3970 North First Street
Novellus provides semiconductor device manufacturers with advanced chemical vapor deposition (CVD) processing solutions that deliver superior productivity, the highest film quality, and the lowest cost of ownership. Novellus Systems, Inc.'s vision is to achieve total customer satisfaction by providing advanced CVD technology with high productivity. The Company's products are differentiated by their ability to provide simultaneous solutions to productivity and wafer quality problems facing the worldwide semiconductor manufacturing industry.
Based in San Jose, California, Novellus Systems, Inc. is a leading semiconductor capital equipment manufacturer of chemical vapor deposition (CVD) systems. The CVD process places a layer of either conductive or insulative material on a silicon wafer in order to connect two or more levels of circuitry in the process of manufacturing semiconductors. CVD technology, which developed around 1982, improves upon the problems of antiquated furnace diffusion and sputtering techniques. Novellus designs, manufactures, markets, and services CVD systems. One of Novellus's strengths is that its machines process 5 to 7 wafers at a time, while most CVD systems can only process one at a time. Novellus' machines cost up to $1 million, and the company's customers include most of the world's major semiconductor producers: NEC, Motorola, Advanced Micro Devices, and LSI Logic.
Founded in 1984
A relatively young company, Novellus had a precarious start in 1984. The company, founded by Brad Mattson and other former employees of Applied Materials, built a prototype CVD system, but ran out of money to continue operations. Robert Graham, then senior vice president of Applied Materials, tried to persuade his company to purchase Novellus, but Applied Materials declined. In 1986, Graham resigned from Applied Materials and joined Novellus at the helm, as president and CEO. With experience beginning Intel's Japanese operations, Graham began at Novellus by seeking Japanese distributors. In 1987, Novellus shipped its first product: Concept One. Concept One is a two-part system, consisting of a machine that positions wafers for handling, and a processing chamber, where insulating or dielectric chemical films are deposited on the wafers.
Novellus went public in 1988, at $8 a share. At that time, the chemical vapor deposition market was dominated by U.S. companies, and was growing rapidly, attracting the interest of overseas competitors. Between 1987 and 1988 (paralleling Novellus's sales burst from $3.2 million to $23.2 million) the market grew 88 percent, from $278.5 million to $523.2 million. This growth is even more astonishing when compared to the company's earlier compound annual growth rate of 28 percent between 1984 and 1987. Such demand for CVD technology was fueled, in part, by the rising demand for facsimile machines and car phones, and the advent of high definition television. These products utilize the CVD process because their complex structures use several levels of interconnecting circuits.
A potential long-range problem for those active in the CVD market was the cyclical nature of such technologies. In 1989, Novellus CEO Robert Graham told Electronic Business that he anticipated another three to four years of spectacular growth for the CVD market before it would inevitably be supplanted by a newly developed technology. Four segments define the CVD market: atmospheric, low pressure, plasma-enhanced, and photo. At this time, Novellus focused entirely on the largest of the four segments--the plasma-enhanced segment--which comprised over 50 percent of the entire CVD market. Competitor Applied Materials, on the other hand, worked toward the creation of a machine that could handle multiple segments.
In 1989, a small number of companies dominated the U.S.-controlled, burgeoning CVD market. The top players included Novellus, Applied Materials, Inc., and Genus. With 158 employees, Novellus's 1989 sales reached $51 million, with net income of $11.2 million. A 1989 stock sale helped Novellus retain a healthy amount of cash and an impressive balance sheet.
In 1990, the key to control of the CVD market was tungsten. Previously, aluminum was used to connect transistors on each layer of a device, as well as between layers. However, with geometrics becoming narrower in modern devices, the sputtering technique used with aluminum became inadequate. Tungsten, on the other hand, fills the holes between layers (or vias) more uniformly. Taking advantage of this new technology to edge ahead of Applied Materials and Genus, Novellus broadened its offerings in 1990, addressing the tungsten CVD market with its new Concept One-W. This new system combined batch and wafer-at-a-time processing, creating uniform wafers in six-wafer chambers, where five were used for deposition and one for loading. By handling five wafers at a time, the chip-making cost was reduced. A previous problem of tungsten deposit backslides was also solved with a combination of vacuum-clamping and gas-exclusion techniques. Stock prices leapt from $11 to $18 between January and April of that year, reflecting an earnings increase of 50 percent in the first quarter, and revenues 45 percent higher than those of the previous year's first quarter. However, later in the year the company was hurt when the overall market fell.
