as above average compared to our peers during TWST: So all in all you’d say you’ve met the agenda? the last down cycle, so that we could provide compelling and Mr. Pollock: Decidedly. Our customer base is embracing improved products to our customers during this up cycle. We’re our products and the capabilities they afford them, and we are focused on growing the revenues by broadening our customer base excited about the growth potential. in both product lines. We have significant operating leverage in our TWST: You have just under 75 employees, correct? business model so we can ramp profitably rather quickly as we Mr. Pollock: Yes, we have a very seasoned group of grow our revenues. employees at Aetrium, with deep industry expertise, and we derive tremendous leverage from a relatively small headcount. Our size enables us to be nimble and respond quickly to changes in our “We have strategically focused our R&D customers’ requirements. spending as above average compared to our TWST: Introduce us to some of the key players on peers during the last down cycle, so that we could provide compelling and improved your top-level management team. Mr. Pollock: Our management team is comprised of products to our customers during this up cycle. We’re focused on growing the revenues long-term experienced individuals. The majority of our dedicated by broadening our customer base in both group of company officers has been with the company in the range product lines.” of 15 to 25 years. We also have many employees in our technical and our manufacturing ranks with the same range of experience. This provides us extensive experience and deep knowledge of the industry trends in technology advancements, process changes that TWST: What are some of the key metrics or events our customers use, and our customers’ operations on a daily basis. investors should be watching for? What should they focus on as Our managers spend a significant amount of time traveling around they track your performance? the world listening to our customers and bringing back the message Mr. Pollock: As I mentioned earlier, macroeconomic to the organization on how we can continue to improve. factors have an effect on most businesses right now, including TWST: Give us a brief introduction to Mr. Pollock. ours, and there is some uncertainty on that front. A key metric that What are the business strategies you rely on to set goals and we use to track demand for semiconductors is tracking the number standards for Aetrium? of semiconductor units being manufactured. We sell capacity with Mr. Pollock: I have a bachelor’s degree in electrical our Gravity Handlers, specifically for analog semiconductor engineering and a master’s in business administration, and have devices. As the number of semiconductor units grows, the demand spent my career in three highly technical and competitive and need for more production capacity grows. Our tester products industries — the disk drive industry, the aerospace industry and are more based upon technology advances. Metrics that we would then the semiconductor capital equipment industry. I’ve had watch are releases and advances in new technologies, new extensive knowledge and experience in manufacturing and materials or even new processes such as conductors, insulators or program management and engineering and general management, shrinking geometries. and I use that broad experience to help grow and continue to TWST: What historically has been Aetrium’s manage Aetrium. shareholder base and has that base undergone any changes? TWST: What keeps you up at night? Mr. Pollock: The shareholder base is a mix of institutional Mr. Pollock: I think the biggest agents for changes in investors and individual investors. I believe we currently have over direction in our industry come from the macroeconomics of the 25% of our shares held by institutions, and that’s been the case for world. It’s still a very uncertain world as we listen to the daily news,many years. Insiders hold roughly 10% of our shares. We tend to and we’re trying to understand the macroeconomic drivers for have many shareholders that have held our stock over a long period electronics. With consumers accounting for more than half of the of time, and I believe just recently one of our institutional investors demand for electronics globally, the availability of discretionary reported owning almost 10% of our shares. income to drive electronics sales becomes an increasingly important TWST: In your discussions with the investment factor. Currently, forecasters are projecting continued growth in community, are there any recurring questions, any electronics, and we believe we are well suited for the forecast of misperceptions? Do investors understand the Aetrium story as growth going forward. Yet we try to monitor as many metrics as we well as you’d like them to? can throughout the global industry to better prepare us to adjust to Mr. Pollock: I think many investors who understand and any changes in direction that occur. track the semiconductor industry, specifically the capital equipment TWST: What’s been the financial history of Aetrium, segment, have been able to follow the industry cycles and do well the strengths, the balance sheet and the P&L? What specific investing in capital equipment companies like Aetrium. However, items are you focused on for improvement? we do not believe that our growth potential is being fully reflected COMPANY INTERVIEW — AETRIUM INC. in our current stock price as compared to our peers. We hope many organization. As I indicated earlier, we have the capabilities for more investors will have the opportunity to get to know Aetrium becoming profitable quickly with our very low expense base. I and understand our simple and effective message on how we intend believe all these factors uniquely position Aetrium for our investors, to grow the company profitably. and our stock price is currently at a modest level based upon TWST: Do you plan to step up your investor relations historical metrics. activity? TWST: Have we missed anything, is there anything Mr. Pollock: We’re always looking at the ways and the you’d like to add? possibilities of getting our message out to our investors as we Mr. Pollock: No, I believe we’ve covered all the high continue to focus on growing the business. points. I appreciate the opportunity to present Aetrium’s story to TWST: What are the key summary points that your readers. would compel an investor to include ATRM not only as a part TWST: Thank you. (KL) of their current portfolio but as a part of their longer-term investment strategies? JOHN J. POLLOCK Mr. Pollock: I would summarize by saying our objective President, CEO & Director is to grow faster than our industry by gaining increasing market Aetrium Inc. share. First, we serve a growth industry with growing needs for our 2350 Helen Street equipment. Second, we have compelling products, and we intend to North St. Paul, MN 55109 grow by releasing new products and having multiple evaluations at (651) 770-2000 existing and new customers. We’re obtaining new customers based (651) 770-7975 — FAX upon our differentiating value and better equipment efficiencies and www.aetrium.com capabilities for our customers. Third, we have a very lean e-mail: [email protected] COMPANY INTERVIEW ChipMOS TECHNOLOGIES (IMOS)

SHIH-JYE CHENG has served as CEO and one of ChipMOS TECHNOLOGIES’ Directors since its inception. He was Deputy Chairman from inception to May 2004 and became Chairman in May 2004. Mr. Cheng has also served as a Director and President of ChipMOS Taiwan since 1997, the Chairman of ChipMOS Taiwan since June 2003 and the Chairman of ThaiLin since 2002. He was the Chairman of ChipMOS Shanghai from 2002 to June 2005, the Chairman of Chantek from 2002 to November 2005, the Chairman of ChipMOS Logic from January 2004 to November 2005, the Chairman of AMCT from 2003 to April 2004, and a Director of Ultima Electronics Corp. from 2000 to June 2003. Mr. Cheng was a Division Head of the back-end operation of Mosel Vitelic Inc. from 1992 to 1997. He has a master’s degree in business administration from Saginaw Valley State University.

SECTOR — SEMICONDUCTORS years based on exciting innovations and end-user demand. (AVB602) TWST: Please begin with a background of TWST: What’s the competition like? How robust is ChipMOS, and then describe what you see as your business competition and what are the decision points for customers in and company today. choosing their supplier? Mr. Cheng: ChipMOS was established in 2000. Our Mr. Cheng: Competition exists, but ChipMOS has a headquarters are located in Taiwan, a major hub of consumer clearly differentiated market position led by our history of electronics, LCD TVs and mobile phones. We are listed on the technology and process innovation, quality, performance, value and Nasdaq, with ticker IMOS. Currently we have around 5,500 customer service. We have helped customers to increase their device employees worldwide. Our business focuses on the testing and performance and further reduce their costs. The second one is assembly of semiconductors. Known as the OSAT industry, quality. ChipMOS has been a valued partner to our customers outsourced semiconductor testing and assembly companies have worldwide because of our commitment to quality in what is a grown typically twice as fast as the overall semiconductor industry. mission critical component of the overall semiconductor production. ChipMOS is differentiated from other outsourced TWST: What role will strategic opportunities play as semiconductor assembly and test companies. Our focus is on the you look to grow ChipMOS? Are there consolidation memory semiconductor market, which includes commodity, niche opportunities through M&A? Is there an opportunity for DRAM, SRAM and flash memory products. We have also benefitted strategic alliances in this marketplace, and what’s on your list of from major growth in the LCD driver market, due to increased criteria as you look at these types of opportunities? demand from LCD TVs, cell phones, and also LCD screens for Mr. Cheng: Traditionally, the outsourced semiconductor computers and monitors. We also have a mixed-signal LCD TV assembly and test industry has been active in acquisition of back- peripheral chip business. end operations, in M&A and in the acquisition of equipment. In our Our revenue for 2010 was $585.4 million. We expect case, ChipMOS has been opportunistic with regard to the acquisition revenue growth of approximately 10% in 2011 based on current of equipment as we add capacity to support our growth and customer demand, with a continued improvement in gross margin customer demand indications. We are focused on building closer to 10% to 15%. Our EBITDA margin target is 38% to 42%. shareholder value and will continue to evaluate additional strategic As part of continued cost controls, we are targeting capex below $80 opportunities that can benefit our company’s growth, drive for million for 2011. We expect to generate free cash flow from increased profitability and increased shareholder value. operations at $230 million, which will allow us to pay down our TWST: What international opportunities exist for long-term debt by approximately $110 million in 2011. ChipMOS? TWST: Would you tell us what the typical ChipMOS Mr. Cheng: I think that there are couple of areas, client profile looks like today and how you see that profile including Japan. Following the March earthquake and Tsunami, we changing over the next two to three years? have seen customers looking for additional suppliers as they seek to Mr. Cheng: Our business continues to grow led by diversify and insulate their supply chain. In Europe and the U.S., we growth in LCD applications, mobile applications, smartphones and are seeing considerable growth opportunities in TFT display. The continued growth in consumer electronics. We expect the other area of course is China, which remains the major growth 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted proliferation of such applications will continue over the next few engine of the broader global economy. COMPANY INTERVIEW — CHIPMOS TECHNOLOGIES

TWST: Are there any limitations on the company at our gross margin. We will also continue to use our expertise to this point? diversify our customers in faster-growing areas like smartphones, Mr. Cheng: Technology-wise, ChipMOS has a portable laptops and the next-generation TV displays. differentiated strategy from other OSAT companies, including TWST: What is the essential message today for an Amkor (AMKR), ASE and Siliconware Precision (SPIL). Our investor? What are the strengths and highlights that convince product and technology portfolio is focused on serving customers in an investor to buy in? memory, LCD driver and mixed signal. We are also committed to Mr. Cheng: ChipMOS has done an excellent job in developing the technology and support infrastructure our customers restructuring our balance sheet, diversifying our customer portfolio, will need moving forward as they continue to expand their strategically adding on capacity at attractive terms and shifting our relationships with ChipMOS. business into higher-margin business areas where we can leverage TWST: Provide us with a frank assessment of your the company’s proven expertise. We are optimistic about the growth top management team at this point. Do you have the skill sets prospects for the company in 2011 and expect shareholders to and the bench strengths to meet your future growth benefit as we work to improve shareholder value. opportunities? Are there any specific areas you are looking to TWST: Would you care to comment on your stock change or to add? price? Mr. Cheng: ChipMOS has benefitted from a stable, highly Mr. Cheng: While we do not monitor the day-to-day experienced executive management, R&D staff, quality control and trading in the company’s stock price, we believe there is considerable sales. We add on to support our strategic capacity expansion, room to improve shareholder value as we continue to execute on our customer demand levels and to accommodate healthy attrition. business strategy and deliver results. TWST: At this point, how could Wall Street or the TWST: Are there any thoughts or issues you would investment community improve its perception or understanding like to present that we have not covered? of ChipMOS Technologies? When you speak with analysts and Mr. Cheng: I think we have covered everything. investors, have you noticed any misperceptions? TWST: Thank you. (KL) Mr. Cheng: We have spent the past few years restructuring our balance sheet, diversifying our customer base and actively SHIH-JYE CHENG working with two major customers undergoing financial duress. We CEO & Chairman have emerged as a much stronger company with great growth ChipMOS TECHNOLOGIES prospects. Based on valuations assigned to other companies in our No 1 R&D Road 1 industry, ChipMOS is significantly undervalued. We believe that as Hsinchu Science Park we continue to execute on our business strategy and deliver Hsinchu, 300 impressive results, investors and analysts will give ChipMOS Taiwan greater attention and a higher valuation. 886 3 577 0055 TWST: What is your vision for the company? 886 6 505 2336 — FAX Mr. Cheng: We expect ChipMOS can grow its revenue www.chipmos.com.tw by 10% to 15% annually, while also driving further improvement in e-mail: [email protected] COMPANY INTERVIEW MKS Instruments, Inc. (MKSI)

SETH H. BAGSHAW, CPA, is Vice President, Chief Financial Officer and Treasurer of MKS Instruments, Inc. Mr. Bagshaw has more than 25 years of experience in a variety of senior financial management positions, primarily with high-technology, publicly held multinational corporations. He has extensive international experience, which includes residing in Asia for several years, as well as strategically growing companies both organically and through mergers and acquisitions. Mr. Bagshaw graduated summa cum laude from Boston University with a B.S. in business administration, and he earned an MBA from Cornell University.

