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The SEZ Group
Consolidated Key Figures
Corporate Bodies
The Single Wafer Advantage
To our shareholders
Report on the Financial Year 2004
The SEZ Group develops, manufactures and markets unique process systems and applications needed for microchip manufacturing. With an installed base of over 900 tools, the SEZ Group is the leading provider of single-wafer, wet-clean processing solutions for the semiconductor industry. With its Spin-Processor technology, a worldwide patented method for wet chemical cleaning solutions, SEZ has been able to firmly establish itself as a global technology leader in the area of single-wafer manufacturing.
Since 1996, SEZ Holding Ltd. has been listed on the main segment of the SWX Swiss Exchange (SWX: SEZN). The Group's operational headquarters is Villach, Austria. Additional subsidiaries in North America, Japan, Taiwan, Singapore, South Korea and China provide a global service and distribution network.
Board of Directors
Egon Putzi, Chairman, Delegate of Board of Directors, Austrian, Villach
Franz Sumnitsch, Vice-Chairman, Delegate of Board of Directors, Austrian, Klagenfurt
Dr. Thomas Egolf, Risk and Audit Committee, Swiss, Oberrohrdorf
Dr. Thomas Lustenberger, Secretary, Risk and Audit Committee, Swiss, Ebikon
Jack Schmuckli, Swiss, Stäfa
Management Board (Corporate Executive Board)
Egon Putzi, Chief Executive Officer
Franz Sumnitsch, Chief Executive Officer
Sabine Kampitsch, Finance (Executive VP & Chief Financial Officer)
Kurt Lackenbucher, Corporate Operations (Executive VP & Chief Operating Officer)
Strategy Advisory Board
Wilhelm Ladenhauf, SEZ AG, Technology & Innovation
Hans Kruwinus, SEZ AG, Research
Ernst Gaulhofer, SEZ AG, Process Application
Lutz Deutschmann, SEZ AG, Global Marketing
Yutaka Watanabe, SEZ AG, Global Marketing
Jim Mello, SEZ America, Sales & Marketing
Auditors
KPMG Fides Peat, Zurich
SEZ Vision
SEZ will extend its global leadership and become the industry's most complete supplier of single-wafer wet-processing solutions throughout the IC manufacturing lifecycle.
SEZ Mission
Product
Our mission is to enable the manufacturing of advanced semiconductor devices by delivering superior single-wafer wet-processing solutions that help our global customers optimize process results, enhance device performance and boost manufacturing yields.
Growth
Continuously maximize economic value of the company through focused cost control management, continuous efforts to increase market share, maintaining a strong cash position and strong global and strategic positioning.
People
Increase overall corporate effectiveness by capitalizing on our corporate culture and employee excellence. We empower our people with career planning, continuing education and training programs.
Environment
To attain a high degree of environmental protection by enabling programs that increase environmental awareness, safety and emission control. We aim to maximize efficiency of resources.
The Wet Processing Equipment Market
SEZ's technology is a key enabler in the production of the ICs, or chips, used to power today's hottest electronics products. SEZ's role in the semiconductor supply chain is related to wet processes performed after a variety of other processing steps. This wet wafer cleaning market has become one of the most critical areas of the entire semiconductor manufacturing process.
Wet cleaning includes processes used to clean wafers with wet chemicals or water. Wet cleaning is a subset of wet processing including cleaning, etching & resist stripping. There are three main reasons for cleaning wafers: Removal of particles, metals and of organics. All are used to enhance production yield.
However, this market is highly fragmented and most players are traditionally found in batch processing segment. Today, around a fourth of all wet application steps in microchip manufacturing are performed using single-wafer processes. Based on current market indicators, there is an increased expectation that the transition from batch to single-wafer processing technology is accelerating, especially as advanced cleaning FEOL will necessitate the flexibility and advanced process controls that single-wafer provides.
Advantages of single wafer include enhanced process performance (increased uniformity, repeatability, cleaning efficiency and particle control), improved productivity and reduced cost of owner ship (reduction in chemistries, water, exhaust, electricity, footprint), faster cycle times and increased flexibility (improved lot scheduling, reduced wafers in progress, flexible line integration).
Companies need space-saving tools that can accommodate the tighter flows required in today's state-of-the-art fabs, creating a significant advantage for single-wafer vs. batch technologies.
