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Semitool rides ups, downs in tech sector

If roller-coasters tend to make your stomach flip-flop, you probably shouldn’t be peeking at Ray Thompson’s financial statements.

By MICHAEL JAMISON for Western Montana InBusiness

"There’s a lot of wild swings," said Thompson, who is president, CEO and chairman of the board at Kalispell-based Semitool Inc. "It goes way up, then goes way down, then shoots back up. It’s an exciting business, in that respect."

His exciting business is the business of high technology – specifically, the business of making the machines that make computer chips.

For 27 years, Thompson has sat in the front seat of that roller-coaster, arms up, sometimes laughing, sometimes screaming, always hoping that somewhere along the ride he’ll "have some fun and make some profit."

Of course, it’s always more fun when you’re making a profit.

In 1978, Thompson brought his unlikely dream of high-tech profit in Montana all the way from California, bucking conventional wisdom that advised against trading in silicon outside the valley of the same name.

But profit he did, and for 20 years Semitool slowly grew, producing high-end semiconductors for overseas computer chip manufacturers.

Then, just as the company looked poised to strike big with new copper-conductor technology, Thompson was laid low in 1998 with a bad bout of the Asian financial flu.

His major customers, in Japan and along the Pacific Rim, stopped making capital improvements at chip factories as their national economies sank into prolonged recession.

One day, Semitool couldn’t keep up with all the orders. The next day, no one was buying.

By the time the flu ran its course, Thompson’s competitors had caught up with his copper technology, and the cutting edge was somewhere else.

"That’s just the way it works in this business," Thompson said. "Up and down, up and down. Historically, in Asia, they build plants because they have the technology and they have the money and it makes good politics – not because they have a strong market. That makes for a very unstable business climate."

Unstable indeed.

In fiscal year 1997, Semitool packed away a cool $5 million in profit, and seemed on the verge of even bigger gains. But then the company’s orders fell off, and Semitool lost $1.1 million on sales of $30.4 million in just the last three months of 1998.

And that was just a sign of things to come.

The fiscal year ended with nearly $7 million in losses.

But on this ride, the lowest lows are good indicators of high highs to come.

Sure enough, in fiscal year 1999 the company’s stock jumped 145 percent, and Semitool ended the year with nearly $4 million in profits as sales soared. Thompson’s company, which had laid off 300 people in 1998, emerged as the best-performing stock in the state in 1999.

The climb was driven, in large part, by the rapidly growing telecommunications field, which in turn was driving a need for more and more computer chips, which in turn was driving a need for more of Thompson’s semiconductor machines.

It’s no small coincidence that the same year Semitool’s stock took off, Montana Power Co. also was marking strong earnings.

At the time, two-thirds of Montana Power’s value was tied up in Touch America, a telecommunications company that was laying a web of fiber-optic lines across the country. In 1999, Montana Power offered a two-for-one stock split, and even after that saw share values rise by 28 percent.

At the end of 1999, Montana Power stock hit an all-time high, as did Semitool’s.

Three years. Up five million, down seven, up four.

He was braced for another down.

Sure enough, Semitool stock is trading today at about $5 a share, down from about $30 in late 1999, and once-booming Touch America is making noises of bankruptcy.

"Our industry is really struggling today," Thompson said. "There’s a lot of capacity out there, but not much demand."

That means big chip factories aren’t investing in capital equipment purchases, and so aren’t buying Semitool’s semiconductors.

The ups and downs, Thompson said, have much to do with the underlying nature of high-tech research and development. There will be a technological breakthrough, he said, and for a short time supply will not be able to keep up with demand as more and more applications are found for the new technology.

Those are the fat years.

Then, as the market becomes glutted and the price of the technology drops amid market pressure, producers scale back on capital improvements.

Those are the thin years.

Then, another technology or a new application for an existing technology appears on the commercial horizon, and the sails fill with wind again.

The trick to sailing those seas, he said, is to "keep debt down. That’s why we own all these facilities outright. Everything’s got to be paid for, because you can’t be worrying about a happy landlord when business is on a downturn." Another key to weathering the vagaries of the technology climate is to help customers find a cheaper and better and faster way to do the same things they’ve been doing. That helps cover your tail during times when no new breakthroughs are emerging, he said.