SECTOR — SEMICONDUCTORS robust is competition, and what are the decision points for the (AVB608) TWST: Let’s start with some background on MKS customers in choosing their suppliers? Instruments. Please describe your business and where the com- Mr. Bagshaw: In the semiconductor market, many of our pany stands today. products are included in the critical subsystems market, where we Mr. Bagshaw: MKS Instruments is a leading global pro- are a global leader. We believe we have over 34% market share in vider of instruments, subsystems and process control solutions that our served market. This is a highly competitive market in which measure, control, power and analyze critical parameters used in strong technology, global application and customer support, and advanced manufacturing and research processes. Our largest served significant research and development investments are required in market is the semiconductor capital equipment market, in which we order to be successful. In other advanced markets the same stringent develop technologies and solutions used extensively in the develop- requirements are becoming more common as well. ment and manufacture of semiconductors. In 2010, sales into this Our customers also want to partner with a technology market were about 65% of our business. leader who will also be able to provide the long-term stability that We also serve a variety of other advanced, high-growth is needed in their supply chain. We are also able to react to changing markets, such as solar, LED, medical and other high-technology levels of demand in our customer business levels. As I mentioned, markets that make up the remaining 35% of our business. I’m veryMKS is well capitalized. And we have been able to make — and pleased to say that 2010 was a record year for MKS, with $853 mil- more important, continue to make — the necessary investments to lion in revenue, which was more than double our revenue in 2009. support our customers. And in 2011, our first-quarter results were also a new quarterly high In general, we believe that customers’ requirements are at approximately $232 million in revenue. becoming more and more complex, in terms of both technology TWST: Would you tell us what the typical client pro- and geographic footprint. Since we have a wide portfolio of prod- file looks like today? How do you see that evolving over the next ucts supported by more than 350 patents, and we have a geographic two to three years? presence in all the key regions where our customers conduct opera- Mr. Bagshaw: We have approximately 4,000 customers tions, we believe these trends are to our competitive advantage. located around the world in a variety of technologically advanced TWST: Going forward, how will MKS continue to dif- markets. The common theme or requirement of our customer base is ferentiate itself from the competition? the need for advanced products to ensure that the requirements of Mr. Bagshaw: We’ve obviously worked very hard in sophisticated research and development and of high-technology achieving a global leadership position in our markets. We are very manufacturing processes are met. Our top 10 customers are customer focused and are able to apply a broad platform of prod- approximately 40% of our revenue and are primarily in the semicon- ucts and solutions to a specific customer issue. Therefore, if exist- ductor market. However, on the other side of the size spectrum, for ing or potential customers need a solution to a complex problem, example, we have over 300 customers in the burgeoning China solar or multiple solutions to multiple problems, they tend to look to market. These customers are taking advantage of the growth in the MKS in those instances. local China solar market, as well as the worldwide demand for re- Customers, besides needing a more effective solution for newable energy solutions. And we’re pleased that they are looking process control, also want a proven supplier who can react quickly to MKS Instruments to develop newer market-based solar applica- to changes in the business climate and have the financial strength to tions. As in all of our markets, we continually see the need for ad- be a valued, long-term supplier. We have a very strong balance sheet vanced process control as a key driver for us. with almost $480 million in cash and investments. 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted TWST: What’s the competitive landscape like? How TWST: What role would strategic opportunities play COMPANY INTERVIEW — MKS INSTRUMENTS, INC. as you look to grow? Are there consolidation opportunities? is a meaningful return of capital to shareholders, while still pre- Mr. Bagshaw: In the semiconductor market we serve, serving our ability to grow the business both organically and we’ve typically grown a few percentage points greater than the through acquisitions. overall served semiconductor capital market growth rates. That is We will also continue to make significant investments in due primarily to the factors I mentioned previously. In the other research and development, which increased 25% in 2010 as compared advanced markets we serve, such as solar, medical, LED and others, to 2009. We have a well-educated, talented and motivated global our long-term goal is to grow our sales in these markets at a com- workforce, and we look forward to many successful years ahead. pound annual growth rate of at least 15%. TWST: Please give us a frank assessment of top man- agement at this point. Do you feel you have the skill sets and the “After a challenging global recession in 2009, bench strength to meet future growth opportunities? Are there we were able to take a number of difficult specific areas you’re focusing on for change or additions? steps to rationalize our cost structure and Mr. Bagshaw: We are very fortunate in that our top divest certain nonstrategic product lines. As a management team here has been with the company for 25 years or result, when the business expanded in 2010 and continued into 2011, our financial business more. As we’ve expanded our revenue and product portfolio, we have been able to attract and develop a significant number of tal- model allowed us to significantly leverage the improving revenue top line. We achieved ented senior management individuals to help manage and grow record results in 2010 in terms of both the business. We are a very customer-focused team and have a revenue and profitability.” hands-on management style, which allows us to stay close to the customers and operations. As I’ve mentioned, we have made a number of acquisitions over the years and have been successful in We’ve also been very active in the acquisition arena and integrating those acquisitions within the MKS technology and have acquired about 15 businesses since we became a public com- operations portfolio. pany in 1999. These acquisitions either extend our existing prod- As we continue to expand our global footprint, particu- uct portfolio or selectively add new technologies to further fill out larly in Asia, we will further augment those resources with increas- our product portfolio. We believe this strategy will be a key com- ing focus on continuing to develop local capabilities. It’s likely that ponent in conjunction with organic growth to further expand our trend will continue for the foreseeable future, and this is one key long-term opportunities. organizational requirement we’re focusing on at this point. TWST: What are your international opportunities? TWST: How can the investment community improve Mr. Bagshaw: In our customer base, we’ve been heavily its perception or understanding of MKS Instruments? focused on the international market for many years. Approximately Mr. Bagshaw: In speaking with individual investors, a 45% of our overall revenue is shipped directly to customers located consistent theme is that we execute very well and have a very robust outside the United States. In addition, many of our larger U.S. cus- operating model. The visibility in our business, due to the highly tomers also export a large percentage of their products to customers cyclical nature of the semiconductor capital equipment industry, outside the U.S., which drives up our indirect sales to international plus the number and breadth of the markets we serve, make it some- customers. We believe this trend will continue as more of the devel- what challenging to model our business compared to some others. oping markets continue to accelerate their needs for new solutions Therefore, the area where we’re putting more attention is conveying and local support. Fortunately, we have a long, established direct the overall growth opportunities for MKS. presence in all of these major international markets, so we are well I mentioned before that in our served semiconductor positioned to continue to expand our international customer base. capital equipment market we’ve been able to grow that business, we TWST: What is the major limitation, if any, on MKS believe, at least a few percentage points greater than the overall Instruments at this point? Is it cash, is it capital or is it people, semiconductor capital equipment market growth rates. We believe resources or technology at some level? we can continue to grow faster than the underlying market due to Mr. Bagshaw: After a challenging global recession in the technology we provide and the trends in that marketplace that 2009, we were able to take a number of difficult steps to rationalize favor more process control. our cost structure and divest certain nonstrategic product lines. As a In the other advanced market segment, which for MKS result, when the business expanded in 2010 and continued into was only about $100 million in revenue in 2003, we’ve successfully 2011, our financial business model allowed us to significantly le- grown sales to those markets to $308 million in 2010, also a new verage the improving revenue top line. We achieved record results record. This is a 17% annual compounded growth rate in that time in 2010 in terms of both revenue and profitability. At the end of the period, which is consistent with our long-term goal of at least a 15% first quarter 2011, we have approximately $480 million in cash and annual growth rate. That segment of the business has performed investments on the balance sheet. So we’re well capitalized, well very well for us and is the result of a key strategic focus we placed funded and have a very robust operating model. on growing sales to these markets. We also think we are somewhat unique for a company Since 65% of our revenue is from the semiconductor of our size in the semiconductor capital equipment market in that capital equipment industry, perhaps some investors may still view this year we initiated a quarterly dividend of $0.15 per share. MKS as fundamentally only a semi cap stock, even though 35% The current dividend yield is just north of 2%, which we believe of our business is in other high-growth advanced markets. Those COMPANY INTERVIEW — MKS INSTRUMENTS, INC. other advanced market growth rates, as I mentioned, are very pliers and customers for all of their support over the years. good. If you consider that we have the dual advantage of growing TWST: Thank you. (KL) faster than the semiconductor market we serve and layer on the long-term growth rate of other advanced markets, then our growth SETH H. BAGSHAW opportunities are attractive. Vice President, Chief Financial Officer & Treasurer TWST: Have we overlooked anything? Are there MKS Instruments, Inc. any thoughts or issues that we haven’t covered? 2 Tech Dr. Mr. Bagshaw: Next month, MKS Instruments will cele- Suite 201 brate its 50th anniversary, and I just want to thank our almost 3,000 Andover, MA 01810 employees worldwide for their dedication and hard work, and for (978) 645-5500 making MKS a global market leader. It’s an honor to be able to (978) 557-5100 — FAX celebrate our 50th anniversary, and I look forward to another 50 www.mksinst.com years of success. I also want to especially thank our investors, sup- e-mail: [email protected] COMPANY INTERVIEW

Magma Design Automation, Inc. (LAVA)

RAJEEV MADHAVAN has served as CEO and Chairman of the board since he co-founded Magma Design Automation, Inc., in 1997. He also served as President until 2001. Prior to founding Magma, he co-founded and served as President and CEO of Ambit Design Systems, Inc., and co-founded and served as Director of Engineering of LogicVision Inc. Mr. Madhavan received a bachelor’s degree in electronics and communication from KREC, Surathkal, India, and a master’s degree in electrical engineering from Queen’s University in Ontario, Canada.

SECTOR — SEMICONDUCTORS things to your voice is analog processing. We now have — this is (AVB606) TWST: Would you give us an overview of Magma unique for Magma, unique technology for doing analog verification Design Automation, a history of the company up to where it is — we have a tool called FineSim. In the digital area, we have tools right now? called Talus and Tekton. And in the analog, we have a tool called Mr. Madhavan: We are a company that provides solu- FineSim and Titan. FineSim verifies that a circuit can perform in the tions in the electronic design automation. Basically, our software is analog arena, and Titan helps implement the analog portions of a used to implement some of the most complex chips in the wireless chip. We have in the analog and digital area four products, and a mobile applications. In fact, in the mobile baseband, 70%, 80% of fifth product, which is in the area of yield management. We recently the chip market uses Magma software. Until a couple of years ago, signed an agreement with Applied Materials where when they we based our business and our IPO on enabling just the digital por- shipped their UVision platform, used at almost every fab line in the tion of those chips. But if you look at the chips today, they have memory area, with our software that is used as a database and as a digital, analog, memory. They have high-performance cores from mechanism to do design-based bidding. We provide software from ARM or from MIPS or from Imagination graphics cores. We are tapping the digital content, designing the analog, and the same tools unique because we now are providing the solution, which allows are used for memory design, as well as in the fab line for yield- such heterogeneous systems on chip to be implemented with the management side of things. least amount of resources. Over the last two or three years, it has Two or three years ago, we didn’t have the last product; been a complete reviving of our product line as we went into the four years ago, we didn’t have an analog product line. We moved recession. And prior to that, the company had gone through some into doing the full assembly design and sign-off verification of periods of litigation. We have come out of all of that strong from a much of the chip in an automated single-product line. Magma’s business side, as well as from a technology perspective, having re- available market was like $450 million. Today we are very close to written much of the products that we had at that time. $2 billion market availability that we are attacking on and getting TWST: Please describe your product lines. these new products out there. Mr. Madhavan: Primarily, we have four product lines. TWST: For our readers who may not be familiar with One is in the area of the digital portions of a chip and actually imple- your products, what are the benefits of your Talus platform? menting those portions. If you look at any of your cell phone chips, Mr. Madhavan: Talus is our digital implementation flag- for example, there’s the analog signal and the speaking signal. They ship product. The basic benefit is very simple. If a chip design team are converted and then processed, most of it in digital, then recon- is using Magma’s Talus for designing a digital chip, it needs less verted and transmitted over the air. We provide two sets of tools for number of engineering resources, which means profitability if the the digital portion. One is to implement the chip in that area, and the company making the silicon is much higher designing using other is to make sure that when it is implemented and the design Magma. Given the complexities of Moore’s Law — and chips are team gets the silicon back, it meets the performance goals that they getting more complicated — we allow design teams to do more with set for the chip, be it performance in terms of timing, how fast does literally less number of engineers, that’s the first value. The second the chip run. In addition, there are two tools in that area of digital. value is in the time it takes to go from the beginning of the imple- One for implementing the digital chip, and the other is in what’s mentation process to having a design, which is then ready for trans- called sign-off. That tells a designer how good the chip is going to fer to the manufacturing companies, is faster with Magma. perform when it comes back after it was manufactured. TWST: What is the size and growth potential as you The third area that we provide, which is new for Magma, see the EDA industry at this time and in the next few years?

is in analog design and verification. Much of life is analog, touch Mr. Madhavan: The industry has been pegged at around $4 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted sensors and everything from — basically your tactile input side of billion to $5 billion, growing now at around 5% to 10% according to COMPANY INTERVIEW — MAGMA DESIGN AUTOMATION, INC.

