Insights from Intel’s earning release.

Intel reported a very strong Q3 result, especially from an income perspective. Net income grew 33.6% from the same quarter last year and an impressive 60.8% from last quarter. We will get more detail when Intel files its quarterly report but a major part of the result will be based on the client computing segment. While the PC segment is in decline, Intel can still generate results by optimising manufacturing faster than customers are given price decreases.

 

 

However, this is only a temporary strategy as there are limits to how much juice you can squeeze out of a declining business. Intel will need to get some more meaningful growth out of the smaller divisions. The problem is that the smaller divisions are a lot smaller. 

 

 

The datacenter Group is the only current division that can add to meaningful growth. Getting close to 5B$/qtr the group is serving two major markets. The enterprise data centre market that is in moderate decline and the cloud data centre market that is in exponential growth.

 

 

The overall growth of 7,4 % is not stellar in a market that has grown 60% in the same period. Although most of the growth in the data centre is driven by increases in memory pricing, Intel's direct competitor Nvidia has grown more than 190% in the same period. Even AMD is starting to get revenue out of the cloud data centre. Intel is still a formidable company but it will need to transform its business faster than it is currently to maintain its ability to be a value creation company.

 

 

On the balance sheet,  inventory kept increasing suggesting that the revenue numbers achieved were lower than the planned expectations. This could also represent a product mix mismatch

Over the last few quarters, Intel has made some deep cuts into the SG&A expenses. It has reduced the cost with over 550m$ since the beginning of 2016. This is most likely representing deep cuts in marketing and sales as the administration costs typically are a function of size. Since the beginning of 2016, Intel has reduced headcount by 10.000 employees. Although there has been acquisitions and divestitures impacting this number, Intel is clearly in consolidation mode as a response to the modest growth rates. 

The MobileEye acquisition was closed in the quarter draining Intel for 14.5B$ of cash. Not surprisingly most of the value of the acquisition (10B$+) does not come from tangible or measurable intangible assets but has hit the goodwill balance. This is not unusual for an IP based acquisition but at the same time, it is a significant investment that impacts Intel's numbers and is certainly not without its risk. 

You can download the free Q3 Intel Factbook here

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Gold nuggets from TSMC’s earning release.

 

The semiconductor industry is heavily impacted by results of TSMC that accounts for approximately half of the foundry industry. The company reported 3rd quarter results yesterday and as usual gave some insight into the industry.

 

Although revenues were up to approximately the same level as the same quarter last year, inventories went up once more indicating a potential slowdown. Although TSMC was reasonably upbeat indicating a 6% /year growth rate they did reveal that their customers’ inventories also were increasing. Some of this effect can be down to Apple’s launch of new iPhones although this was not mentioned specifically.

 

There has been a major shift in technology over the last quarter towards 10nm technology that is likely to have a negative impact on revenue. 10nm technology allows TSMC to deliver more to the customers for the same price and it looks like the entire productivity gain has been given to the customer.

 

 

 

TMSC was upbeat about future capital investments and expected to open several lower geometry fabs over the next couple of years, down to 3nm. This could be true although the numbers for the quarter show a drop in CapEx below the depreciation level indicating a contraction in manufacturing capacity. The CapEx is lower than the replacement investments needed to maintain the current level. This might not be a signal as CapEx requirements can shift significantly over time but it could hint at TSMC delaying investments as a result of a change in the market conditions.

 

From a market perspective, communication and consumer keep losing share. This is in line with the general market trends of Smartphone consumption is under pressure from high memory pricing and from lower cost Chinese phones gaining market share on high feature flagship phones.

Interestingly TSMC is growing its industrial business indicating that the IoT revolution is finally hitting the money and not just a paper tiger anymore.

The computing segment also saw a jump in revenue coincides with the jump in 10nm revenue. It would be surprising if there is not a connection. Nvidia reported an increase in their Cost of Sales of approximately 200M$ in their last reported quarter which would move the needle 2,5% for TSMC. These data could be hinting at a good next quarter for Nvidia.

TSMC themselves report solid growth in cryptocurrency mining to 350-400M$ in Q3. This is mainly High-performance computing Asics and not revenue from GPU that is used for cryptocurrency mining. The implications could be negative for Nvidia as GPU graphics cards have been used for crypto currency mining but could be in the process of being replaced with very specialised ASIC processors.

The company is estimating the (Foundry) High-Performance Computing TAM to be 11.5B$ in 2017. The two major players AMD and Nvidia have a cost of sales of approximately 3,5B$ and 3B$ and is accounting for more than half of the market. TSMC’s HPC market share is in the ballpark of 30% or 3.5B in 2017.

 

Do you leave money on the table? We help strategic purchasers in the semiconductor market find right partners and negotiate better deals. Our research and insights are sharp ammo for your negotiation. Understanding the business and business model of your semiconductor suppliers is key to achieve a win-win situation.

Is your Semiconductor Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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Operating Costs for Memory companies are now below 12%

Last night Micron decided to dilute their stocks with an additional 1B$ offering of new stocks. The company intend to use the proceeds to buy back debt. This comes at a time with record profits and cash flow for Micron and the other memory companies. This is indeed a time to harvest and sow, to prepare for the next (if history is a good indicator for the future..) memory cycle.

All of the memory companies have enjoyed increasing revenues and gross profit margins to the level where the operating costs now are below 12%. Surprisingly Hynix have the highest gross profit margin indicating very competitive products or a strong presence in high-profit markets like the data center.