International Expansion During the 1990s
To make up for the domestic recession, Novellus became active in the international market, expanding into Japan--where 45 percent of the world's chips were now manufactured--and Europe. The Japanese market paid off, helping to boost Novellus's sales in the first half of 1991. In fact, Japanese bookings accounted for over one-third of 1991 revenues, and total international business supplied well over 50 percent of the company's sales. Novellus's biggest Japanese customer was NEC Corp.
Thanks primarily to Japanese business in 1991, sales increased to $80 million, with net income of $16.8 million, and stock prices reached a high of $27 1/4. The company expanded to employ 265 people, but continued to keep profit margins at 21 percent with a 29 percent return on shareholders' equity. Moreover, Novellus had no debt to speak of and cash had grown to a reserve of $44 million. Stock prices tripled to $27 between January and April of 1991, sinking again to $22 by August.
Competition with Applied Materials continued to be a priority, with Novellus still ranking number 2 behind Applied for domestic business. To gain an edge over Applied Materials, Novellus launched an innovative partnership with Lam Research Corp. Novellus and Lam joined together to secure an offer from Cypress Semiconductor's fabrication facility for a tungsten deposition system (Concept One-W, supplied by Novellus) and metal etcher (supplied by Lam). This order was the first sale of Concept One-W since the product was introduced in September, 1990 (later that year Novellus installed a second Concept One-W machine at Signetics Co.'s fabrication plant in Albuquerque, New Mexico). The partnership set a precedent in the industry, where teamwork had been an anomaly. Novellus also continued to claim a competitive advantage due to the efficiency of its machines, which completed 50 percent more wafers per hour than those of the closest rival, and sold for 25 percent less. At the beginning of 1992, Business Week called Novellus "the industry's fastest-growing and most profitable public company."
Novellus achieved strong sales and a near-sparkling balance sheet through its ongoing implementation of an outsourcing strategy. The company works closely with a handful of trusted suppliers, outsourcing the manufacture of major subassemblies and thereby minimizing costs and capital expenditures. The only manufacturing performed by the company itself is final assembly and testing, with this work performed by only 12 shop-floor employees. Thus, Novellus is free to concentrate its efforts on product design, and staff costs are held low. In 1991, the company's sales per employee figure exceeded $350,000, almost twice the industry average. Developing strong relationships with vendors, Novellus has on several occasions purchased parts for them when they lacked cash-on-hand. Such investments pay off in the long term, fueling lasting and lucrative partnerships. Another advantage offered by Novellus is its clean room, where a customer's process can be run on the machine before it is installed. Start-up time was improved by depositing on the wafers before shipping units.
A major change in leadership occurred in two phases, beginning in 1992. Novellus president and CEO Robert Graham stepped up to the chairman position, and Daniel Queyssac became president/CEO of Novellus. Queyssac was previously chief operating officer of SGS-Thomson Microelectronics N.V., a significantly larger company. After only six months, Queyssac left the company due to differences over managerial style, and was replaced by former senior vice president and chief financial officer Joseph Dox, who had been semi-retired.
In 1992, the worldwide chip-making machinery market was valued at $9.9 billion, and Japanese companies had cornered a 47 percent share. Novellus was a serious competitor for Hitachi Ltd. (with $54.8 billion in sales) and Canon Electronics (with $538 million). Weak economic conditions in Japan caused Novellus's earnings to fall from 87 cents a share to 34 cents in the first nine months of 1992. Novellus had been profitable since 1988. However, by the end of 1992, sales declined to $69.8 million (a 12.7 percent decline over 1991 sales) with net income of $6.2 million. International sales had slid from 55 percent to 44 percent of revenues between 1991 and 1992. In addition, low sales may partially have been due to the lack of expected orders for Concept One-W machines, as well as the slowness of interest in Concept Two (a cluster machine, combining deposition equipment with modules that fulfill other aspects of chip-making). Stock prices fell from a 52-week high of $26.50 to $8, then rose again in the end of 1992. On the bright side, despite the 1991-92 recession, Novellus's profits grew 20 percent, with sales of $350,000 per employee.
In 1993, the leadership transition was completed when Rick Hill became the new company CEO. That year, the company combined the modular architecture of the Concept Two and the tungsten CVD process chamber, resulting in another new product--Concept Two-ALTUS. Helping to undo the damage of decreased business in Japan, Novellus demonstrated strong penetration into Korea, with a $14 million order from Hyundai Electronics for Concept One-200 plasma-enhanced CVD systems. After ten years in business, the Concept One line still accounted for substantially all of the company's sales. In 1993, Concept One-W received the seal of approval from Sematech, certifying the machine to produce devices with the appropriately sized geometrics. Sematech tested the machines in a 21-day, 24-hour-per-day trial. Novellus was able to use this certification to solicit additional accounts for its main product line. Sales in 1993 surged to $113.5 million (a 63 percent increase), with income at $16.1 million (triple the previous year). Primarily responsible for this extraordinary recovery were higher unit shipments of Concept One-Dielectric and Concept One-W systems, and initial shipments of Concept Two-Altus systems.