EDAC, the EDA Consortium. We do not rely on the growth of the in- chip doubles every two years. Intel talked about their 3D transis- dustry. We are changing the way things are done with more productive tors, which means a modeling change in what we need to do. We solutions, and hence we are taking market share from a competitor. are already doing that with a couple of customers, and we will have that completed. These sort of challenges are a natural pro- gression of life in this EDA industry. Every 24 months, we get to see some effect of it from the fact that the new geometry forces “We have grown steadily over the last nine some of these changes. While these are challenges and it’s impor- quarters. Our operating margin is at 19% tant that the companies stay tuned and focused, life in this industry operating margin. This year we’ll certainly get is always full of those challenges of transition that comes about as into the 20s. We have a lot of new tools, a lot you move from one process to the other. of top-line growth possible.” TWST: We recently saw Apache Design Automation’s IPO take place, the first one in EDA in a decade. Does that re- flect changes in the structure of the industry in regards to bar- riers to entry? Mr. Madhavan: No, Apache is a growing example of what TWST: What are the competitive issues now, and Magma does. Apache has a product line focused in what’s known as what is Magma’s market share and advantages? Where do youpower analysis. Their cash cow is called RedHawk, which is in the stand in the industry? power analysis portion of rail analysis. It can determine how much Mr. Madhavan: The share percentage for these five current and power is taken up in the power mesh of these chips. products is different across the board. In digital implementation, we Apache dominates the area of dynamic power analysis and is profit- have about 20% of the designs. Of that 20%, most of the chips able, with bookings at about $40 million-plus the last few years. It’s Magma does are in the deepest submicron geometry, the most com- a good example of how such technology can do that. Let me give you plicated chips. If you take that percentage, our percentage would another example. Our own FineSim product in analog verification is have been much higher. The new tools, such as digital sign-off about four years old. It has higher booking numbers right now than tools, the digital verification tools, our percentage is still in the Apache’s IPO profile. This proves the point that, in our business, if single digits. For example, Tekton in digital sign-off went from 0% you focus on providing value and providing substantial differentia- market share a year ago when we launched the product in fiscal year tion, you can get operating margin and leverage quickly. at the end of April. We have taken 5% of the market share in one TWST: How do you plan to maintain and improve year. We have grown substantially in that product line. your market position? We have a product in the SPICE FineSim in the analog Mr. Madhavan: Over the last few years, we pretty much verification area, where four years ago we were 0%. Today we are did everything, relearned on the digital side. Analog is new for booking anywhere in the range of between 40 million to 50 million Magma. We now have all the differentiation, and I look at what are a year in a market, which is around $370 million. We are about 15% the limitations that come with growth also. We have one challenge, of the market now and growing. We are doubling every year in that which is everything that we have in the analog area. We are estab- particular segment, and we expect to double it this year as well. This lished and are governed in the hands of customers. In the digital is the first year with the full analog implementation product line. We area, we are about a month away from being able to give everything have about 25 deals where we booked each in the range of $0.25 we have without any real limitations or support to being able to give million to about $1 million. There is one customer who is in the $3 it to customers and get them trained and up and running. We are million range. Our opportunity is to convert all the accounts we about 30 days to 60 days from achieving that high level of stability have closed into multimillion-dollar deals and achieve a significant that’s needed with this software. As soon as we achieve that, we percentage of the market. overcome any limitations. We overcome any challenges that come The last product line is yield management. This is a about in planning and maintaining and employing our basically bot- unique product, unlike any EDA product, because it combines the tom line while growing the top line at the same time. design knowledge along with the fab knowledge from Applied TWST: Are there any limits to your growth right now? Materials and puts it into the fab. Applied Materials is deploying it Are you concerned about the direction of the industry? into their customer base, making it difficult to give you a total avail- Mr. Madhavan: It’s simple. It’s a challenge for Magma in able market. We don’t have any competition in that area because it’s that we have grown steadily over the last nine quarters. Our operating a new way of doing it. As with the rest of our tools, we have a margin is at 19% operating margin. This year we’ll certainly get into unique, innovative technology series in both the digital and analog the 20s. We have a lot of new tools, a lot of top-line growth possible. area, highly differentiated, and we are gaining market share quite We don’t want to go all the way to 25% right away. We have bookings substantially in each of those products. estimates of at least 20% growth in this current fiscal year, which we TWST: What types of emerging technology are you just got into. Given that, we have to make some investments. And concerned about that may pose a challenge to Magma these are application-engineering staff and some in R&D to make Design? sure that we can handle the influx of new requirements and new fea- Mr. Madhavan: In our business, that’s life. Every 24 tures required in the tools. Those are the limitations that we need to months, as Moore’s Law predicts, the number of transistors on a continuously model. It’s a trade-off between operating margins and COMPANY INTERVIEW — MAGMA DESIGN AUTOMATION, INC. what we take given that we have a lot of new products. right now. I think there are regions like Europe where we have TWST: Do you see most of your growth coming inter- substantial growth opportunity given our SPICE portfolio in the nally? Are there possible partnerships or M&A activity that rest of the world. We need to go there and then take a much bigger may contribute to growth? focus. And I’m not delegating that. I’m leading from the front. Mr. Madhavan: As far the company is concerned, much of it is going to come internally. There will some partnerships. For example, we have a partnership in the area of test automation. We have different pieces, and we work with different companies. As a “There are regions like Europe where we have culture of, we will not get into a new product area unless we can substantial growth opportunity given our substantially differentiate. There will be areas where we just don’t SPICE portfolio in the rest of the world. We want to get in, and we will partner with others. With respect to need to go there and then take a much bigger M&A, chances of us doing M&As are low. We may do what I call focus. And I’m not delegating that. I’m leading tuck-in M&As, where we basically may have one algorithm that from the front.” somebody has come up with, something unique that we may do to enable us to continue the growth that we are on. But other than that, 95% of it is going to come pretty much from organic growth that we have within the company. TWST: Aside from the IP area, what other advantages TWST: As the CEO and Chairman, what are your do you feel you have? basic business principles? What tenets do you rely on to set the Mr. Madhavan: From a company perspective, we have goals and standards of the company? unique, differentiated algorithms that provide us the advantage. Mr. Madhavan: It’s simple. In my view, you win at the From a culture perspective, we have substantial advantage. Even same rate at which your customer wins. And that means making though we’re a small company, we are a company where everybody customers happy with the deployment of the tools, not just running knows that a “can do” attitude makes some big difference. And it’s — these are complex tools. While it may seem that I’m spending a pretty much like what Avis, which is a car company, says: “We try lot of resources to make them successful in deployment — to me, harder.” We absolutely do the same here. that culture of helping them get their tapeout — their actual tapeout TWST: Please give us a frank assessment of your man- is the process of actually getting a design into manufacturing. And agement team. Are there any areas you feel are truly outstand- internally we say it simply. No tapeout left behind. We mean it. We ing? Which areas do you feel need shoring up at this time? provide all great technologies. But at the end of it, if our customers’ Mr. Madhavan: We’ve actually made substantial changes tapeout is not happening — tapeout of passing that manufacturing even in the last couple of weeks as we changed the year end. We’ve data to their foundry to fab — then we have failed our customers. promoted one of our key technologists to become a new business That culture of no tapeout left behind is from the top management unit lead in the area of digital sign-off. It was under digital imple- down. We absolutely are behind that mantra within the company. mentation. We’ve changed our sales force completely because we TWST: Looking at the company’s financial reports, used to have a sales force that could sell only the digital portions of what are one or two items or statistics you personally focus on, our tool. And now, as I told you, we have digital, analog and even and what do you think would give the long-term investor in- nano things in the area of analog design verification. We needed a sight into the company? different sales force that understands or has the ability to use the Mr. Madhavan: We have a licensing model where most talent within the company to go sell a much broader portfolio. About of our bookings come from our backlog. We do this 90/10 model 76% of our sales force is new. Our sales management is about a year where 90% of our revenue comes in from backlog. With that model, and a half, so we have made drastic changes over the last one, one- our bookings growth is actually a good indication of how good our and-a-half years. We made all those changes, including this new revenue growth is going to be going forward. For example, Magma promotion of somebody in the area of digital sign-off, one of the key just finished a year where we grew 31% in bookings when our rev- areas that we expect to see continuous growth. enue is growing by closer to the double digits, but on the low end of TWST: Which areas are you focusing on personally the double-digit side of things — we grew at about 13% on the versus delegating, and why? revenue side. With this model, where we sign up the customers on a Mr. Madhavan: There are a couple of areas in sales. In time-based licensing model, we had a good year that we’ve just the last year or two, if you had asked me the question, I probably finished. We had a good year the year before. But 2009, because of would have said R&D. Now R&D doesn’t keep me up at night. the recession, was a bad year. While our bookings are growing 31%, I’m pretty sure that every piece we have is highly differentiated. our revenue only grew 13%. But our revenue is still faster than any Now it’s time to push the sales, and that’s where I’m not delegat- other in the EDA segment. ing. I’m on a plane probably two-thirds of my time, if not more. Our bookings are substantially differentiated in our We have to train the sales force, enable them and motivate them. growth rate. And bookings, as we grow at this 30% rate, we have Personally, it’s not about delegating, but visiting those regions to guided to at least 20% growth for the next year, the fiscal year end- figure out how good our sales force is, to figure out how to help ing April 2012. That tells you that we have upside in that revenue them sell the technologies. That’s an area where I’m hands-on growth, which allows us to grow the top line in an interesting fash- COMPANY INTERVIEW — MAGMA DESIGN AUTOMATION, INC. ion as we go forward. That’s an important portion of what Magma than 15%. It’s close to 16%. We are at a 31% bookings growth for is all about. We have a fairly clean P&L, where debt and all that are the year we finished. We are, and we believe we will be, the fastest- taken into account. We are into positive cash flow, so we really can growing EDA company. We have an opportunity to take our operat- run the company with positive cash flow for nine quarters in a row. ing margin up, albeit in a guided fashion rather than just taking it All aspects of the financial side are important, but that booking up, because we need to grow our top line as we see these new prod- growth of 30%, which surpasses any other business in our industry, ucts into deployment. That’s a unique change for the company from is a big reflection of the growth of Magma, which is increasing at a a couple of years ago during the recession, and it will change per- faster rate than anybody else. ceptions. We have turned things around, if that’s the right word to TWST: Has any particular market given you prob- use. We completely turned our products around, our finances lems? What markets abroad are you involved with and do you around, and we have rebuilt the base of the company. see good growth in? TWST: What is the key message you would like to Mr. Madhavan: Clearly, we have done well in North convey to long-term retail and institutional investors? What are America. And we’ve done well in Korea, China, Taiwan. We arethe company’s main advantages and strengths? just beginning to grow. We are making changes in the organization. Mr. Madhavan: We will be the fastest-growing company We have work to do in Europe. While we’ve changed much of the in EDA, focusing on one thing that we understand. Our customers sales force in the rest of the world, we haven’t made changes in are doing one piece of silicon, maybe a complex SoC. We provide Europe. Instead we are letting them make the changes themselves. solutions for their products by having four sets of tools, and a fifth Our issues are more about training our sales force to understand that being the yield management, all tightly integrated to allow our cus- we’re more than a digital company today. We have to teach them tomers to provide the best highly differentiated silicon in their de- that we are more than that, and we need to make sure that every sign process, thereby allowing Magma to have better-and-better piece of Magma is being sold. That’s our challenge in Europe. growth going forward. That’s our challenge in China. That’s our challenge in Taiwan. TWST: Are there any issues about the industry or TWST: What kind of growth in this company would your company’s position we haven’t covered? Would you like to make you feel satisfied over the next three to five years? add anything else? Mr. Madhavan: Could we satisfied? It’s a tough prob- Mr. Madhavan: No, I think the industry has shown some lem. But having said that, we grew 30% in bookings this year, and pretty good growth, which also helps, and I hope that it continues to we’ve guided them to a 20% growth rate. I would be deeply disap- grow. While the growth of others in the industry helps us, there is pointed if 20% is our growth line. I would love to certainly surpass wind behind that. There is wind behind us also. We’re not relying in that. I think we have a lot of opportunity to do that. And if we any way on the products that we have for that. We have to have continue to grow revenue like we did bookings, we’ll catch up tohighly differentiated, unique, innovative technology that allows us that same level over the next one or two years. That will set a stage to grow at the rate we need to grow. for growth in the company, which is phenomenal and interesting for TWST: Thank you. (KL) investors as we grow at the same rates at which we are growing on the bookings side. RAJEEV MADHAVAN TWST: Does the investment community understand CEO & Chairman the Magma story? Do they have any misunderstandings or Magma Design Automation, Inc. misperceptions? 1650 Technology Dr. Mr. Madhavan: I think a lot of it has been defined by San Jose, CA 95110 how Magma was portrayed during the recession. Today, the fact that (408) 565-7500 we are back to close to a 20% operating margin will change percep- (408) 565-7501 — FAX tions. We’re growing our revenues. Next year’s forecast is more www.magma-da.com COMPANY INTERVIEW Mattson Technology, Inc. (MTSN)

DAVID L. DUTTON is the President and CEO of Mattson Technology, Inc. Mr. Dutton serves on the board and sets the direction of Mattson Technology, leading the executive team in establishing and realizing long-term strategies and objectives for corporate growth. A veteran of the semiconductor industry for more than 20 years, Mr. Dutton joined Mattson Technology in 1994. In 1995, he became Vice President and General Manger of the plasma strip group, where he was instrumental in growing to help Mattson become a dominant leader in the global strip market. In 1998, Mr. Dutton was promoted to Chief Operating Officer, setting him on the path toward the President and CEO position. He last served as the President of the plasma products division until his appointment as President and CEO in late 2001. Prior to joining Mattson Technology, Mr. Dutton held key management positions at Intel Corporation and Maxim Integrated Products. In addition to his current leadership role at Mattson, Mr. Dutton is a Representative of the Silicon Valley Leadership Group on behalf of Mattson Technology. He also participates in the Silicon Valley Bicycle Coalition. Mr. Dutton earned a B.S. from San Jose State University.

SECTOR — SEMICONDUCTORS just its production line to bring in new products and add services? (AVB605) TWST: What is Mattson Technology? Mr. Dutton: It is actually a big commitment and a sig- Mr. Dutton: We are a semiconductor capital equipment nificant investment for our customers. For example, they typically company. Specifically, we design, manufacture and market semi- start with a set of demonstrations using the equipment in a supplier’s conductor wafer-processing equipment used in the fabrication of facility that can take three to five months. We then move to what is integrated circuits. Our equipment is used for applications in dry known as an evaluation system, where we typically work with a photoresist strip and rapid thermal processing, otherwise known as customer and place a tool on site for them to use and integrate into RTP. Additionally, we have entered the etch market with our propri- their device-fabrication line. That process can typically take six to etary inductively coupled plasma technology. Plasma stripping and nine months to get final yield qualification. From that point, it RTP are our core markets, which we have been in for a number of moves to what is referred to as a pilot production ramp for about years, and we are one of the global leaders in both markets. Etch is another three months before the customer fab really goes into a full- a new emerging market for us, and one that we are very excited volume production. So it is typically about a 12- to 18-month com- about, as it more than doubles our served available market and al- mitment and investment from our customer and us to bring a new lows us to expand and grow at a very strong rate above the industry. tool into a manufacturing line. It is a very comprehensive process, TWST: Would you give us the dynamics between qual- and this is why we require extra working capital to fund the ex- ity attainment on the production line versus the cost analysis tended use of evaluation inventory. manufacturers go through? TWST: What do you see from competitors at this stage Mr. Dutton: There is a real balance. And to us, quality is of the game? How robust is competition and what are some of paramount. Quality is a number of different things to our customers, the decision points for customers in choosing their suppliers? and it comes down to allowing them to achieve a very high yield of Mr. Dutton: Competition is very strong in this industry. Our computer chips on each wafer, which is related to us helping them customers are consolidated, and they seek to maintain a highly com- deliver on Moore’s Law, a long-term trend in which the number of petitive environment amongst their suppliers. Most of our customers transistors that can be placed on an integrated circuit doubles ap- have what is called a dual-supplier strategy, where in each respective proximately every two years. To adhere to this Law, our customers area they will typically maintain at least two to three suppliers to en- have the challenge to add more devices that are very close in proxim- sure a very competitive environment. In our case we are the David ity on their chips. Our goal is to deliver tools to our customers that are versus Goliath — our competitors are large-cap, multibillion-dollar very high in quality, with very high throughput and uptime, so that companies, and we are a hundreds-of-million-dollar company. their yield results are at the highest levels. It is always a balance be- We compete with them on some very leading-edge tech- tween being a trusted supplier that will deliver a strong quality system nology, and we do this with what we call our disruptive platform. out of the box, so that we do not put their production process at risk. This industry is all about making computer chips smaller, closer in Copyrighted material: For reproduction permission contact Kenneth Wolfrath (212) 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted TWST: How easy is it for a manufacturing plant to ad- proximity, in order to get billions and billions of transistors onto one COMPANY INTERVIEW — MATTSON TECHNOLOGY, INC. small chip. To do that without increasing costs is a challenge. Our market is a $4 billion market, and one that is very critical to the indus- strategic focus is, one, making sure that our technology is unique. try — and we’re a new entrant in that market. We deliver to a subseg- And two, delivering technology that helps our customers achieve ment of that market, which is a little over 50%, or about $2 billion of those billions of transistors at a 30% or better cost of ownership than available served market for Mattson Technology. Our other served any of our competitors. When we achieve both of those objectives, markets, strip and RTP combined, are only about a $700 million mar- which our products do, we take market share from even the big guys. ket. So you can see the magnitude of opportunity that is presented for TWST: Why do customers buy your tools over these the company by now playing in a new $2 billion market. bigger players’? Mr. Dutton: In 1965, Intel’s Co-Founder, Gordon Moore, proposed that the number of transistors incorporated in a chip will “We have had eight consecutive quarters of approximately double every 24 months. This was later named as growth, seven of which have been double Moore’s Law and has since been adopted as the long-term driver for digit. In fact, in the last quarter our top line the integrated circuit industry. This law is an economic law that we grew by 14%. Looking ahead, I see the view as including a relationship to cost as well as smaller transistor potential for that growth to continue. We have design. Our disruptive platform and the value proposition that we to be able to fund that growth and further our provide to our customers are to deliver unique technology that en- evaluation opportunities, which is how we win ables the ever-smaller transistor at the lowest cost of ownership. new positions.” Many of our competitors place their primary focus on just the technology piece, but that is a shortsighted approach and actu- ally detracts from Moore’s Law. When we deliver on the full value Relative to the rest of our competitors, this allows us set, that’s what gets our customers’ attention and makes them want significant growth opportunities. Etch is a very critical mission for to work with Mattson Technology. For the technology piece I em- the company to continue on our trend of outgrowing the industry phasized the word “unique,” which is a very critical component. By and grow to what we call a sustainable critical mass — which al- that I mean it is our own intellectual property that delivers an ad- lows us to deliver to the future Moore’s Law nodes for our custom- vantage for a customer in some area of making a computer chip. ers and provide the infrastructure to support their ever-growing When we do that, we help our customers where others can’t — and global presence. From an investor standpoint, it is a huge opportu- then we leverage further into more common areas of the process. nity that we have been investing in and are now starting to see that Mattson Technology has significantly accelerated and made a heavy translate into real growth for the company. investment in developing a set of products for some key inflection TWST: How well positioned are you in RTP and strip? points in the industry, in RTP, in etch and even in strip. It is this Mr. Dutton: Very well positioned. Not only are we mar- investment that is driving our eight consecutive quarters of growth. ket leaders in both areas, we were able to leverage our expertise in I am highly confident that we will continue to win on this formula, strip to develop and organically grow into etch. In fact, we are the and we are seeing that as we grow. first company that has organically entered into etch in the last two TWST: Mattson recently completed a secondary of- decades. We were able to do that because our two core products are fering. What drove that offering? strong. In RTP, our tools have historically been very strong memory Mr. Dutton: It was fully about the growth opportunities products; however, we have not stopped there. We are now seeing we see ahead and ensuring that we can meet them. I just men- engagements in what is called the foundry side, which is the other tioned the heavy investment we made in new technology posi- half of the computer chip manufacturing world. The opportunities tions. Through one of the worst recessions that we have seen in in RTP are to extend growth beyond the memory market where it our lifetime, we established these technology positions and prolif- was strongest in the past. erated them across multiple customers. We are seeing a return on In strip, we are a world leader. As far as our global posi- that investment, with solid growth. The proof statement is we have tions, we are number one with the broadest number of positions in had eight consecutive quarters of growth, seven of which have the top 20 capex spenders. It is important to note that strip is a been double digit. In fact, in the last quarter our top line grew by subset of etch. We leveraged our core technical ability in strip, and 14%. Looking ahead, I see the potential for that growth to con- we built the etch group from scratch. That is why we are able to tinue. We have to be able to fund that growth and further our develop it so efficiently. Last year, we were by far the fastest- evaluation opportunities, which is how we win new positions. growing strip company, as well as an extremely fast-growing etch Looking at the potential we have ahead, we wanted to ensure that company. What is allowing us to move forward is that synergy we would not miss a beat on any one of these growth opportuni- that those two areas are now putting together, allowing us to give ties, and that is why we did the offering. better returns to our shareholders. TWST: You said the etch market may be one of your TWST: Please walk us through some of the key points biggest sources of future growth. Do you play in the entire etch from your recent first-quarter results. market or a particular subsegment? How big is that market Mr. Dutton: We had a great first quarter. I mentioned opportunity for Mattson? already, it was our eighth consecutive quarter of growth. We grew Mr. Dutton: The etch market is truly a big market, espe- 14% quarter over quarter. We had a record etch order for the com- cially relative to our initial core markets of RTP and dry strip. The etch pany — the largest etch order we have had to date — and we an- COMPANY INTERVIEW — MATTSON TECHNOLOGY, INC. nounced that our etchers are now moving into new applications, Mr. Dutton: We have a very strong, seasoned team where we expanded the available market by about another $500 with deep industry expertise that we leverage to our advantage. million. In the first quarter, our foundry business with our strip We are taking market share from formidable competitors and are tools continued to outpace the industry. So overall, we felt Q1 was delivering products at the leading edge that deliver value to our an extremely strong quarter for us and positioned us well against customers. This requires seasoned professionals with dedication our competitors moving forward. and expertise. Many on the Mattson Technology management team have been with the company for over 15 years. They are very passionate, very committed and dedicated to their areas, and all have considerable depth and strength. “We are ahead of the pack. According to TWST: Historically, what has Mattson’s shareholder Gartner Dataquest, our growth rate through base been like? Is that evolving? 2010 was over 300%, while the industry Mr. Dutton: Yes, I think coming into the recession in 2009 averaged 148%. In the most recent quarter we were seeing a lot of growth and value funds, because we had just we had growth of 14%, one of the highest of started to execute to our new etch growth strategy. Through the first our peers.” half of the recession, we all struggled with what I call the nuclear winter, where most companies in the industry saw almost no orders at all — previously unthinkable in the industry’s history. It was a very difficult time for the entire industry. I think we saw some shifts TWST: How did you do compared to your competitors? to value shareholders, but more so into the general funds. We are still Mr. Dutton: Actually, I believe we are ahead of the pack. appealing to growth and value shareholders. Over the near term — as According to Gartner Dataquest, our growth rate through 2010 was the company starts to execute to our growth strategies and the bal- over 300%, while the industry averaged 148%. In the most recent ance-sheet metrics change as we start to move to profitability — the quarter we had growth of 14%, one of the highest of our peers. This potential return on investment to shareholders is expected to in- shows that our growth momentum is really starting to kick in, and I crease, and we should see our growth shareholder base increase. think that is what is attractive about Mattson Technology. TWST: What are the key metrics or events investors TWST: How financially strong is Mattson at this should focus on in order to track your performance? point? What items are you looking to improve? Mr. Dutton: We just finished an Analyst Day. And from Mr. Dutton: I look at where we are today, and I think the feedback we have received, it was a great event. The key things Mattson Technology currently has one of the strongest operating that investors need to watch for are in the near term. We have talked models in its history. First, let’s talk about our balance sheet. Weabout etch expanding into new customers, especially on the foundry have no debt, which is highly important in navigating through this side. Look for us to announce some of that progress and to make highly cyclical industry. With our recent offering, we have over $35 further advancements as we get into the second half of 2011. RTP is million in cash, as per what we announced at the end of the first now engaged in five different foundries. As we go through the next quarter. At the same time, we have reduced our operating expendi- quarter, we expect to solidify some of those positions and move our tures by about 20% to 25% as compared to where they were before RTP tools into volume production. Most critical is to watch the the recession. And we are starting to drive revenue levels that are company move closer and closer to profitability and start to generate very close to profitability. As the company’s top line grows to the positive cash flow moving forward. I think those are the three key next level and we start to deliver profitability on this new product areas to look at and watch to see that we are delivering on our base, I am very confident that Mattson Technology will deliver growth strategies and our operational metrics. stronger earnings than it ever has before. TWST: Have you encountered any misperceptions or TWST: Do your plans for growth include M&A? recurring questions in your conversations with the investment Mr. Dutton: We are more focused on our current growth community? Is your company well understood among investors? strategy, which we began in about 2007 to 2008, which is to take the Mr. Dutton: That’s a good question, and I don’t think it company to $500 million in size and beyond. And most of that is is. I think that foremost, when you compare us to our big competi- centered around organic growth today. We feel it is the most effec- tors, you have to take into consideration that they are not executing tive use of our investment with the lowest risk. Although the speed a growth strategy per se, but executing further extensions of what to top-line growth is slower than that of M&A, I believe these tech- they already have — and they are high volume, multibillion-dollar nologies produce much more solid growth and a much more solid companies that drive very high returns and earnings. We’re more top line with less risk than you might get with an M&A merger. Our akin to an etch startup, and we’re still investing and not yet deliver- strategy of organic growth is focused in a significant market. As I ing profitability — but delivering a growth foundation that will mentioned, we’ve delivered our core competencies into etch, at allow the company to outgrow the industry. some key inflection points for the industry. So our near-term growth I think the problem lies in that we get measured on the is focused on organic growth, and focused on delivering the com- expectation that we should be delivering earnings first and growth pany to be $0.5 billion in size as we look out into the distant future. second, and that’s just not what will make the company a long-term TWST: Please tell us about your senior management. company built to last. And that’s where I think the frustration or Do you have the talent necessary for your future etch strategy? misperception lies with investors. As we move to profitability, that COMPANY INTERVIEW — MATTSON TECHNOLOGY, INC. changes. But in the meantime, from this vantage point, the company TWST: Is there anything else you would like to add? is strongly undervalued when looking at any typical Wall Street Have we missed anything? metric. And I think that’s where value investors would find us -com Mr. Dutton: I think we’ve covered everything very well. pelling. Because, once again, we’ve grown for eight quarters. We I just want to relate one story I have, which I think highlights what see growth potential continuing, and I think this train has already is sometimes underestimated in what we’ve accomplished. I men- left the station and is decidedly gaining steam. tioned earlier that we have organically grown into etch. When we TWST: From vantage point as CEO, what would make entered etch, there were two other companies that entered etch at the next 12- to 24-month time frame a success for Mattson? the same time. Both of these other companies had experienced etch Mr. Dutton: I think if you look in the next 24 months, I people from bigger companies in this industry, and everybody ex- expect Mattson to deliver record earnings, definitely on a quarterly pected that they would be the strong contenders moving forward in basis. I see etch continuing to grow. This year, etch comprised etch, not Mattson. And here we stand today. roughly 33% of our total revenues. And next year, I would expect it We actually spent significantly less development money to start to exceed 40%. And lastly, that RTP delivers strongly into than either of the other companies. And yet, we’ve delivered twice foundry. I think if we see those things delivering strong returns to the results of the startup company, and the public entity didn’t even our bottom line, I’m going to be extremely happy with what the get established in etch. I think when you step back and look at the company has accomplished. David in the industry, we bring a clean shot that’s more effective TWST: Please give us your best summary statement. than anything else. That’s something that I think you have to under- What would compel investors to review Mattson Technology stand as we go forward. That core competency in this company and include it in their long-term investment strategies? continues to strengthen as we grow, and I think we’ll become a Mr. Dutton: I think if you look at Mattson today, we are a stronger and stronger competitor. growth stock. We’ve made an investment that has delivered very TWST: Thank you. (KL) strong and solid positions that are now opening up into growth op- portunities for the company. We have demonstrated strong growth on DAVID L. DUTTON eight consecutive quarters, while holding operations expenses very President, CEO & Director tight and making progress on our product margins. We expect that our Mattson Technology, Inc. products — which are positioned at some very key technical inflec- 47131 Bayside Pkwy. tion points in etch — RTP and strip are positioned to deliver market Fremont, CA 94538 share gains while still delivering strong returns to the bottom line. (510) 657-5900 When you bring all that together, I think this is indicative of a com- (800) 628-8766 — TOLL FREE pany that is passed a startup phase and starting to move forward. And www.mattson.com it has huge growth opportunity and value opportunity for investors. e-mail: [email protected] COMPANY INTERVIEW Pixelworks, Inc. (PXLW)