As the semiconductor industry develops processes for the 65 and 45 nm nodes, wafer cleaning faces new challenges for both front-end-of-line (FEOL) and back-end-of-line (BEOL) requirements - including increased fragility of structures and materials, and more stringent requirements for cleanliness and material loss.
The upswing in the international microchip market, particularly in the semiconductor manufacturing equipment segment, had a favorable impact on the first nine months of our financial year 2004. A sharp increase in demand was already noticeable in the last quarter of 2003, which SEZ was able to finish with an 80 percent sequential rise in incoming orders over the previous quarter. SEZ repeated this excellent performance through the end of September 2004 by consistently raising net sales each successive quarter, and— following an increase of 79.2 percent compared with the previous year—was able to complete financial year 2004 with record sales of CHF 304.8 million.
Totaling CHF 309.1 million—an increase of 53.4 percent—the volume of orders was also at a record high level. Toward the end of the year, SEZ reported a book-to-bill ratio of 1.01, even though the demand for semiconductor manufacturing equipment had passed its peak in mid-2004, and the inflow of new orders had slowed down in the fourth quarter. Once again, we profited from our ability to rapidly respond to market trends and to allow them to flow into the development of new applications. The order intake for our latest Spin Processors from the Da Vinci product family exceeded our expectations. The Da Vinci tools meet microchip manufacturers' stringent performance requirements needed for high production quality. At the same time, they support the aim of delivering higher yields at reduced costs per unit. These are the key criteria that are helping speed up the transition from batch to single-wafer processing technology in the cleaning sector. Following the logic chip manufacturers' lead, memory makers are now increasingly making the switch to single-wafer from batch processing technology.
As technology and market leader for single-wafer wet cleaning solutions, SEZ profits directly from this trend. Following the launch of the complete Da Vinci series in February 2004, the Da Vinci tools quickly took hold, accounting for 7 percent of equipment sales and 22 percent of incoming orders in the reporting year. Early in 2005, we received a volume order for several Da Vinci DV-38F tools from a major memory chip manufacturer based in Korea. In total, we are expecting the Da Vinci product family to represent around 50 percent of the SEZ Group's net sales in 2005.
The innovative Da Vinci tools' rising share of market is also elevating our ability to respond flexibly to price and currency influences that are due, on one hand, to new competitors entering the single-wafer cleaning segment and, on the other, to the high Euro rate. Additionally, we are working on a program that will enable us to lower production costs from fourth-quarter 2005 onward, and to lastingly strengthen the gross margin. Regarding market development, we expect that the temporarily slowed economic recovery on the international microchip market will continue already from mid-2005 onward.
Yet again in the reporting year, the SEZ Group received awards for its achievements in the semiconductor equipment market. In the annual "Ten Best Small Suppliers of Wafer Processing Equipment" customer satisfaction survey conducted by renowned market-analyst firm VLSI Research Inc., SEZ climbed in ranking from fifth to fourth in 2004.
As technology leader for single-wafer wet processing, SEZ, along with such products as the Da Vinci series, meets the market's stringent requirements, and its partnerships with customers and internationally leading development consortia support its continually high rate of innovation. With the launch and evaluation of new solutions, SEZ will further expand its position as one-stop supplier of complete solutions for wet cleaning steps based on single-wafer processing technology. In addition, specific solutions for front-end-of-line (FEOL) cleaning applications and photoresist stripping will open up additional market potential for the SEZ Group from 2006 onward.
We owe the record results of 2004 to our staff all over the world who continually demonstrate their commitment to the SEZ Group and our customers by pursuing far-above-average quality standards day after day. We wish to express our gratitude to our employees for their high commitment and loyalty. We would also like to thank our customers and business partners for their efficient and close cooperation and, last but not least, all our shareholders for the confidence they place in us and for their support.
Egon Putzi | Chairman of Board of Directors
Franz Sumnitsch | Vice-Chairman of Board of Directors
Kurt Lackenbucher | Member of the Corporate Executive Board
Sabine Kampitsch | Member of the Corporate Executive Board
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Course of Business 2004
In the overall year 2004, SEZ achieved the highest net sales in its history, totaling CHF 304.8 million and exceeding the year previous by 79.2 percent. Order intake rose by 53.4 percent to CHF 309.1 million. Order backlog as of end of year stood at CHF 76.7 million—8.6 percent higher than in the prior year. The ratio of incoming orders to net sales (book-to-bill ratio) in the reporting year equaled 1.01. Operating results (EBIT) totaled CHF 37.8 million (EBIT margin: 12.4 percent), and net profits amounted to CHF 32.1 million (CHF 2.03 per share). Operating-profit margin came under pressure due conventional Spin Processors' share of the product mix exceeding expectations. Moreover, the high Euro rate—especially compared to the U.S. dollar (USD) and the Japanese yen (JPY)—put a strain on cost of products sold.