An example: Semitool has pioneered new conductive materials that can be electroplated onto silicon chips. The company also has come up with new and better ways to do the electroplating itself. The materials are cheaper, the process is cheaper, and the conductors conduct better.

Semitool also has forged better technologies for "washing" computer chips, which must be cleaned after each layer of circuitry is imprinted. The new HydrOzone process uses water and ozone to do the job, replacing sulfuric acid. It’s cheaper, he said, and better for the environment.

"We’re constantly refining our opportunities," Thompson said. "The technology is getting more finite in its dimension and more cost competitive in the market. You have to invest in research to stay afloat."

To survive, he said, a company has to anticipate the next breakthrough and be ready to get in on the ground floor, before the market is glutted.

"We’re always in the lead," he said. "We’re always on the edge. That’s where we play. We don’t do ‘me too.’ We’re out in front."

Out in front means looking ahead to the day when "everyone carries four or five chips around in their billfold," a pocketful of computerized money, identification and health records. Out front means anticipating the next wave of portable electronics and finding ways to increase battery life or electronic memory. Out front means sitting on a trio of big technology announcements, expected to come next month, but about which he remains unwilling to spill the beans.

And a couple years ago, he said, as the Asian flu lingered, out front meant foreseeing not only the technological future, but also the geopolitical future.

Specifically, Semitool turned away from Japan and toward China in a bid to find customers when customers were scarce. What he found was a country starved for exactly what he had to offer.

"It’s an unbelievable thing," he said. "The most fascinating trip you could make would be to go to Shanghai and see all the capitalism exploding around this communist country. It’s absolutely amazing."

And not just a little bit profitable, which makes it even more fun.

In early March, in fact, Thompson attended a semiconductor trade show in Shanghai, a place where trade, let alone a trade show, was unheard of just a few years back.

At that show, Thompson and others talked about the future of the industry, an industry he says "is looking like it’s going to recover somewhat – but it’s going to be a slow year, again, I’m afraid. We’ll just have to weather it. That’s part of being in the cyclic semiconductor business."

The cycles, he said, he cannot change. All he can do is prepare for the downturns and batten down the hatches.

One way to prepare is to try and teach Montana’s policy-makers about how the technology world works. The day before he was to leave for Shanghai, he was busy doing just that.

Montana’s lawmakers, meeting in Helena, were considering a bill that would make public any trade secrets revealed during the discovery phase of a lawsuit.

"We would have to publish all of our trade secrets," he said. "That would just leave us completely disarmed in front of all our competitors. It would just not be possible for us to operate here anymore. The folks in Helena simply don’t understand us here in the technology field. If this were California, lawmakers would clearly understand the implications of a bill like that." If this were California, he said, there would be a governmental and social infrastructure in place to encourage technology firms. There would be an active push for venture capital. There would be a reward system for small entrepreneurs rather than for large corporations.

"Those are the ones who will make it," Thompson said. "The individual entrepreneurs with new ideas, new products. Not the big corporations who are looking for a big piece of the pie. The people in little niches will do well as opposed to the business looking to take on huge market shares."

The little guy, however, is exactly the one who, without support and encouragement from the state, is least able to weather the ups and downs of Thompson’s roller-coaster.

In 1999, he said, the semiconductor industry did about $22 billion worth of business. In 2000, it doubled to $40 billion. In 2001, it was down to $27 billion and by last year it had sagged to $18 billion.

The latest projections – which Thompson takes with a whole handful of salt – indicate the industry could be worth $43 billion two years from now.

"You need some know-how and support to ride a chart like that," he said. "All you can say is you know there is no doubt there’s going to be major swings. What you don’t know is the timing of them. I’ve been here 23 years, and I wouldn’t want to predict Montana’s future in technology. I think I’ve been humbled too many times."

Reporter Michael Jamison can be reached at 1-800-366-7186 or at [email protected].

http://missoulian.com/articles/2003/04/01/business/bus01.txt

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