BRUCE A. WALICEK is President and CEO of Pixelworks, Inc., and serves on its board of directors. Prior to assuming his current position at Pixelworks in January 2008, Mr. Walicek served as an Executive in Residence at Sevin Rosen Funds, and from 2003 through 2006, Mr. Walicek was employed by Worldview Technology Partners. Prior to entering the venture capital industry, Mr. Walicek worked at Deutsche Bank Alex Brown from 1996 through 2003, leading the semiconductor investment banking efforts as part of their Global Investment Banking Group, and from 1996 to 2000, he held the position of Senior Equity Research Analyst covering the semiconductor and electronic design automation industries. Before entering the financial services industry, Mr. Walicek held a number of executive positions in the semiconductor industry over a 15-year career at firms such as Texas Instruments Inc., VLSI Technology, Inc., and Cirrus Logic, Inc. Mr. Walicek began his career at Tracor Incorporated, where he developed image and signal processing technology for underwater sound applications. He holds an MBA from Santa Clara University and a B.S. in mathematics with highest honors from Texas State University.

SECTOR — SEMICONDUCTORS Mr. Walicek: Over the last several years as we turned the (AVB601) TWST: What is Pixelworks? company around, we have focused on a number of key objectives Mr. Walicek: We are a fabless semiconductor company that included improving product execution, focusing the company that specializes in innovative semiconductor and software video on its core strengths and value proposition, rebuilding the solutions for the global display market. Being fabless, we management team, fixing the balance sheet and getting the outsource the wafer and package manufacturing to other company back on a growth track. So consistent with these themes, companies, and provide the concept, design and marketing of our on the top of our list was to regain new product momentum by products. The company was founded in 1997 and went public on improving product development and getting our products out on Nasdaq in 2000. We were originally based in Portland, Ore., but time. To that end we are on plan and, despite an inventory moved the headquarters to San Jose at the beginning of 2008 when correction and the Japan earthquake, had good results last quarter, I became the CEO of the company. where our new products were up 157% year over year and We have about 250 employees worldwide, mostly accounted for more than 50% of our revenues. engineers, and we have a very strong presence in Asia, which puts Secondly, was to gain market share and grow in the us close to our suppliers and customer base, who tend to be large advanced large-screen flat panel TV market. In the second half of top-tier multinational display manufacturers. The company was a 2010, we delivered our fourth generation of advanced video highflier during the last decade, but fell on hard times during the processors for this market, and we are experiencing very good 2006-2007 time frame, and we have spent the last several years design win momentum. In this market our Q1 revenues were up rebuilding the company and refocusing on a few key markets that 123% quarter on quarter, and comprised 17% of revenues. And we play to the company’s strengths and value proposition. These are now sampling our next-generation products, so we continue to markets typically require advanced, high-performance video make good progress on delivering on our roadmap and gaining processing, which is an area we have excelled in for over a decade. market share in our target market. We also sampled the next Today, we are the leading supplier of video solutions to the front generation of our products for the projector market last quarter, projector market, which is our original business and core market called the Topaz family, which is a complete refresh of our at about 77% revs in 2010. We are expanding into the Advanced projector chip and software product line. So overall, we feel we are Large Screen Flat Panel TV market, which is providing exciting on track to our plans over the last 12 months. growth opportunities, and all of our products are sold into a variety TWST: What are some of the key trends in your target of video markets, such as video teleconferencing and medical markets that are creating opportunities for Pixelworks? Has imaging — we call embedded video display applications — which Pixelworks addressed those trends and what are your was about 15% of our 2010 revenues. advantages? TWST: If we were speaking 12 months or so ago, what Mr. Walicek: There is quite a lot going on, and there are would have been your objectives at that point? How have you a number of trends that are driving change and opportunity for us. 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted done in meeting that plan? First and foremost is the pervasiveness of video. Video is invading COMPANY INTERVIEW — PIXELWORKS, INC. all aspects of our lives and is being played on an expanding array opportunities for innovation and areas to apply our technology, of products, such as smart phones, projectors, large screen TVs, which could turn out to be a home run. PCs and now tablet devices, to name a few. And in addition to traditional content from the networks or Hollywood, there are new content sources of varying levels of quality driven by user- generated content captured and created in a wide variety of frame ”Video is invading all aspects of our lives and rates, resolutions and formats, and being widely distributed over is being played on an expanding array of wired and wireless broadband. This is causing quite a bit of products, such as smart phones, projectors, complexity in the video ecosystem, and a lot of opportunity to large screen TVs, PCs and now tablet devices, improve the quality of content. to name a few.” Another key trend is the emergence of LCD panels and projectors as the dominant large-screen technologies. The rapid price declines of LCD panels has driven elasticity in the market, causing large unit growth. LCD technology in particular is changing rapidly to adapt to higher-performance needs like 3D and LED TWST: What is the competitive landscape like from backlighting, to name a few trends, and all of these factors create your perspective? What are its dynamics and what ultimately video quality issues and all drive the need for advanced video distinguishes Pixelworks? processors. Also, a lot of these screens are being connected to the Mr. Walicek: We face a number of tough competitors, internet and this “connected TV” trend is in the early stages of both large and small, but over the last several years the transitioning to “Smart TV,” where the TV is now becoming a overarching theme in the chip market for TVs has been compute platform, running an operating systems and performing a consolidation, as a number of our competitors, such as Zoran, wide variety of tasks. So not only will your smartphone and tablet ATI, NXP and Trident have been acquired or merged together. be running an operating system such as android, but your TV will Also a number of larger competitors now tend to focus on the as well. Essentially, what is happening is that the processing main TV processor market, which is larger and is rapidly capability of a high-performance PC is headed for the middle of becoming a very complex project with escalating development your TV. This is dramatically increasing the complexity of the main costs. We do not address that market segment and only focus on chip and software of an advanced flat panel TV system, as the the video processor. A lot of our competitors are much larger platform not only has to handle intense video processing but also a companies, so maintaining our focus is critical. wide variety of performance intensive tasks as well. High- Additionally, there is internal competition at some of the performance video processing requires a separate chip to handle the larger manufacturers that also have chip operations, like Samsung, load, and our products for this segment are used either on the TV but overall we believe that there is a secular trend toward Platform alongside the main chip, or on the Advanced Panel itself. outsourcing driven by increasing time-to-market pressures and This is arrangement is very similar to a graphics chip sitting next to rising development costs. In the projector chip market, TI has been a processor in a PC. a historical competitor for DLP-based systems, and there are some Some of these trends are also impacting the projector smaller companies like I-Chips out of Japan. Internal solutions are market, specifically the need to marry video processing and part of the competitive landscape, but projector manufacturers are networking connectivity. There has been quite a bit of change in experiencing the same pressures for outsourcing as TV the projector market driven by the need to share video and manufacturers. For us it is all about focus. We are a small company content across a network. Years ago network connectivity was a competing against much larger firms in most cases, so focusing on higher-end requirement in projectors, but today all segments what we do well, which is video, is the key to success for us. require this, which has created opportunity for us. And like the TWST: What is the agenda at this point? What will large flat panel TV market, 3D processing is beginning to move make the next 12 to 24 months a success? into projectors as well, further increasing performance demands. Mr. Walicek: Now that the major issues are behind the So fortunately for us, the rate of change and new requirements in company and we have re-established new product momentum at the market have been increasing rapidly and generating this point, our top priority is to generate profitable growth. That will opportunities for our value proposition. be a function of staying focused on what we do best and continuing TWST: What are some potential home runs over the to improve on the success we have to date and, in this business, the next one to two years for Pixelworks and what could cause need for improvement never stops. It’s relentless, and we have to higher-than-expected profitability? continue to drive execution across the company and increase market Mr. Walicek: We think that the video processor segment share in our target markets. Another agenda item is to bring for the advanced flat panel TV market could potentially be a home innovation to the market. We have some great technologists at the run for us over the next few years. According the DisplaySearch, company, and our job is to bring their creativity to our products and this market is expected to about $500 million in 2012, so it solve hard video problems for our customers. And finally we want represents a significant growth opportunity for us and is an area of to get our story out to the investment community and become a focus. As large flat panel screens continue to become connected and great small-cap stock. Internet video becomes more pervasive, we think there are many TWST: Looking at the balance sheet and P&L, what COMPANY INTERVIEW — PIXELWORKS, INC. are some of the strengths today? What are some items you the executive team has the same general profile. We are all 25- might be focused on for improvement within that? What has plus year semiconductor industry veterans that started out at large been the funding history? Are there any funding needs on the companies, such as Intel and Texas Instruments, and we all have agenda to address? high-growth fabless semiconductor experience from companies Mr. Walicek: Over the past several years we have such as Genesis Micro, Cirrus Logic and ATI. One of our key significantly improved the balance sheet by retiring $140 million executives is our CTO, Bob Zhang, who has been with the of debt. We started out with negative cash on the balance sheet a company for 10 years. Bob was the founder of a successful few years back, but we were able to purchase most of the debt at company that Pixelworks acquired in 2001, and he has been discounted rates and that allowed us to end up in a positive cash instrumental and key to our innovation over the last decade. position. We have also focused on improving other metrics such Another key executive who joined the company a few years ago as inventory, where turns have increased from 3.8 to 6.7 over the is our EVP of Engineering, T. Chan. T. has a long track record of last few years. We also recently completed an equity financing, execution success from companies such as Intel, Cirrus Logic and which further strengthened the balance sheet. This is the first Genesis Micro; he has been a major part of our turnaround, and time the company has been able to tap the capital markets since we were very pleased that he joined us in early 2009. 2004, so we were pleased to be able to get that done. On the P&L side our intense focus is on achieving top-line growth and consistent profitability. TWST: Historically, what has been the shareholder “Another key metric that we have focused base of this company and has that base undergone any recent investors on over the last several years is how changes in the last year or so? our new products are becoming a bigger Mr. Walicek: We recently completed an equity percentage of our revenue stream, which really points to the success of our R&D efforts. We financing, so our investor base has undergone a dramatic change focus greatly on these metrics, and they are for the better. We now have a number of new institutional important to us and our investors as well.” investors owning our stock in addition to the high-quality institutions that were already shareholders. Since we have been relatively quiet over the last few years, as we focused on fixing the company, we lost quite a bit of institutional sponsorship, so this TWST: As investors track and assess your process was in some respects a “re-IPO” of the company and a performance, what are the key metrics or events on which they reframing of who Pixelworks is today. We look at the process as a should focus? big step toward more actively engaging current and potential Mr. Walicek: Of course the standard key financial shareholders and getting our story out. metrics of revenue growth, margins and profitability are critical, but TWST: In your discussions with the investment our focus also continues to be introducing and driving our new community, are there any recurring questions or misperceptions? products to market and gaining market share, especially in the Is the Pixelworks story well understood? large-screen advanced flat panel TV market. We break out these Mr. Walicek: No, and we are working to change that. As markets on our conference call so investors can get a view into our I mentioned, we are relatively undiscovered and not followed on progress. Another key metric that we have focused investors on Wall Street since the company hit tough times, so the perception of over the last several years is how our new products are becoming a the company is from the last decade when it was headquartered in bigger percentage of our revenue stream, which really points to the Portland and largely based in North America. Today we are a San success of our R&D efforts. We focus greatly on these metrics, and Jose-based company with a large employee footprint in Asia, as they are important to us and our investors as well. opposed to North America, with a new, very focused management TWST: What do you feel investors should consider as team and expanding market opportunities. they decide whether to include PXLW as part of their current TWST: You have a strong CFO in Steven Moore. portfolios and their long-term investment strategies? What are his strengths and what do you rely on him to do? Mr. Walicek: At this point, after a multiyear process to Mr. Walicek: Steve is a very accomplished and talented get the company back on track, we have passed the inflection CFO, and he is responsible for many of the improvements in our point and the company is in position to grow meaningfully over financials we discussed earlier. After a few years of effort, we now the next few years. We have significantly improved our execution, have an extremely clean balance sheet and have always had great and our new products are experiencing good momentum as performance in the timely execution of our filings, which is one of evidenced by the growth in our most recent quarter. We have a those areas that is taken for granted until it is an issue. We run a very great team with a track record of innovation and execution, top- tight ship financially due to the crisp Sarbox compliance and tier customers, and a solid core business in the projector market budgeting processes we run at the company, and we have Steve and with a great growth opportunity as a focused player in the his team to thank for that. advanced flat panel TV video processor segment, where we are TWST: Introduce us to your top-level management just beginning to gain market share. So we believe there is ample team. Who are two or three of your key individuals? opportunity and headroom to grow the company and increase Mr. Walicek: We just discussed our CFO, but overall shareholder value in the coming years. COMPANY INTERVIEW — PIXELWORKS, INC.

