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Cymer’s Bright Spot in Chip Equipment Market

Thanks to consumers’ love affair with gadgets like cell phones, laptop computers and digital music players, companies in the computer chip industry such as San Diego’s Cymer Inc. are getting richer.

Cymer doesn’t actually make the chips. It’s a leading maker of excimer laser light sources essential to the manufacture of most semiconductors.

“Every time a Steve Jobs comes up with a great new idea like the iPhone, it can have a significant impact on the semiconductor industry and the companies that enable that industry like Cymer,” said Bob Akins, Cymer’s co-founder and chief executive.

Cymer doesn’t have the cachet of an Apple Inc., Intel Corp. or IBM Corp., but these and other well-known technology companies depend on the laser generating machines made at Cymer’s Rancho Bernardo headquarters.

Using a process called “deep ultraviolet lithography,” Cymer’s machines imprint precise patterns required in the microscopic circuitry found on all wafers.

Last year, Cymer enjoyed a blowout record year, with sales rising 42 percent from 2005 to $543.9 million and net profits more than doubling to $95.6 million.

And yet, Cymer shipped just 280 machines to customers, up from 207 machines in 2005. Each piece of equipment costs an average of more than $1 million.

In addition to direct sales of new equipment, the company receives half its revenue from servicing an installed base of more than 3,100 existing machines around the world.


Small And Fast

In the world of semiconductors, the trend moves inexorably in two ways, smaller and faster.

And to serve that trend, Cymer continues to create equipment used to make smaller and faster chips. To give an idea of how thin those circuits must be, many circuits contained in today’s chips are smaller than 250 nanometers, or one-four hundredth the diameter of a human hair, according to Cymer.

The company’s beginnings, like a good many local technology success stories, date back to the early 1980s at UC San Diego, where Akins and classmate Richard Sandstrom were part of a team researching deep ultraviolet lithography, or DUV.

The research was focused on government applications, including the anti-missile protective system called the Strategic Defense Initiative, better known as “Star Wars.”

Though Star Wars only advanced to the drawing board stage, the effort led by then-President Reagan helped hasten the demise of the Soviet Union. That, in turn, helped boost Cymer’s growth.

As the Iron Curtain crumbled in the late 1980s, Akins said the company was able to hire more scientists from the Soviet Union. Today, about half the company’s scientists come from outside the United States, including China, Germany, India and South Korea, through the largest contingent hails from Russia, Akins said.

“The market is global so it makes sense that we also have a global work force,” he said.


Major Markets

The semiconductor market is also global, and remarkably hefty.

According to Gartner Dataquest, a Connecticut research firm, the total manufacturing market is about $300 billion; while the market for chip equipment is $50 billion.

Cymer’s light sources are sold to the world’s three main lithography tool suppliers, or stepper manufacturers. Canon and Nikon of Japan and ASM Lithography of Holland integrate Cymer’s light sources and other components into steppers sold to the largest chip makers in the world, including Advanced Micro Devices, Fujitsu, Hewlett-Packard, Hitachi, IBM, Micro Technology, NEC, Philips, Samsung, Sony, and Texas Instruments.

Although the chip market has been notoriously volatile this decade, and went into a tailspin in 2001, Akins said the industry is operating smarter, so business fluctuations aren’t so dramatic.

As the business got tougher, the best companies got smarter, and more efficient, and figured out how to minimize the effects of bad years, he said.

“Now in the worst of times they broke even or made a little bit of money, and in the best of times they made a boatload of money,” Akins said.

Dean Freeman, an analyst at Gartner Dataquest, said Cymer is probably the first laser of choice among the world’s stepper companies and dominates the market, which has been generally flat this year, and projected to decline in 2008. The key for Cymer is continuing to sell machines while maintaining its dominant position in servicing its installed base.

At Cymer’s manufacturing site in Rancho Bernardo, a group of workers inside a clean room assemble a laser machine. While components arrived from around the world, manufacturing takes place here and at another plant in South Korea.

Total employment at Cymer is just below 1,000 workers, with 700 in Rancho Bernardo, and includes 130 employed in manufacturing.


Bonus Program

Cymer’s recent success prompted management to install a bonus program over nine straight quarters in which employees receive a maximum 15 percent bonus. That’s one of the benefits of working at a company where the per-employee revenue ratio is more than $500,000.

Though Cymer’s financial results have been stellar of late, its stock, traded under CYMI on the Nasdaq exchange, hasn’t been so impressive. A year ago, CYMI hit just above $50, but then headed south and as of Oct. 8 closed at $40.13, nearly a 20 percent drop in the past year.

Mark Miller, an analyst covering the company for Brean Murray, Carret & Co. LLC in New York, said part of the reason behind the slumping price is Cymer’s main competitor, Gigaphoton Inc. of Japan, has captured some of its market share, but in laser machines at the lower price points.

“At the higher end of the market, they are still dominant and have maybe 90 percent,” said Miller, who has a buy on the stock, and a 12-month target price of $56.

Freeman said Akins’ tenure as a founder and chief executive officer for 21 years is unusual for many tech startups. “Usually many founders get in the way as the company gets larger,” he said. “Is Bob lucky or is he brilliant? That’s a question you have to ask to people who are much closer to the company.”


Cymer Inc.

Founded: 1986.

Revenue: $543.9 million in 2006; $249.6 million through June 30.

Headquarters: Rancho Bernardo.

Employees: 992 worldwide, including 700 locally.

Business: Maker of excimer laser light sources.

Chairman and CEO: Bob Akins.

Stock symbol: CYMI on Nasdaq.

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