 

The chart also reveals the high operating costs of processing companies like Intel and Nvidia. Their business is highly reliant on keeping a high gross margin to keep the business healthy. A few companies are obvious negative outliers of which AMD and Cypress is a more permanent kind than NXP.

 

Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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TSMC’s new fab cost more than the yearly foundry Capex.

Morris Chang of TSMC recently gave his view of the capital investments needed for the company’s next 3nm fab in southern Taiwan. Chang believes the fab will require an investment of 20B$ before it is fully operational. This is more than the total yearly capital investments for the entire semiconductor foundry industry.

The total CapEx of Semiconductor companies, Semiconductor conglomerates and Semiconductor foundries will not pay for many fabs moving forwards. Manufacturing will be a game only played by the largest of companies.

 

 

Although semiconductor foundries are controlling more of the total semiconductor manufacturing they are not able to capture the value creation from their customers in the current growth market. While most of their customers have grown both revenue and operating profit the foundry industry has not been able to follow. Read the Bloomberg article here

 

Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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Semiconductor Fabless Revenue is not growing.

Many Semiconductor companies have embarked on a strategy without semiconductor manufacturing. The immediate advantages of a fabless model is a positive impact on the investment cash flow as capital expenditures for new factories now is the problem of the foundry. The long-term ramifications are difficult to predict but short-term gains are hard to resist, even if there is a price to pay.

 

 

We have started to track the performance of the different manufacturing categories, ranging from fabless to fully fab’ed semiconductor companies, with two categories in between.

A good performance metric to evaluate the different model is the operating income and it does not look favourable for the fabless category in the latest upturn. Every other category has done better the last 6 quarters. Not surprisingly the FullFab category has benefitted from the memory boom as memory companies owns their own fabs. The fab heavy category is impacted by a positive gain by NXP in Q1-17 but has generally grown healthy. The best model over the last 6 quarters has been the FabLight model.

Investigating if there is a shift in the profit of the semiconductor value chain requires an investigation of the operating profit of the foundry companies.

 

 

With an initial gain in both revenue and operating income, both are now pointing south indicating that the bargaining power is back in the hands of the foundry customers. This could indicate a market shift.

It might still be too early to conclude which model is optimum for Semiconductor companies, but we are committed to drilling for data and insights needed to make the right strategic decisions.

 

Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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Toshiba can eat its cake and keep it

It looks like a Toshiba’s memory division finally will be sold, and the cash-strapped conglomerate can get a much-needed cash infusion. A consortium constructed by Bain capital has been selected by Toshiba as the winning bid (not necessarily the highest bid), that also can satisfy the Japanese authorities. The deal can still be derailed by Western Digital that has several joint ventures with Toshiba and has sued the corporation to stop the transaction.

 

It has been incredibly complicated for Bain to navigate the many stakeholders and get to a deal. Not only has there been the national interests of Japan to protect but also many different stakeholders have been trying to get a share of TMC. Several customers like Apple, Dell and Kingston, are working to hedge themselves against further increases in Flash pricing by getting a share of the profits joined by suppliers, competitors and joint venture partners.

There have been several antitrust issues to be avoided. Seagate, Toshiba and Western Digital (part of the competing bid from KKR & Co) have full control of the hard disk market and Toshiba, Hynix and Western Digital combined would control more than 43% of the NAND flash markets. Both of these antitrust issues would prevent a normal acquisition of the Toshiba Memory Corporation.

 

 

The construction from Bain involves eight different investment partners. To make the deal palatable to authorities and Toshiba, Bain is creating an investment vehicle with several different share classes to isolate some of the joint venture partners from influence. Bain has created an acquisition company called Pangea to act as the buyer of Toshiba Memory Corporation.

 

 

The owners of Pangea are:

  • Bain Capital. Responsible for the construction and a future IPO.
  • Toshiba. Reinvesting a significant amount of the proceedings into the new company.
  • Hoya Corporation: A supplier to Toshiba and seen as important in the eyes of the Japanse authorities.
  • SK Hynix: A direct competitor to Toshiba that is prevented from buying TMC directly.
  • A US Consortium: Four of the largest customers of NAND flash in the world. Dell, Apple, Kingston and Seagate.

There is now sufficient information to get an overview of the ownership structure of Pangea. The construction is built around three share classes that isolate some of the companies from direct influence:

  • Common Shares – with full voting rights
  • Convertible Preferred Stock – Likely with guaranteed dividends, liquidation rights and conversion right to common shares under IPO and similar circumstances.
  • Unconvertible Preferred Stock – Without liquidation and conversion rights. But a significant hedging investment if your company is buying flash.
  • An ownership structure that would satisfy the available information can be seen below:

 

 

Effectively Bain has constructed a financial setup that will give Toshiba Corporation 1.65 Trillion Yen and let them, together with Hoya, keep control of the company on Japanese hands. Bain themselves get a massive influence for a relatively small investment, while Hynix, the largest single investor get very limitied influcence.

 

 

 

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Is your Strategy based on anecdotes? Do you want opinions or data-driven insights? Semiconductor Business Intelligence follows the industry in detail. We update our customers with general or customised quarterly reports on companies, products and end-markets. All of our research is based on our proprietary data and analysis of top semiconductor companies and related markets. We create a quarterly Factbook for each product group, end markets and of each of the top 50 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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