TWST: Is there anything we’ve missed or anything Pixelworks, Inc. you want to add? 224 Airport Parkway Mr. Walicek: No, I think we covered all the key issues, so #400 thank you for allowing us to update your audience on Pixelworks. San Jose, CA 95110 TWST: Thank you. (KL) (408) 200-9200 (408) 200-9201 — FAX BRUCE A. WALICEK www.pixelworks.com President, CEO & Director e-mail: [email protected] COMPANY INTERVIEW TowerJazz (TSEM)

RUSSELL C. ELLWANGER joined TowerJazz as Chief Executive Officer in May 2005. He also serves as Chairman of the board of directors of its wholly- owned subsidiaries, Tower Semiconductor USA, Inc., and Jazz Technologies, Inc. From 1998 to 2005, Mr. Ellwanger served in various executive positions for Applied Materials Corporation, including Group Vice President, General Manager of the Applied Global Services (AGS), from 2004 to 2005; and Group Vice President, General Manager of the CMP and Electroplating Business Group, from 2002 to 2004. Mr. Ellwanger also served as Corporate Vice President, General Manager of the Metrology and Inspection Business Group, from 2000 to 2002, during which he was based in Israel. From 1998 to 2000, Mr. Ellwanger served as Vice President of Applied Materials’ 300-mm Program Office, USA. Mr. Ellwanger served as General Manager of Applied Materials’ Metal CVD Division from 1997 to 1998, and from 1996 to 1997, Mr. Ellwanger served as Managing Director of CVD Business Development, during which he was based in Singapore. In addition, Mr. Ellwanger held various managerial positions in Novellus System from 1992 to 1996 and in Philips Semiconductors from 1980 to 1992.