Even more impressive were the figures the following year, in 1994, when sales nearly doubled, reaching $224.7 million, with an incredible net income of $44.9 percent. Novellus benefited greatly from the worldwide shortage of chip-making capacity and the 1994 expansion of chip-making factories. In addition, the fact that semiconductor technology had changed from six-inch to eight-inch wafers caused worldwide chip-makers to seek out newer, more precise equipment. To meet increased order demands, Novellus's employee workforce now numbered 530--exactly twice that of 1991. However, to ensure against overhiring, Novellus strictly adhered to its rule that revenue per employee must not sink below $300,000. Cash holdings continued to be strong, with 1994 cash around $105 million and no long-term debt. With stock trading at around $40 a share, Novellus made a secondary offering of 1.5 million shares to offset the 1992 sales decline, caused by the downturn in Japanese business.
One of the challenges Novellus met in retaining strong financials while working with Japanese customers (who still made up 25 percent of sales) was the slow payment habits of the Japanese (120-day cycles being common) and the rising value of the yen against the dollar. To alleviate these problems, Novellus established a $7 million line of credit in yen at Sanwa Bank and Bank of America in Japan. Upon billing of Japanese customers, Novellus drew yen from its accounts and sent dollars back through intracompany payments. Then, when invoices were paid, Novellus immediately replaced the money in the accounts. In this way, yen-dollar fluctuations presented no problem to previously completed sales transactions. In other countries with comparatively slow paying habits (including Korea, Taiwan, and Singapore), Novellus utilized confirmed letters of credit, guaranteeing payment within 30 days.
Applied Materials--the company that declined to buy Novellus in its faltering early years--filed a patent infringement lawsuit against the company in 1995. The lawsuit charged patent violation associated with the use, in Novellus's Concept One and Concept Two systems, of plasma-enhanced tetraethylorthosilicate (TEOS), a silicon-containing source gas used in dielectric CVD. In the $704 million CVD market, Applied continued to be the leading company in the dielectric segment. However, Novellus demonstrated higher growth than Applied in 1994, challenging Applied's market share. The case became more complicated, with two additional patent infringement suits, related to metal CVD technology, filed in association with the initial dielectric CVD technology suit. Novellus claimed that Applied's WxZ tungsten CVD system infringed on a Novellus patent, and Applied counterclaimed that Novellus systems infringed on a separate Applied patent.
Strongly Positioned for the Future
By 1995, Novellus systems were used by all of the world's largest semiconductor device manufacturers. The company received the Texas Instruments' Supplier Excellence Award, and was named among the Ten Best Process Equipment Companies in the VLSI Research annual survey. Sales in 1995 were $373.73 million (a 66 percent increase over 1994), with net income of $82.5 million (an 83.7 percent income increase). A new product, Speed, was completed that year. Speed is a high-density plasma system with simpler, more cost-effective solutions for inter-metal dielectric films. Novellus's entire product line now consisted of dielectric solutions (Concept One, Concept One Maxus, Concept Two Sequel, Concept Two Dual Sequel, Concept Two Sequel-S), dielectric HDP solutions (Speed and Speed/Sequel), and metal solutions (Concept One-W) and Concept Two-Altus, and Concept Two-Dual Altus). To service its expanded international markets and product lines, Novellus now employed over 800 people.
Market conditions were difficult throughout 1996, with lowered bookings and higher expenses affecting net income. Stocks of manufacturers and suppliers in the $150 billion worldwide semiconductor industry took a downturn, with Novellus handling the downturn better than others. A new product--a plasma-enhanced anti-reflection layer system--was introduced at Semicon Japan. Novellus was rated the favorite large supplier of wafer processing equipment in VLSI Research's 1996 Customer Satisfaction Survey.
According to Novellus, the total available dielectric and metal CVD market is expected to grow to $2 billion by 1998. The company's name, "Novellus," is derived from the Latin word for "unique," and the company has carved a unique market niche for itself since it began in 1984, keeping labor costs low and profits high while maintaining a presence in new technological developments. While the nature of the semiconductor market leads to fast growth and easy failure, Novellus has managed to weather storms including economic recession and the weakening of Japanese business, remaining near, if not at, the top of the market.