The first three business quarters of 2004 were characterized by intensive demand—first and foremost, from customers from the Asia-Pacific region, primarily foundries. The majority of orders involved 300-mm manufacturing tools. Additionally, the unexpected aggressive completion of existing fabrication lines resulted in a high number of deliveries of conventional SEZ four-chamber systems in the third and fourth quarter, due in large part to customers employing the proven "copy exact" concept—i.e., using identical equipment throughout the entire fabrication line. In the fourth quarter, the SEZ Group felt the weakening market development that began at mid-year, and growth compared to the record results of the preceding quarters slowed.
The share of net sales achieved with wet-processing equipment reached 94 percent, while about 60 percent of the delivered Spin Processors were intended for use in 300-mm production. Clearly, the Da Vinci system series is increasingly gaining market significance.
Over the financial year 2004, the Asia-Pacific region, characterized by foundries, further expanded its percentage of SEZ's sales from 47.3 to 61.8 percent. In absolute figures, CHF 188.5 million were generated in this region compared with CHF 80.5 million in the previous year. In Japan, net sales were increased by 16.5 percent to CHF 60.0 million. This means that Japan, with a sales share of 19.7 percent (prior year: 30.3%), was once again the second strongest market. With CHF 31.8 million, Europe accounted for 10.4 percent of group sales (prior year: 12.8%), while, with CHF 24.5 million, the U.S. market represented 8.0 percent of sales (prior year: 9.6%). In the U.S., adoption of single-wafer technology is still low—contrasting sharply with the rising single-wafer trend in Asia.
In April 2004, the issuance of 2 790 000 nominal shares increased the SEZ Group's capital to 16 740 000 nominal shares. The inflow of funds resulting from this transaction totaled net CHF 110.2 million, enabling SEZ to speed development of its Spin Processing technology, and providing a solid basis for the entire group to continue to benefit from the cyclicality of the global semiconductor market.
Market and Market Position
In the financial year 2004, the international semiconductor equipment industry grew by 50 percent to USD 25 billion. The segment for wet surface-cleaning processes relevant to SEZ increased by 58 percent to USD 1.5 billion. With a 79.2 percent increase in net sales, SEZ again managed to far exceed the market, further expanding its market-leading position. Market growth stemmed mainly from foundries in the Asia-Pacific region, as well as from Japanese microchip manufacturers. Additionally, from the second half-year onward, several new projects in the European region provided for an upswing in this market.
The technology transition in the cleaning sector from batch to single-wafer processing technology continued to accelerate throughout the reporting year. Major chipmakers are increasingly replacing multi-wafer systems with single-wafer systems to meet rising quality requirements in microchip production. Initially, logic-chip producers were the primary adopters of single-wafer technology; now, more and more memory chip manufacturers are taking advantage of the superior performance and cost advantages offered by single-wafer wet-cleaning technology. In the reporting year, single-wafer applications accounted for 23 percent of the overall market for wafer surface cleaning.
Due to rapidly increasing miniaturization, larger wafer diameters, the growing number of microchips per wafer, and the use of new materials and technologies, the trend toward single-wafer applications will further accelerate. As the market leader in this segment, SEZ benefits from this trend, especially when it comes to more precise cleaning processes. Propelled by the current industry trend toward increased cost reduction, better yield and high productivity, the Da Vinci series tools far exceeded during the reporting year the expectations at their market launch. By the time the first sales-effective order was booked in the second quarter of 2004, multiple Da Vinci tools had already been installed at customer locations worldwide. For 2005, the Da Vinci product family is expected to represent more than 50 percent of the company's total sales.
Cooperation Ventures and Alliances
In the international semiconductor market, the right partners and alliances are of strategic importance, representing a key prerequisite for keeping pace with the high degree of innovation required by the market. SEZ maintains strong strategic contact with its customers, leading consortia and industrial partners, ensuring the company's ability to develop future process applications, as well as further develop and evolve existing applications.