SECTOR — SEMICONDUCTORS world, which is a 0.7 millimeter camera used in endoscopic (AVB603) TWST: Please begin with a description of Tower applications, to the largest camera in the world, which is a single die Semiconductor. Tell us what your business is and how you see 5x6-inch on an 8-inch wafer that has been tiled together to make a the company today. 10x12-inch X-ray panel, and we have a variety of applications in Mr. Ellwanger: Tower itself started as National between that. We also have a very strong RF portfolio, and I believe Semiconductor in Israel in 1984. In 1993 it was bought from of any foundry offering, we have the highest speed (fT) Silicon National and then was listed on Nasdaq as Tower Semiconductor Germanium offering in the world with a commercially available and became a pure-play foundry. It grew as a foundry and focused process platform delivering a 260GHz fT. itself over the years to be a specialty foundry, which means that the Within the RF sector, we have multiple applications that activities that we do, or at least since I came in 2005, are very we go after and enjoy a very nice market share in those sectors as specifically analog focused. We still drive a digital roadmap to a pure-play foundry. The other area that we specifically have some extent and through the digital activities that we do, we drive developed and go after very strongly is Power Management, and specific platforms that we then add analog content to. In September that was organically developed in the company since 2006 plus or of 2008, we merged with Jazz Semiconductor, so we’ve changed minus — and we have now gained a lot of traction with a the name formally to TowerJazz. As we sit right now, according to 0.18-micron Power Management platform extending anywhere IC Insights, we are the number one by revenue specialty foundry in from low voltages up to 700 volt at 1-micron platform. So that’s the world, and number five overall if you include the top four pretty much our portfolio. As I mentioned, we are a pure-play digital foundries. So we’ve come quite a long way as a specialtyfoundry, we don’t make any products that are sold by us into end foundry in a short amount of time. We were number 12 in 2005 at users, there is no product that has our name on it as an end package a revenue level of $102 million, and we completed 2010 at a chip; everything that we do, we do with and for our customers. revenue level of $509 million, again moving up into the number One additional thing that differentiates us against multiple other one position as reported by IC Insights. foundries is that we have a very competent and full-service design During this period of time, almost all metrics in the center, so for multiple customers, we do designs directly from a company have improved greatly. We have a very reasonable debt-to- spec sheet and then fabricate the wafers, ship the wafers to the EBITDA ratio in the low twos. We had last year for 2010, $168 packaging house and they are then packaged as per the million EBITDA at the $509 million revenue level, which was quite specifications of our customers. Our design-enablement platform nice. There was about a 60% drop to bottom line as compared to the complements our sophisticated technology and enables a quick approximately $300 million revenue of 2009. Our major focus is and accurate design cycle. analog solutions for a wide range of customers using a variety of I believe we have a very complete package of process platforms. One of our major business units, CMOS Image Sensor, technologies to serve RF, Power Management and CMOS Image enables us to make everything from the smallest camera in the Sensor customers, and to some small degree we also do MEMS 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted COMPANY INTERVIEW — TOWERJAZZ applications and as well, Core CMOS for 0.13-micron copper up depending on which segment you’re talking about, there is strength through higher technology nodes. That’s a little bit of an overview at different companies. The first thing that one has to look at is the of the company. We’re headquartered right now in Migdal Haemek, fact that we focus on specialty analog technologies. The four largest Israel, with two manufacturing facilities there and a design center in foundries in the world focus primarily on digital technologies and Natanya, Israel. We have a manufacturing facility and R&D more or less follow the trend of Moore’s Law. They have very deep activities in Newport Beach, Calif. We announced a short while ago sub-micron lithographic capability and continually drive the that we had signed a non-binding agreement to acquire the Micron technology roadmap so that you have lateral shrink of the dye, of factory in Nishiwaki, Japan, which is a very high-volume factory of the transistor size, of the metallization, as well from one generation about 60,000 wafer starts per month. So hopefully we will close the to the next; this requires very high capital expenditure. We do not acquisition some time in the near future; we are targeting to close it compete in the digital landscape. within the second quarter. That would then give us fully owned manufacturing presence in Israel, Japan and the U.S. We also have a minority 10% holding in HHNEC in Shanghai for which we have a manufacturing supply agreement as well. ”One of the big changes that we had done in TWST: If we were speaking 12 months or so ago, what the company strategy after I joined was to would have been your objectives at that point and how have you move away from digital technology, where we done in meeting those objectives? would be a second or third source, and become Mr. Ellwanger: At the Needham Conference in New a first and full source within analog York in January 2010, we announced that we had a target to achieve technology.” $500 million in revenue, and at that time, although not yet announced, we came off of 2009 where we had a $299 million revenue year. So our target was to reach the $0.5 billion level. We had announced that to the Street as well as our target to achieve a One of the big changes that we had done in the company quarterly GAAP net profit. From a cash-from-operations perspective strategy after I joined was to move away from digital technology, we’ve been positive for multiple years, but we had not reached the where we would be a second or third source, and become a first and degree of profitability to cover our depreciation, so we had full source within analog technology. Now that being said, some of announced that we would achieve GAAP net profits in the second the large digital factories also provide analog technology, but the half of the year on a quarterly basis. As I mentioned already we big differentiation that they have within digital is really the present broke the revenue target, we went up to $509 million, which to all momentum that they have and a very big center of mass that enables reports that I’ve seen show us as the number one growth foundry them to invest the billions of dollars per year needed for capital 2010 over 2009 and maintains us as the number one growth foundry expenditure. Instead of driving deeper and deeper technology 2010 over 2005. So since I’ve been at the company for that five- nodes, what we do is we drive more content into the silicon, and that year period, we were number one in growth at a slightly greater than allows you then from multiple generations to take advantage of an five times growth, and again 2010 over 2009 was 70% growth. So equipment set that reaches full depreciation and allows you to I think we gave a very aggressive target, and we certainly have met continually optimize the efficiency of the manufacturing line. As far that target we had announced at the beginning of the year. That as our competitors, if you look at Power Management, there are wasn’t the guidance. We don’t give yearly guidance, but we did saymultiple other foundries that compete. What we have that at the Needham Conference that we targeted $0.5 billion revenue. differentiates TowerJazz is a continual movement of our roadmap TWST: Would you give us some background and our performance driving certain IP blocks that allow you a non- information on your Aerospace and Defense division? We hear volatile memory block that is a zero mask adder versus commercially that TowerJazz expands MPW services to include CMOS Image available IP blocks, where you’d be adding anywhere from eight to Sensors. Would you explain that in layman’s terms? 11 masks on top of the original flow. Mr. Ellwanger: The Newport Beach facility has a We offer platforms that give extremely good performance, business group designated for Aerospace and Defense work for which is very low Rdson and possibly the lowest Rdson in the different companies within the U.S. This is all with ITAR clearance. foundry industry. In the case of CMOS Image Sensor technology, Those activities for the most part are specific and under certain we have our own pixel IP, so one of our benefits is the IP that we restrictions for information flow into other areas of the company. own as a company and we have our own design tool, a prototype It’s a good business for us. It’s run by Dr. Marco Racanelli. What tool that customers can design with and be able to get first-round our MPW press release meant is that we had transferred some of our information of the direction that they want to go with their basic CMOS Image Sensor platform, which was predominantly run technology. In the case of RF, we have a very long and rich history in Israel, into the Newport Beach facility for use within the U.S. of intellectual property. With the Jazz Semiconductor merger, we Aerospace and Defense business unit. acquired a rich IP portfolio and we take strong advantage of that. TWST: What’s the competitive landscape from your Jazz began as Rockwell, which then spun off to be perspective? What are the dynamics there and what ultimately Conexant, which then spun off the factory as Jazz, which is what we distinguishes TowerJazz? acquired. We also supply pretty much start-to-finish design services Mr. Ellwanger: We have multiple competitors and for customers that are in need of that and for customers that do not COMPANY INTERVIEW — TOWERJAZZ need us to do the full design, we have spot on PDK design kits that having done an acquisition specifically to increase market share, but enable customers first-time success to a very high probability. So having done an acquisition to increase our served market. So I think the biggest differentiation that we have really comes into the the first area that makes some very good sense to do an acquisition intellectual property that’s contained within the company and theis to increase your served market. continuation of analog roadmap excellence accompanied with the design services that enable customers to have confidence to be successful on first-time designs. Within the company, our big focus is partnering with “We went from being number 17 in the customers, listening to customers, getting our input from the industry in growth 2005 over 2004 to being customers, and using them to enable us to modify our vision year- number one in growth 2006 over 2005 almost over-year and to change the company quickly according to market solely as a function of having aligned ourselves needs and desires. I believe that we probably differentiate ourselves to customers and driving quickly projects that as well within the role of being a very customer-centric company. met customer needs.” When I first came to the company, one of the issues that I believed that Tower had was that it had a central R&D group and had a central sales and marketing group. The R&D was then project based, and the sales and marketing had very little clout to complete The second is an asset acquisition, especially as a foundry commitments that were made to customers. We changed that fairly or a company that produces silicon wafers. To build a factory on quickly by creating at that time, in 2005, a product line, and we greenfield land is very expensive, especially if you’re dealing with moved the customer support, the R&D and the product marketing new tools. If you’re dealing with used tools, the price comes down into the product line itself under a product line General Manager from the new tool price; but you still have the cost of the facility, that then had the capability to make commitments to customers, but you have the startup cost, and you then have to buy a lot of used also the resources to make those commitments work. tools — many of which have problems starting up and not all of We went from being number 17 in the industry in growth which you’ll ever get a complete line, but you’ll still have to 2005 over 2004 to being number one in growth 2006 over 2005 intermix it with some new tools. The Micron facility we’re buying almost solely as a function of having aligned ourselves to customers for $40 million cash and about $28 million in stock, and then we and driving quickly projects that met customer needs. We’ve tried assume $70 million pension liability, but the pension liability goes to maintain that to have a structure that some would say maybe isn’t against the cost model year-over-year, so it’s not a one-time optimally efficient through centralization, but it does allow us to be, payment. It’s just basically as people retire, you come up with some I believe, very efficient to focus on customer needs. So what we try pension numbers. But the real cash outlay with the cash and stock to do as a company dogma is we do not centralize any core is $70 million, plus or minus. To try to build that type of capacity capability in the company, we try to keep it as a per se localized — 60,000 wafer per month — would cost hundreds of millions of capability; localized meaning underneath the leadership of the dollars, plus during the time that you were staffing the factory, you person who is responsible to the customer to deliver the product, have no revenue coming in. which is the Business Unit Head, the way that we are set up now. In our case, it typically takes about a year to 14 months, TWST: Would you say that’s the rationale behind the plus or minus, to bring up a new floor, and from the time the floor Micron Technology deal in Japan? is brought up, can take another six months for the customer to get Mr. Ellwanger: No. If you look at acquisitions, at least qualified on the floor. And then they have to build their business. So my belief, there are only three reasons a company should do an you’d be looking at the minimum 18 months up to two years of acquisition. The first would be to increase your served market. If being very strong cash flow negative because you’ve built capacity you have a market share of 30% or 40% and you buy a company that’s unused in a new facility if you’re building on a greenfield site. just to increase the market share of a product platform that you In the case of the Micron acquisition, it comes with the loading already have, it doesn’t say so much for your organic capability toagreement, so for definitely the first 18 months, the factory is cash listen to customers and to adjust your platform, or your product in flow positive during the time that we’re bringing up our own floors. our case, to meet our customer needs. Although many companies do And then there is another 18 months to where the utilization that, they buy companies just to increase their market share, I don’t commitment from Micron decreases, and we then have the free think that’s the wisest. But if you a buy a company to increase your utilization to build up the capacity that we’d be doing with served market, it makes a lot of sense. When we bought Jazz, there customers other than Micron. So the model is a very good one, was not a single overlap in the top 30 revenue customers at Tower which allows us to get very high capacity at a reasonable cost. against the top 30 revenue customers at Jazz. We can say that really The last part of why it would make sense to do an can make sense from a synergy standpoint in as far as you’re buying acquisition would be if the acquisition allows you a regional a company that has technologies that increase your served market presence in an area that otherwise you had no representation, and quite substantially. Then within that served market, increase those the Micron acquisition of the Japan factory also provides that for us. customers that now you have in common. So within our top 30 and We’re undersubscribed by Asia Pacific customers into our factories their top 30, we have the ability to cross sell products that we have worldwide as compared to the overall usage from Asia Pacific. By and increase our market share through cross sales; therefore, not having the factory in Asia Pacific and specifically in Japan, the COMPANY INTERVIEW — TOWERJAZZ market share that we have within that region we believe will $198 million cash balance. Shareholder equity in 2005 was negative increase because of the geographic location. It’s a very long answer,$30 million, it ended 2010 at positive $118 million. Bank loan but I hope it answers your question. balance in 2005 was $497 million, in 2010 we ended the year with TWST: What’s the agenda at this point? What will $183 million pro-forma. Net debt to EBITDA in 2005 was negative make the next 12 to 24 months a success? 18 versus 2010, which ended at positive two. So if you look at the Mr. Ellwanger: First is to complete the deal of the overall financial highlights in the company, they are pretty Nishiwaki factory, close on it, and then to continue to provide high- reasonable. If you look at operating cash flow, in 2005 it was quality manufacturing for Micron within that factory, and to bring negative $61 million, in 2010 it was positive $121 million. So up and qualify several process platforms that are internal to things are good. Now if you say, what are we focused on as time TowerJazz presently and build the customer base there. So that’sgoes on, certainly to increase our net cash is always important, and been a very high priority for us at this point within the next 18 to continue to have adequate bottom-line growth that’s associated months, to maximize the future potential coming out of that factory. with the top-line growth that we have. But we don’t presently have Additionally, we have multiple new programs, big commitments any fundamental issues with the balance sheet. and new platforms within Newport Beach on the RF side. In TWST: What historically has been the shareholder addition, we will focus on continual new programs and commitments base with Tower Semiconductor, now TowerJazz? Has that base within the IDM transfer side and on Power Management. So it’s undergone any recent changes you can discern? really to bring to market successfully these platforms and continue Mr. Ellwanger: At the beginning of 2000 when the to advance them with our customers. 8-inch factory was built in Migdal Haemek, there was a group that came in as shareholders called the wafer partners. It was SanDisk, Macronix, Alliance, and Quicklogic to a smaller extent, as far as ”Net debt to EBITDA in 2005 was negative 18 their equity, and the Israel Corporation. The Israel Corporation versus 2010, which ended at positive two. So if participated as well in funding at that time, and they held a you look at the overall financial highlights in reasonable amount of shares in the company. Four of those were the company, they are pretty reasonable. If you customers, which was Quicklogic, Alliance, Macronix and SanDisk; look at operating cash flow, in 2005 it was and three of them held board seats. Over the years, we have gained negative $61 million, in 2010 it was positive different shareholders, they’ve sold some of their shares. So at this $121 million.” point for shares outstanding, none of those wafer partners hold a great amount of shares with the company. As far as the new shareholders, there are multiple institutions that are involved in the company. There are shares that are held still by the Israel When I was talking about our different businesses, there Corporation and certain sectors of the public. A direct breakdown of is one other thing that we do that’s a good part of our business, and the shareholders I don’t have in front of me presently. that’s what we call IDM transfer. That’s where we partner with an TWST: In your discussions with the investment integrated device manufacturer that has its own factory, but possibly community, are there any recurring questions or misperceptions? not enough capacity internally for what it needs in order to advance Is the TowerJazz story as well understood as you’d like it to be? the technology node to meet its need in the future. They either Mr. Ellwanger: I think to begin with, there were a transfer to us their process platform that we then only manufacture number of years when the company was floundering. Now, since for that specific customer or we co-develop a process platform, that 2005, we’ve had year-over-year growth, and I’m not saying that the depending on the agreements, we may also only manufacture for company is in perfect shape now, but we are in pretty reasonable that specific customer. So that’s another area where I think that we shape. There are two things that still have to happen in the market. strongly differentiate; the fact that this itself is a business group and Number one, we need to bring potential investors to an understanding we focus on that as a major product that we sell. The ability to of the reuse capability within analog manufacturing, and that an quickly transfer customer flow into our factory — not their product, analog factory can grow quite substantially without needing to have but their specific flow — to bring it up and meet their output billions of dollars of capital expenditure. I think that’s not parameters is a key distinction for us. necessarily obvious to people. Now some will look and say that if TWST: Looking at the balance sheet and P&L, what you have a TSMC, which is an incredible company, predominantly are some of the strengths today? What are some items you are driving a digital roadmap, but that has four generations of focused on for improvement within that? Do any funding needs technology shrink in manufacturing beyond what your capability is, need to be addressed? how can you compete with them? The point is that the products that Mr. Ellwanger: There is nothing announced about our we make not only do not need to get to those levels of shrinkage, funding needs that we’d be focused on in the short term. Many but many of them could never go there because of the needs of the things can come up, many things can happen. The balance sheet device. So I think that’s something that we have to explain a bit itself has changed quite drastically over the years. If you look at better to the overall market, just about what our model is and what 2005, at that time as mentioned, the company was at $102 million the growth potential of an analog foundry is, which is quite high. I in revenue, and 2010 ended at $509 million. In 2005 the cash mean, analog technology itself is quite high. balance end of year was $39 million, and in 2010 we ended with If you look at some of the markets that we’re getting very COMPANY INTERVIEW — TOWERJAZZ strongly into within Power Management, you’ll see LED drivers. to somewhere about 110 to 115; and in Q1, we maintained triple- Now if you look at LED commercial lighting, there are beliefs by digit design wins of this past year. We announced yesterday our Q1 many that by 2020 the greatest portion of all commercial lighting results. So one thing that I would as an investor want to have my will be LED because of the huge savings in power of LED versus eye on is how stable is the future, and what are the design wins the Edison bulb. Our platform within that or the drivers for the LED saying about the future? The other thing is certainly to look at what is very strong, it’s a 700-volt platform; we have good traction at are the platforms that you’re providing into, what are some of the leading suppliers, leading LED players. So just in that one area, if products you’re making, and are those markets ones that have good you look at the potential volumes — and not that we’re going to win growth potential? Another thing to consider obviously is the all the volumes — but the potential volumes of an analog 700-volt company’s current performance, because current performance platform of LED drivers in and of itself, especially as Edison bulbs tracking over the past few years is a fairly good indicator of what get replaced, would take 100% market share. There’s more capacity will happen in the future. What does current performance mean? I for that one product type than we have in all of our factories, even think always it’s revenue, it’s EBITDA and it’s cash flow. including the Micron acquisition. So the ability to grow within analog is strong, remains strong, and other than the need for capacity, does not take much additional investment. However, even ”If you look at LED commercial lighting, there the need for capacity, as described in the Micron fab acquisition are beliefs by many that by 2020 the greatest with the Nishiwaki factory, can be done very cost effectively. Other portion of all commercial lighting will be LED than that, there is no need to have huge capital expenditure because because of the huge savings in power of LED you don’t have to go technology node to technology node. So I versus the Edison bulb. Our platform within think that we need to continue to show investors and potential that or the drivers for the LED is very strong, it’s a 700-volt platform; we have good traction investors the capability of analog, the benefits of an analog at leading suppliers, leading LED players. roadmap, as well as continue to show results. ” Now we have had good growth, I think it’s about 40% CAGR for the past, 2010 over 2005. We have to continue to bring in that type of top-line growth connected with bottom-line growth, TWST: What should investors consider as they decide and I think then we just have to let customers and potential investors whether to include TSEM as a part of their current portfolios, see the story and know the story. We do present at several good as well as their longer-term investment strategies? analyst conferences. We have within our roadmap to go on several Mr. Ellwanger: I think our track record and performance roadshows within the next half year, non-deal roadshows just to get to commitment has been very clean. I think you’d always want to the story out, but do we have a story to get out? We certainly do. We look at that, as many say the past is a very good indicator of the are the number one growth foundry in the world, and within a five- future, so that’s number one. Number two would be the design wins year period have gone from $100 million negative EBITDA to $168 momentum that we have. The fact that with those design wins, one million EBITDA. That’s a very good trajectory. would believe that the revenue should continue to grow. Also, to see TWST: As investors track and assess your that we’ve acquired a 60,000 wafer start factory that, in addition to performance, what are the key metrics or events on which they our present capacity, can bring the company to beyond $1 billion should be focused? What should matter to the investor and revenue. The last part of that would be the fact that the company has what matters to you? expressed the 2014 target of reaching $1 billion in quarterly run Mr. Ellwanger: I think to start with, there is a metric that rate. So I think that those things are ones that I would want to keep we report which is called a design win. A design win doesn’t in mind and consider while I invest in a company. necessarily mean that something will go into production, but a TWST: Is there anything we’ve missed, anything design win means that a customer has selected us, they have put you’d like to add? resources on the project, they’re no longer working with our Mr. Ellwanger: No, just as a very last part on a human competition. Provided that the product itself works, it will go to standpoint: we focus philosophically very much on the development market with you as long as at the time they go to market, they are of people in the company, and that development of people deals still in need of that product. Now not every design win goes into with something that I was taught actually from the CEO and production, I wouldn’t want to be misleading on that, but typically Chairman of Applied Materials. I had gone in and asked him how it’s more or less the same type of an average of what is the he can be balanced between being so big picture that at the end of percentage of design win that goes into volume production. The the day, you think you’ve really done nothing, thirsting so much time of the design win to volume production takes anywhere from into the detail that at the end of the day, you haven’t done anything 12 months to 30 months, maybe even a little bit longer with certain of a big picture — and possibly have really taught every one of your types of products. So to look at the amount of design wins is, I employees to be too much into the details of their job. Anyway, think, a fairly good indicator as to what will be happening for more or less, that was the question I asked. But he gave me a very revenue. And revenue is always associated with bottom line in a interesting management lecture, and one of the points he talked to two-year horizon from right now. me about was employee development. And it was excellent. He In 2008 the company had about 50 design wins per basically said that myself, as a leader of an organization, should not quarter; in 2009, about 75; in 2010, we brought it into triple-digits try to develop the poor performers, should not try to develop the COMPANY INTERVIEW — TOWERJAZZ average performers. If I did, then I would just have an average Hence what he told me was really true; you then develop group. I should not try to develop even the good performers; if I did, a group of superstars. I think something we’ve been very good at I’d just have a good group. But identify some amount of superstars in the company is really a focused effort to find people that are and spend all my time with the superstars — any personal time I extremely high potential, not just very high impact. There are spend with people, not reviews or something, but personal time, many that are high impact, but when those that are high impact development time, and then I’ll have a group of superstars. I find itwith high potential are given opportunities beyond their experience to be the most accurate and incredible advice. level to grow and we see the way that they grow and their impact For instance, if you go about and you identify among new in the company, it’s very exciting, both for them and for college graduates that have been in the company two years, three management. In that regard, I think it’s been excellent. So that years, maybe even less than that and you see those that have a may be one of those soft values, but it’s a soft value that if really certain spark about them and you put them on a very fast-growth followed, I think has tremendous benefit. And I think we’ve been track and you give them big responsibility, number one, you get the very good at that. benefit of them, but there is also multiple others that you can never TWST: Thank you. (KL) identify. The minute that you have an organization that has hundreds of people — and ours is presently 1,800 people — there is no way RUSSELL C. ELLWANGER that I can identify or even have identified to me every superstar in Chief Executive Officer the company. But when people see that someone with certain TowerJazz characteristics and certain attributes and performance levels are 4321 Jamboree Road given big opportunities and that their career is growing, they either Newport Beach, CA 92660 believe that they are just as good and work harder to prove (949) 435-8000 themselves or they try to copy and demonstrate the same (949) 435-8757 — FAX characteristics as the person whose career is growing. www.jazzsemi.com COMPANY INTERVIEW Ultra Clean Technology (UCTT)

CLARENCE GRANGER is the Chairman and CEO of Ultra Clean Technology. He became CEO in 2002, after serving as the company’s President and Chief Operating Officer since 1999. Mr. Granger joined the company in 1996 as Executive Vice President of Operations. He has a broad range of management experience with high-technology manufacturing companies. Prior to joining UCTT, he was Vice President of Media Operations for Seagate Technology LLC. Prior to that, he was President and CEO of HMT Technology. Mr. Granger earned a bachelor’s degree in industrial engineering from the University of California, Berkeley, and received his master’s degree in industrial engineering from Stanford University.

