Dramatic increase in MOCVD orders

Over the past few years, suppliers of epitaxy equipment have had it tough. Now, it seems, the worm has turned. LED manufacturers are tooling up with new reactors to make improved LEDs that will meet the requirements of the next big application wave – display backlights for televisions and PC desktop monitors.

Veeco Instruments and Aixtron are the two leading vendors of MOCVD equipment for LED production, and although the drawn-out sales process means that revenues are yet to really kick in, the order books at those two firms are suddenly looking very healthy. Given Aixtron s caution when booking orders for MOCVD equipment – it has a strict internal policy and only records an order after a committed delivery date from a customer is received – the German company s backlog is a good measure of demand within the industry.

By early November, Aixtron already had enough MOCVD equipment orders to prompt a €10 million upgrade of its full-year revenue expectations for 2006 and it will take a very healthy backlog into the start of 2007. All €98.3 million ($127 million) in equipment orders on the books in early November were scheduled for delivery by the end of 2007.

Veeco is seeing a similar picture. It is forecasting 2006 revenue from its epitaxy division (which includes sales of both MBE and MOCVD equipment) to reach $85 million, up strongly on the 2005 figure of $63 million.

Like Aixtron, Veeco s order book is also brimming, again thanks to major orders from LED makers. In the firm s late-October earnings call, Veeco CEO Ed Braun said that orders for MOCVD equipment alone had surpassed $20 million in recent quarters. And although the hard-disk data storage sector remains the number-one market for Veeco s overall business, an analysis of its latest orders shows that the break-out of 2007 sales will be much more influenced by III-V device makers.

Of the 15 leading customers who placed orders with Veeco in the third quarter of 2006, seven were III-V companies. The top four customers were all major hard-disk firms like Seagate and Hitachi, but in fifth place was the epiwafer foundry Bandwidth Semiconductor, followed by the Chinese firm Nanjing Guosheng Electronics, Osram Opto Semiconductors and Taiwan-based Arima Opto.

With three other Korean and Chinese chip makers ranking in the top 15, it is already clear where Veeco s revenue is coming from next year. Once they have received their new MOCVD reactors, those LED chip vendors will set to work refining new processes, some using larger-diameter substrates, and begin attacking the new market for large-scale display backlighting.

DisplaySearch predicts that some 308 million backlighting units for flat-panel displays will ship in 2007. Of those, just 3.5%, or 10.8 million units, are expected to be illuminated by high-quality LEDs, but this will still represent a huge increase on the forecast 2006 market penetration of only 2.6 million units.

As a result, Veeco is reckoning on a 30% rise in epitaxy equipment sales to compound semiconductor firms next year, to about $115 million. And it won t stop there – the US firm says that in 2009 it expects to generate sales of $175 million as LED-based backlights become firmly established, with in excess of 50 million unit shipments, and applications in more general illumination begin to drive demand for next-generation equipment.

Predictions aside, there are some signs that this is starting to happen. Samsung recently began selling an LED-based monitor for high-specification applications like desktop publishing and ultimately the Korean firm plans to use LED backlights in all of its LCD displays.

For LED manufacturers, the performance requirements demanded for flat-panel TVs and monitors are extremely high. This means that the central wavelength or specific color emitted by each LED made must conform to strict guidelines. Veeco says that its customers have found that this color distribution is much tighter for chips made with its latest GaNzilla II equipment, with more good die produced per wafer and better yields.

The focus on higher-quality die production means that Veeco and Aixtron are selling more of their newest reactors. This has an added benefit for their finances, since the latest equipment is the most profitable to sell. This much was clear from Aixtron s latest financial results, which indicated a rapid improvement in profit margins. The trend is set to continue, since more than 20% of Aixtron s third-quarter orders were for these latest systems. Aixtron says that 2006 will now deliver a €3 million profit, rather than merely breaking even.

Aixtron CEO Paul Hyland is certainly in a more confident mood than he was at the start of 2006, when he described the market for MOCVD equipment as "cautious". In the firm s latest conference call for investors, Hyland was even bullish about the longer-term prospects for solid-state lighting applications, saying that they will likely begin to emerge sooner than had been expected.

"2007 and 2008 will be a very interesting couple of years for LEDs," Hyland said, although there is likely to be a leveling-off in orders for MOCVD reactors as LED makers concentrate more on reducing the costs of their new equipment and honing their new processes.