Research and Development
In the year 2004, SEZ's research and development (R&D) activities focused on the further development of single-wafer applications, with the strategic aim to become the leading supplier of complete solutions for wet-cleaning steps based on single-wafer technology. In total, CHF 45.7 million, or 15.0 percent (prior year: CHF 37.6 million, or 22.1%) of consolidated net sales were spent on R&D. In the reporting year, the completion of the Da Vinci platform—four- and eight-chamber tools for the preparation of 200-mm and 300-mm wafers in high-volume manufacturing—was the main focus of R&D activities. Other activities centered around solutions for critical front-end-of-line (FEOL) cleaning steps and photoresist strip processes to allow SEZ to offer future advanced cleaning solutions. These new tools should contribute to group sales from the year 2006 onward.
Investments
In the reporting year, CHF 25.3 million, or 8.3 percent of net sales (prior year: CHF 18.0 million, or 10.6%), were invested in fixed assets and intangibles. The focus centered on expanding the infrastructure capacity in Villach, Austria, with new training facilities, development labs, and increased production capacity, as well as more than a dozen new systems for demonstration and laboratory purposes. Also, a new development laboratory, focused primarily on back-end applications, was erected in Yokohama, Japan.
Financial Situation
At the end of 2004, net financial assets amounted to CHF 135.7 million, compared with CHF 57.3 million in the previous year, while net current assets totaled CHF 171.3 million, compared with CHF 101.4 million at the end of 2003. With CHF 385.0 million (prior year: CHF 251.7 million), equity capital equaled an equity ratio of 75.7 percent (prior year: 75.5 %).
Personnel and Organization
As a result of powerful, reawakened demand for its technology, the SEZ Group's average number of employees worldwide grew in the reporting year from 629 to 663. Due to the increased staff numbers and success-related bonuses, staff costs rose from CHF 53.4 million to CHF 77.0 million. In the SEZ Group's corporate culture, team spirit, entrepreneurial action, and the encouragement of individual entrepreneurial skills are given great importance. Regular structured employee interviews and employee surveys are held to secure motivation and quality of work and to support effective employee development. The SEZ Group's largest location, SEZ AG in Austria, achieved a top-three ranking in the Europe-wide "Great Place to Work" study, yet again distinguishing itself in a benchmark comparison as one of the most attractive employers in Austria.
Business Excellence, Quality and Environment
The SEZ Group is committed to creating sustained added value for all involved parties, based on an integrative understanding that gives equal importance to economical, social and ecological factors. The high standard of social responsibility is documented by assessments of international funds based on the criteria of business ethics, personnel and environmental management. SEZ also attaches great importance to quality awareness at all corporate levels. In order to monitor quality costs along the entire value chain, the company implemented a special Quality Inspection Management System. Certification to ISO 14001 and to ISO 9001 (established since 1997 and 1998) and validation according to the EMAS Directive (confirming environmental compatibility at the production facility in Villach) form the basis of the SEZ Group's quality and ecology standards.
At the production facility in Villach, SEZ also publishes an Environmental Report, which is available to the public upon request.
Corporate Governance
A detailed Corporate Governance chapter can be found on pages 18 to 27 of this annual report. In addition, the SEZ Group committed itself in February 2004 to a Code of Conduct that constitutes an integral part of responsible corporate governance. All employees of the SEZ Group are asked to conduct themselves in accordance to these guidelines and to perform their tasks while adhering to the code. The Code of Conduct is available to the public on the SEZ Group's website and can also be obtained from the company upon request.
Outlook
For the year 2005, independent market analysts are currently—against originally more pessimistic expectations—anticipating zero growth or a decline of up to 15 percent in the market for semiconductor equipment. Because of its dominant market position, SEZ expects to again exceed overall market performance during the year.
The strategic aim to become a one-stop supplier of wet processing solutions will remain SEZ's key focus in 2005. As part of its Continuous Improvement Program (CIP), SEZ will continue to invest in the further improvement of existing Spin Processors used in Frontend/ back-end-of-line (BEOL) applications, as well as back-end/advanced packaging processes. New R&D activities are focused on Frontend/front-end-of-line (FEOL) tools and applications, which should double the addressable market from business year 2006 onward.
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