SECTOR — SEMICONDUCTORS we’ve expanded away from our traditional gas delivery system -busi (AVB607) TWST: Would you give us an overview of Ultra ness is by moving into other industries. In the last few years, we’ve Clean Technology? expanded into several different industries, which has allowed us to Mr. Granger: Certainly. Ultra Clean was founded in bring in new products and customers. 1991 by Mitsubishi Corporation with the intent to become a manu- TWST: How do your products fit in the marketplace? facturer of gas delivery subsystems primarily for the semiconductor Mr. Granger: On the semiconductor side, gas delivery capital equipment industry. At that time, semiconductor capital systems are utilized in virtually every front-end semiconductor equipment customers were all vertically integrated, making their manufacturing process. If you are familiar with some of those pro- own gas delivery subsystems. Over the last 10 years, virtually all of cess steps — etch, chemical vapor deposition (which is called them have decided to migrate to an outsourcing model, which has CVD), ion implant, strip and RTP — all utilize gas delivery systems. benefited Ultra Clean Technology. Through our major customers, we are participating in all those as- Some other points from a timeline standpoint: In 2002, I led pects of the semiconductor capital equipment market. And then be- a management buyout away from Mitsubishi. And then in 2004, we yond that, we are supporting products in several other industries. In completed our initial public offering. In 2005, we opened up our first the medical industry we manufacture complete turnkey robots for a manufacturing facility outside the United States, in Shanghai, China. major medical customer. In the flat panel industry, in addition to gas Then in 2006, we successfully completed our first acquisition of a delivery systems, we are manufacturing complete turnkey optical company called Sieger Engineering. At the end of 2007, we opened inspection tools. In the research market, we are manufacturing com- our second manufacturing facility in Shanghai. And at the beginning plete scanning electron microscopes. And finally in the energy of 2010, we opened a new manufacturing facility in Singapore. market, which we consider the solar and the high-brightness LED TWST: What constitutes the biggest part of Ultra market, we are providing gas delivery subsystems. Clean’s business? TWST: Are there still issues of seasonality or cyclicality Mr. Granger: Today, gas delivery subsystems make up within the industry? How has your company addressed them? the biggest part of our business. As of last quarter, gas delivery Mr. Granger: Yes. Unfortunately, we are in the capital systems constituted 58% of our overall revenue. Now, if you look equipment business, and the capital equipment business does tend to back to 2004, almost 100% of our revenue was in gas delivery be highly cyclical. When demand is strong for our customers, they subsystems. So we’ve been diversifying away from gas delivery order capital equipment. And when demand slows down, they sig- systems for several years, primarily in two areas. First of all, nificantly reduce their demand for equipment. As a result, we see we’ve been migrating upstream to what we call process modules.significant cyclical variations, and we expect this to continue. The Process modules are typically modules for the semiconductor in- way that we are working to address this is by expanding into other dustry onto which gas delivery systems are mounted. As our cus- industries. I mentioned these previously. We are expanding into the tomers have moved towards an outsourcing model, they initially medical industry, the flat panel, research and most recently into the started by outsourcing gas delivery systems. In the last few years, energy industries — and more specifically, into the high-brightness they’ve extended to outsourcing more complex modules, which LED market. Our expectation and our experience is that these other we call the process modules. industries, while they may be cyclical as well, have slightly different The advantage to us in manufacturing process modules is periods of cyclicality. Our objective is to minimize the overall levels that a process module typically sells for about three times the selling of cyclicality by expanding into these other markets. Today, 80% of 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted price of a traditional gas delivery system. The second way that our revenue is coming from the semiconductor capital equipment COMPANY INTERVIEW — ULTRA CLEAN TECHNOLOGY industry. However, this year we are seeing very strong growth in the customers is full-service support, literally from the beginning to the high-brightness LED market, and as a consequence we expect that end of a product cycle. We start working with our customers in the the percentage of revenue coming from other industries will grow early stages of their product design, typically at their locations. We at a faster rate, helping to minimize some of the cyclicality in the work with them on their engineering designs and follow that through semiconductor industry. the new product development phase and then into initial manufactur- ing, typically in the United States. As products mature, we then look to migrate to the lower-cost manufacturing regions of Shanghai or “We’ve been cash flow positive for quite a while Singapore, whichever the customer prefers. So we believe that we now and have returned to a healthy balance offer our customers a broader range of service than any of our com- sheet. Our inventories are back in order. Our petitors, and that is the value proposition that we provide. accounts receivable and accounts payable are TWST: What are the opportunities your company back in order, and we are generating cash. We may have in terms of mergers, acquisitions, joint ventures and are very comfortable with our current balance strategic alliances? sheet and expect to continue to generate cash Mr. Granger: We consider mergers and acquisitions an and profits moving forward.” important part of our business strategy. We did our last major acqui- sition in 2006. We acquired a company called Sieger Engineering. In doing an acquisition, we have established three key criteria. TWST: What are the dominant or prevalent trends Those criteria are that any acquisition would need to bring us new over the next two to three years in the semiconductor industry? customers or new capabilities. It would need to be immediately ac- What are the positives? What are the negative or cautionary cretive, and it would need to be of a reasonable size. Just to give you aspects of those trends? a sense of what this means to us, in the case of our acquisition of Mr. Granger: One of the biggest trends that I see is to- Sieger Engineering, it brought multiple new customers, it brought wards increased complexity in the semiconductor manufacturing new technology in the area of precision machining and it was im- process, which in the long run helps us significantly. Our customers mediately accretive. For a couple of years during the industry and are adding more process steps. And as they add more process steps, general business downturn, UCTT simply wasn’t in a position to they need more tools, which benefits us from a gas-delivery stand- consider doing an acquisition. But we are now on a much stronger point. To give you an example, a few years ago the industry transi- financial footing, and we are definitely relooking at the M&A mar- tioned from 200-millimeter wafers to 300-millimeter wafers, ket. If we could identify an M&A opportunity that would extend our essentially doubling the number of chips per wafer. When that hap- technical capability or extend our customer base and be immedi- pened, the actual demand for equipment slowed for a while, and it ately accretive, we would be interested in pursuing it. led to lower levels of equipment purchases per semiconductor rev- TWST: Are you as well positioned as you would like to enue dollar. What’s happened now is that the shift has been com- be in terms of your balance sheet? pleted to 300 millimeter, and we don’t see a shift to larger-diameter Mr. Granger: We have made tremendous strides since wafers any time in the near future. As a consequence, when new 2009. Again, we had a tradition of being cash-flow positive and technologies are introduced, more tools are being required. having a very strong and stable balance sheet for many years prior Two new processes that have been recently introduced are to 2009. But in late 2008 and early 2009, with the overall financial called double patterning and 3D transistors. Each of these new pro- collapse, business conditions became very severe. We ended up re- cesses are increasing the complexity that we see in the semiconduc- maining financially stable. But in doing so, we brought down our tor manufacturing process and are driving up the demand for inventory levels, and we extended our accounts payable. Since then additional equipment. We believe this will result in a very beneficial we’ve seen a very, very strong recovery. The year 2010 was actually long-term demand for new equipment. In terms of negative aspects, a record year in terms of revenue and profitability for UCTT, and as we discussed earlier, there is always the cyclicality. But I would we expect 2011 to be another record year for us. We’ve been cash say, over the long term, the trend in the semiconductor capital flow positive for quite a while now and have returned to a healthy equipment industry is very positive for UCTT. balance sheet. Our inventories are back in order. Our accounts re- TWST: How would you quantify Ultra Clean’s value ceivable and accounts payable are back in order, and we are gener- proposition? What are your product’s competitive advantages? ating cash. We are very comfortable with our current balance sheet Mr. Granger: You can think of us as a high-end con- and expect to continue to generate cash and profits moving forward. tract manufacturer. We basically are manufacturing low-volume, TWST: Would you speak to any expectations next highly complex, highly configured subsystems for our customers. year as far as rate of gain in sales? To give you a broader perspective on this, even though an end Mr. Granger: Again, we don’t talk about specific num- customer like Samsung may be buying a tool from Novellus, the bers. As I have said, 2010 was a record year for UCTT. And I have specifications for their gas delivery system are going to be differ- also said that we expect 2011 to be another year of growth and re- ent than, say, an Intel or TSMC. So the products that we manufac- cord profitability for UCTT. We see ourselves in a position of con- ture are really unique for each end-user application, and there is a tinuing to benefit from the outsourcing trend and most specifically great deal of complexity associated with that. to be able to expand into other industries. During 2011, we believe We also believe that one of the values that we bring to our the biggest growth opportunity for us is going to be in the high- COMPANY INTERVIEW — ULTRA CLEAN TECHNOLOGY brightness LED market. We are quite confident that whatever hap- One of the things that I think is also important for an pens in the semiconductor capital equipment industry, we will be investor to understand is, it’s fairly easy for us to switch from one able to outgrow the overall industry. industry to another. Our skill set, our expertise in low-volume, high-complex subsystem manufacturing is relatively easy to trans- fer from one industry to another. So even though for close to 20 “As I’ve mentioned earlier, one of the biggest years we’ve been manufacturing products in the semiconductor new markets that we’ve started to penetrate is capital equipment industry, we’ve recently been able to achieve the high-brightness LED market. . . . We the majority of our growth outside of semiconductor capital equip- estimate the addressable market size for the ment in our other targeted sectors. At first glance, it’s very differ - HB LED gas delivery systems to be potentially a ent manufacturing a semiconductor gas delivery system from $400 million a year market. And we think we manufacturing a scanning electron microscope. But the skill sets have a very good chance near term of capturing to do that manufacturing are very similar, and we think it’s impor- roughly 30% of that market, which could be a tant that the investment community understand this. $120 million a year opportunity.” TWST: As you launch new products, would you share with us your market focus as well as the estimated size you will be addressing? TWST: What could go wrong here? Besides the gen- Mr. Granger: As I’ve mentioned earlier, one of the big- eral economy, is there anything that keeps you up at night? gest new markets that we’ve started to penetrate is the high-bright- Mr. Granger: I would say the thing that concerns me the ness LED market. That market has initially started to grow most is the rapid growth and recovery that we’ve had from the dramatically in backlighting television sets and more recently is depths of that 2009 downturn. In Q2 of 2009, our revenue was just starting to expand into the industrial sector. Over a longer period of under $23 million for the quarter. In our most-recent quarter, our time, it’s clear that high-brightness LEDs will be used in general revenue was $126.7 million. So we’ve grown fivefold in roughly a illumination applications as well. So this has become a very impor- two-year time period. That’s put a lot of stress on our business -sys tant strategic market opportunity for us. We estimate the addressable tems and our management team. So I think the biggest challenge for market size for the HB LED gas delivery systems to be potentially us in the near-term future is to make sure we stabilize those business a $400-million-a-year market. And we think we have a very good systems and our management team. I am very pleased that in the last chance near term of capturing roughly 30% of that market, which couple of months we’ve added a new Chief Operating Officer. His could be a $120-million-a-year opportunity. We now have multiple name is Gino Addiego, and he has a very strong background in our customers in this market. This is a market we entered in early 2010, industry from a technology standpoint, from a manufacturing stand- and we’ve now reached significant volume levels. point and from a management-skill standpoint. While there are al- In the third quarter of 2010, we shipped $2.4 million in ways many challenges, I am confident that we are in a better revenue of high-brightness LED gas delivery systems. By Q4, we position than ever before to handle them. were at $6.1 million. In Q1, we did $11.4 million. And in Q2, we are TWST: What are the key items long-term investors projecting $14 million in revenue of high-brightness LED gas deliv- should focus on when looking at your financial statements ery systems. By the end of this year, we expect to be at a run rate of and annual reports? about $30 million per quarter in this market. We are supplying Mr. Granger: I think the biggest areas that an investor multiple customers and multiple products, some new products and should focus on are our top-line growth and our improvement in some existing products in this space. And we are very excited about margins. We are a relatively low-gross-margin business because of the growth opportunities here. the nature of what we do. But we have relatively low fixed-overhead TWST: Please give us a frank assessment of your costs. And as a consequence, we are able to drop through quite a bit management team, and two or three of the most important to the bottom line. I am very confident that our margins will con- players there. tinue to stabilize and improve, particularly as we migrate more of Mr. Granger: Typically, I don’t talk about specific indi- our products to our Asian manufacturing locations. viduals, but our two most-senior-level individuals are President and TWST: Have you noticed any misunderstandings or COO Gino Addiego and CFO Casey Eichler. Gino is a very new misperceptions about UCTT when speaking to the investment addition to UCTT. He joined at the beginning of March this year. He community? Do they understand your company? has over 20 years experience in the semiconductor capital equipment Mr. Granger: I think the biggest challenge is explaining space. He was at Photon Dynamics and then KLA-Tencor. Then he our relatively low margins to the investment community. Our target spent nine years at Applied Materials, and most recently six years at model is to be in the 15% to 18% gross margin range. Most of our Novellus. Gino has a strong background in technology, including a customers are targeting to be in the 40% to 50% range. So initially Ph.D. and numerous patents. And he has a strong background in most of our potential investors do express concerns about that. We operations. We are essentially an operations-and-manufacturing have to spend a fair amount of time explaining that we are still able company, and he has an outstanding reputation in terms of managing to drop through significant profitability to the bottom line. The rea- operations and managing his team. In the two months that Gino has sons we are able to do this is we have a very flexible business model been here, he has been doing an outstanding job taking over respon- without high overhead costs. sibility for all of our operations. COMPANY INTERVIEW — ULTRA CLEAN TECHNOLOGY

Beyond Gino, another key member of the management Mr. Granger: First of all, I think our business model is team is our CFO, Casey Eichler. Casey has been an employee of the fairly straightforward and easy to understand. We are essentially a company for about two years now, but prior to that he had been a high-end contract manufacturer. We are benefiting tremendously Member of the board and the Head of our audit committee since from the trend toward outsourcing, which doesn’t seem to be -abat 2004. In addition to his experience as a board Member, Casey has a ing in any way. Our core customers used to manufacture literally all strong financial background and excellent working relationships in of their own subsystems, and all of them are migrating to an out- the banking and investment community. In addition, we have a sourcing model. We see this as a continued opportunity to grow at strong management team underneath Casey and Gino. Many of our a rate faster than the overall industry. managers and leaders have been with the company over 10 years. The other thing that I think is important for an investor to This gives me a great deal of confidence in our core management understand is that it’s relatively easy for us to transfer our skill set team as we grow our company and expand into other new markets. to other industries. In the last five years, we have moved signifi- TWST: What are the special talents and resources cantly into other industries, specifically the ones that I have men- your board brings to the company? tioned: the medical, flat panel, research and energy industries. This Mr. Granger: We have five board Members, and the is a very difficult thing for many companies to do, and we are very board Members all have a high level of experience, mostly in the proud we have been able to make these transitions. semiconductor capital equipment industry. Several of them have Another key strength of UCTT is our flexible business operations experience, and a couple of them have financial experi- model. In typical upturns and downturns, we have been able to re- ence, M&A experience and experience with the investment com- main profitable because we have a very flexible business model. We munity. I really feel very comfortable with our board. Most of them don’t have a significant investment in R&D. We don’t have a huge have been on the board for a long period of time, and we have excel- sales and marketing organization, and we don’t have a lot of capital lent chemistry. This is extremely helpful in identifying new busi- equipment expenditures. ness opportunities and new technologies, in strengthening our The last point that I’d like to make is that we are a full- customer relationships, in executive management selection and in service supplier to our customers. It is a differentiator for us. We M&A assessments. start at very early product stages with our customers, typically at the TWST: What are your weaknesses and how do you engineering stage. We take them through the prototype manufactur- plan to address them over the next two to three years? ing stage, all the way to transitioning to a low-cost manufacturing Mr. Granger: I think one of the biggest challenges for region. We can even do repair and refurbishment of older-genera- UCTT over the next two to three years is to truly become an inter- tion tools as they reach the maturity stage. All of these strengths will national company. A few years ago, revenues from our manufac- continue to allow UCTT to grow more quickly than the markets that turing locations outside of the United States were minimal. we are serving. Virtually all of our manufacturing was done in the United States. TWST: Is there anything we’ve missed, anything you Last quarter, 29% of our revenue came from UCTT manufacturing would like to add? locations outside of the United States. Over the next few years, I Mr. Granger: No, I think we’ve pretty much covered expect more than 50% of our revenue is going to be generated everything. Again, we are very excited about the future. The year outside the United States. 2011 looks to be a very good year, and I’m very optimistic about the As this transition takes place, running our manufacturing long-term trends. operations will become much more complex. We now have to deal TWST: Thank you. (KL) with multilingual situations, with time zone situations and with dif- ferent cultural situations. So that’s really changing the way we do CLARENCE GRANGER business. My focus over the next two or three years in terms of our Chairman & CEO management team will be to assure that we completely integrate our Ultra Clean Technology international operations into UCTT, to become fully effective both 26462 Corporate Ave. inside and outside the United States. Hayward, CA 94545 TWST: What is the essential message you would like (510) 576-4400 to convey to long-term investors, retail and institutional, about (510) 576-4401 — FAX the company? What are the four or five strengths UCTT has as www.uct.com investment today? e-mail: [email protected] COMPANY INTERVIEW inTEST Corporation (INTT)

ROBERT E. MATTHIESSEN has served as inTEST Corporation’s Chief Executive Officer since August 1998 and President since February 1997. Mr. Matthiessen also served as Chief Operating Officer from December 1997 to August 1998. Prior to that, Mr. Matthiessen served as Executive Vice President after joining inTEST in October 1984. Mr. Matthiessen has served as a Director since February 1997. The inTEST board of directors believes that Mr. Matthiessen’s education and experience in the fields of mechanical and electrical engineering, his experience in the ATE industry throughout his more than 40-year career, and his extensive network of contacts and relationships in this industry, in addition to his more than 25 years of experience at the company, are the attributes, skills, experiences and qualifications that uniquely qualify him to execute the company’s strategies and make valuable contributions as one of its Directors.

SECTOR — SEMICONDUCTORS size of individual Integrated Circuits, the number of ICs on a (AVB600) TWST: Please begin with a brief overview of inTEST silicon wafer has continually increased. Today some wafers carry Corporation. thousands of ICs, each of which has to be tested. This has Mr. Matthiessen: inTEST designs, manufactures and translated into considerable opportunity for inTEST. As ICs markets products that are primarily used by semiconductor become more complex and testing takes on increasing importance, manufacturers to test their integrated circuits and wafer products. semiconductor manufacturers turn to inTEST to help them test Our product lines include test head manipulators, docking hardware, their products more efficiently, maximize yields and reduce their tester interfaces and thermal test systems. And as a matter of fact, manufacturing cost. Go back to “change” a moment. Our success we are 30 years old this year. We were founded in 1981 and is driven by change in the industry. Any change related to package conducted our IPO in 1997. Since 1997, we’ve made fivetypes, wafer sizes, pin counts, etc., results in a need for new acquisitions, three significant ones. We have traditionally advanced inTEST products. We also make equipment that’s used participated in the back-end test segment in the semiconductor in the product development areas of our customers; and so as they business, so we supply capital equipment to the test areas of develop a product, if they’re using our equipment in the semiconductor manufacturers. This equipment is not the testers development of those products, it makes it much easier to migrate themselves nor the handling equipment itself, but those components that equipment into their capacity build situations. that make it possible for the testers to be connected to the handling TWST: Are there still issues of cyclicality or seasonality equipment, which ultimately makes our equipment mission critical. that have been synonymous with the industry? How has your In addition, in recent years we’ve diversified our product suite into company addressed those types of issues? markets outside of semiconductors to help mitigate the semiconductor Mr. Matthiessen: Yes, the cyclicality is still here; that’s capital equipment curve. These markets include new growth what makes it so exciting and that’s why we love it so much. And industries, such as aerospace/defense, automotive, seasonality is here to some extent. If there were no other influences, telecommunications and medical/pharmaceutical. I would say that typically second quarter is the strongest quarter, as TWST: What would you say constitutes the biggest people begin to build up their capital equipment to test parts that part of inTEST’s business? will be eventually sold in the Christmas season, and fourth quarter Mr. Matthiessen: Presently it’s still the traditionalis generally the weakest quarter. Although, those issues can businesses that we started in; and that would be the test head sometimes be impacted by some macroeconomic condition that we manipulators and docking hardware, which are used to connect were not aware was going to come, so sometimes you see those testers to handlers and wafer probers, in addition to thermal trends and sometimes you don’t. Our strategy to deal with issues conditioning equipment that’s used on the test floor. such as this is to strategically outsource manufacturing where it TWST: How do your products support the current makes sense to do so. For example, as you know, the industry marketplace? experienced a severe downturn a couple of years ago. Like many Mr. Matthiessen: Change drives this industry. There’s companies, we restructured and lowered our breakeven line quite a been a broad switch to mobile computing and the creation of bit and began outsourcing at that time to a great extent. The end dynamic new consumer products that require more capabilities in result is we have a very elastic situation at inTEST facilities, where 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted ever-smaller packages. With technological advances shrinking the we do mostly assembling rather than manufacturing, therefore it’s COMPANY INTERVIEW — INTEST CORPORATION easy for us to expand and contract with the cyclicality. I’ve alluded to them but not really defined them as such. We TWST: Looking at the semiconductor industry and participate in mechanical, electrical and thermal areas of the test particularly the segment you’re in, what do you see as thefloor. The mechanical area is where we make test head dominant or prevalent trends over the next two to three years?manipulators and docking hardware. In the docking hardware, What are the positive trends and what are the negative or we are the most robust supplier in the market. We invented the cautionary aspects of those trends? standard that’s used on test floors today, and we have 50% or Mr. Matthiessen: One trend is there’s going to be more better of that market. In the manipulator market, as I said, we and more parts being tested. We’re relatively agnostic to the type of compete at the high end, but the low-end guys build a lot of parts that are being tested because we’re not actually making the manipulators, and so they are fairly robust. tester itself. But the quantity of parts is important to us, and we see that as an ever-increasing number. Another thing that’s happening is ASPs are being lowered, which is a negative aspect to us. Although ”Another trend is consolidation both at the the number of parts are going up, the lower ASPs mean that money customer level and the supplier level. For gets tighter and tighter and so the pressure comes all the way down example, Texas Instruments and National the chain, all the way down to us little guys who are supplying Semiconductor have announced their intention equipment to the test floor. So that becomes a challenge for us. to combine. We see that as a positive influence The other negative is the attempts by the IC manufacturers to inTEST, because TI has been a very strong customer of inTEST, whereas National has not themselves to reduce their respective need for test. The engineers been so strong.” that design these parts spend a great deal of their time trying to make them with as little test as possible because test is not seen as a value-added situation by them. And so the more success they have, the less they feel they need extra equipment. Fortunately, Although during the downturn, one of those competitors they’ve not been very successful at that because the parts keepwent out of business and another one seems to be having getting bigger and bigger, microprocessors keep growing and so test considerable trouble, so we seem to have been one of the stronger has not shrunk as a result of that, but has actually increased. Another ones coming through that. In the electrical business, we make trend is consolidation both at the customer level and the supplier tester interfaces. That’s the electrical connection between a ertest level. For example, Texas Instruments and National Semiconductor and a wafer prober, and we are probably the most robust of the have announced their intention to combine. We see that as a positive independent manufacturers. Now the tester manufacturers influence to inTEST, because TI has been a very strong customer of themselves also build that equipment, and in fact we build it on an inTEST, whereas National has not been so strong. But TI is the lead OEM basis many times for them. In the thermal business, we are dog in this merger and as such, we would expect that perhaps the leader of the pack in the basic unit that’s used in the National will become a stronger inTEST customer. We also see semiconductor business, which is called Thermostream. We consolidation at our level, in the companies that are in our space, probably have 60% of that business, and that’s growing. and so that’s a trend that’s probably positive because we have less TWST: What are some of the opportunities that competition at that point. inTEST may have in terms of future mergers, acquisitions, joint TWST: How would you quantify inTEST’s value ventures or strategic alliances? Do you see any specific market proposition? When comparing your products to that of the functions or perhaps technology that may need to be filled in or competition, what continues to differentiate inTEST within that filled out? competitive landscape? Mr. Matthiessen: Within our traditional markets in the Mr. Matthiessen: We have a very clear difference semiconductor business, I think we’ve identified pretty much between our competitors in each of the areas in which we compete, everything that’s there and we know where we fit. The opportunities and we offer a more capable high-end product in each area. For for further growth there other than the organic growth of business instance, test head manipulators range in ASPs all the way from itself are rather limited. However, I alluded before to the fact that approximately $4,000 or $5,000 up to the $50,000 to $60,000 range. we are doing some business outside of semiconductor. We call it We tend to participate in the upper end of that range because our non-semi business, and we see that as the avenue to our future margins are better. We also build higher-end equipment because growth because there are many areas out there that we’ve never we’re aiming at the end user more than at the OEM customer. Theaddressed, specifically in the thermal area. Our thermal products OEM customer’s interest is basically in low price, whereas the endused in semiconductor test actually could be used in any kind of user, the guy that’s going to end up with the equipment, is interestedelectrical test outside of semiconductor because they are rather more in functionality and how it’s going to help him. So we are thegeneric products when you get right down to it. What they do is guys that sell primarily to the end user and as such, we typically supply temperature-controlled environment for whatever you want operate at the high end. to test, whether it be a single semiconductor at a semi test TWST: From your perspective, how robust is the manufacturer or an entire assembly at a company that builds circuit competition and what are the decision points for customers in boards or the like. So we see a need for thermal equipment that’s choosing their suppliers? been developed for the semiconductor industry to be migrated into Mr. Matthiessen: We participate in three areas, and the general electronics industry where they normally don’t see such COMPANY INTERVIEW — INTEST CORPORATION sophisticated products at such a reasonable price — and that’s the run ahead? where our targets are. Mr. Matthiessen: We have a great management team, TWST: How strong financially is inTEST at this and the experience for the old guys like me goes back before the 30 point? What items are you focused on for improvement? Areyears, start of this company. The original management team, which you as well positioned as you would like to be as far as your includes me and our Chairman and Founder Alyn Holt, followed by balance sheet? Dan Graham, who is Senior Vice President and General Manager of Mr. Matthiessen: I’m not sure anybody is as welltwo of our groups, all go back to the early days of the semiconductor positioned as they want to be. We’d like more cash and in factbusiness. we I always like to tell people that one of my first visits to a are in a cash-building situation, which is a critical component for a semiconductor company was to Intel on Bowers Avenue in Santa company of our size. But we do have a healthy balance sheet and Clara, and at the time they were still in trailers. carry no debt. We consider that essential and we try to keep it that way. If there is any debt, we keep it to a minimum just for a specific use and then retire it as soon as possible. TWST: Would you speak to your expectations in the “In the semi business, we are going to grow and contract in tandem with the semi cycle. next year or two as far as the rate of gain and sales? There is not much more that we could do than Mr. Matthiessen: In the semi business, we are going to that because we’re riding on the same ocean as grow and contract in tandem with the semi cycle. There is not much they are — and so in this past year, the semi more that we could do than that because we’re riding on the same business grew somewhere between 15% and ocean as they are — and so in this past year, the semi business grew 20%, and we rode that wave.” somewhere between 15% and 20%, and we rode that wave. It probably will not grow as much next year, but on average I would say that our annual growth will be something in the neighborhood of whatever the semi industry is doing, and maybe a mature Of course, some of the people I tell that to weren’t even industry like that is something like 8% or 9% a year now. So weborn are yet. We’ve had management positions in a company called not expecting more than that, but we like it when it is more than Computest going back many years, and then many of us worked at that. For the areas outside of our traditional semi business, that may Siemens Corporation in the United States up until around 1980 be different and if we involve ourselves in M&A, then we make step when we branched out. That’s when Alyn Holt started inTEST. I functions in growth. And that is actually where our targets are. went out and started my own business for a few years, and then we TWST: What about risk? Besides the overall economy, got back together in 1985 at inTEST. Our CFO has been with the is there anything that keeps you up at night? company for 15 years and is a driving force in our fiscal discipline. Mr. Matthiessen: Supply chain interruptions. I mean We have people who are younger than us who are coming up look at what just happened in Japan. I don’t think we felt thatthrough the ranks. The fellow that runs our thermal division has directly yet, but Japan is 20% of the economy of the world, and strongit’s management background and is doing a wonderful job with hard to believe that we are not going to feel that impact someplace that group. So we have a solid level of experience in the downstream. It happens that at inTEST we don’t have any direct management team without being overbuilt and having too much parts that are threatened by that. The only parts that we have from overhead in that area. Japan that are critical are available in pretty good supply at the TWST: For a long-term investor looking at the moment; they either weren’t impacted by that specific event or there financial statements and inTEST’s annual reports, what would is enough in the warehouses to carry us over. Another risk is cheap, you suggest are the one or two items that the investor should low-priced competition. We are an established company. As I said, focus on over time to get added insight into what the company we’ve been around for 30 years, we have a sales and distribution is doing and where it’s going? and service network that circles the globe. If you’re in one specific Mr. Matthiessen: I’m one of the longer-term investors geographical area that builds semiconductors, you’re always afraid and, in fact, one of the longest-term investors, including those that some guy in a garage shop is going to start building or copying others of us that were here for the IPO, and I’ll tell you what we your equipment and his overhead is going to be near zero. So that look at. We’re in a cyclical business. In a cyclical business if you is something we always have to keep our eyes on, especially given run high debt, you have a good chance of not being here next that we operate extensively in Southeast Asia, where you always week, and so we keep an eye on the debt level. And as I said, it’s have to keep your eyes peeled for that sort of thing. at zero right now. The only time when you’ll see any debt on our But when that happens, you have to convince your balance sheet is something to do with an acquisition, and we customer of the advantages of working with a global company retire that in short order, which we did recently in our last where we can not only supply your factory in Taiwan, but we can acquisition. The other thing we look at is our book-to-bill ratio supply your factory in Japan, and we can supply your factory in that tells us where we’ve been and where we’re going. Right now Korea or Southeast Asia and have everything work together. So it’s book-to-bill is about parity. It’s been running above parity for the the value proposition that we have to sell at that point. past few quarters, and it’ll probably oscillate a little bit below TWST: Introduce us and assess the current top-level parity. Because we sold so much in the past few quarters, we management team at inTEST. Do you have the horsepower for expect it to slow down a little bit, but it’s always a good indicator COMPANY INTERVIEW — INTEST CORPORATION of what’s going to happen. So those are the two things I would Mr. Matthiessen: Our biggest weakness is the fact that look at. most, or in fact all of our competitors, are non-public. Obviously TWST: How could the investment community improve there are considerable costs associated with being public that go its understanding of inTEST? Are there any misunderstandings, directly to our bottom line, and this overhead is simply part of any misperceptions there, or perhaps lack of insight? What being a public company. I think we do a very good job of it, and kind of questions are you hearing from investors and analysts? if you can keep your productivity up, you can do that because Mr. Matthiessen: It’s a confusing business and it can be there are also advantages to being a public company. The other very difficult to define what we do to the nontechnical investor. So disadvantage of being public is everything we do is completely for many investors, it’s a pretty difficult thing to understand. I think transparent to the world outside of us. I can’t with absolute the important point is the equipment we make that’s used on the test certainty tell you what the sales level of my competitors are floors is mission critical — this is not something people buy just to because they’re not public. There are many things they know pretty the place up. If they have testers and if they have wafer about us that we’d rather they didn’t know, but as a public probers or device handlers, they must buy the type of equipment company we must make the information available to our investors that we supply to make them work. So they may have $1 million — so that’s probably our biggest weakness. worth of tester and $200,000 worth of handling equipment that have TWST: What would be your summary statement to to be joined together; in order to do that they’re going to need our investors? What are the four or five strengths, highlights and equipment. So I think the biggest misconception is in what we advantages that inTEST offers as an investment today? actually do. My neighbors think that we make computers because to Mr. Matthiessen: We talked about the management team them everything to do with electronics must relate to computers. before, that’s a very big strength here. We have an experienced team Many of the investors think we either make the testers or make the — a very successful management team whose success can be handlers, and we make neither — we make what goes in between measured in the fact that we made it through the largest downturn the two. So it’s a difficult thing to readily understand, but if I get an this industry has ever seen in the past couple of years. We call it the investor nailed down in a room with me, I guarantee you by the time nuclear winter. We not only survived, we’ve come through a he leaves he’ll know what we do. stronger and more efficient company. We could not have done this TWST: What would have been the recent dialogs or without the dedication and outright intelligence of our management coverage from analysts? team and every employee. In addition to that, we supply leading- Mr. Matthiessen: The only coverage we have right now edge products and have extensive intellectual property — something is from Zacks, which happens to be paid coverage. We utilized their on the order of 50 patents today — which is a barrier to entry and services so that we can get on First Call. We’ve gotten fairly is also a declaration to the industry that we are the leaders in these positive coverage from Zacks, but our goal right now is to expand products. From a financial standpoint, we have a healthy balance that coverage to non-paid coverage, and we’re doing that by sheet, carry no debt, we are profitable, are generating cash and we presenting our story to the various sell-side houses as well as to have a specific growth strategy. We have a goal of growing this institutions. We’ve been on the road a great deal this year, and we company to $100 million in three years, and we plan to do that have more plans to continue on this path. And I think we’re having through M&A in the non-semi business to mitigate the semi capital some success, so we’ll see. equipment curve. TWST: What are some of the challenges in getting the TWST: Is there anything we’ve missed here, anything investment community’s attention at this point? we’ve overlooked that you’d like to add? Mr. Matthiessen: I think first and foremost, we are a Mr. Matthiessen: No, I think you’ve covered it pretty small- or micro-cap company, and it is challenging to get the attention well. We appreciate the opportunity to present the inTEST story to of Wall Street — not impossible, but challenging. While we are your audience. diligent in getting our story out to investors via conferences, TWST: Thank you. (KL) marketing trips in the cities where most investors are, etc., we are very focused on securing sell-side coverage. The investment ROBERT E. MATTHIESSEN community is a tough community to get to, and there is nothing like CEO, President & Director a research report to keep investors influenced and abreast of what inTEST Corporation we’re doing. So as far as getting to the investors, we are indeed on an 804 East Gate Drive aggressive program of attending conferences and doing one-on-ones Suite 200 in all the financial cities across the country, and in addition, trying to Mount Laurel, NJ 08054 get that coverage that will be in front of them on a routine basis. (856) 505-8800 TWST: What do you see, if any, as competitive (856) 505-8801 — FAX weaknesses for inTEST? How are you addressing those possible www.intest.com weaknesses over the next two to three years? e-mail: [email protected]