Did Trump just kill Micron Technology?

While it will take some time to understand the impact of the recent US Tax cuts and Jobs act on the Semiconductor industry, the opportunity for US corporation to repatriate income certainly has made a splash. Traditionally, US semiconductor companies pay very limited tax at home. The majority of the revenue and investments are made in other jurisdictions that often have much more attractive tax regimes than the US corporate tax system.

 

 

 

The top 25 US semiconductor companies have increased the tax provision from 2B$ in Q3-17 to 16B$ in Q4-17. With a repatriation tax of 15.5%, this indicates that 80B$ is being brought back into to the US. Almost all of it is by 4 companies: Intel, Qualcomm, Western Digital and Texas Instruments.

 

What to do with 80B$

The intent of the Tax cuts and Jobs Act is to bring back investments and jobs to the US through a lower corporate tax rate. Undoubtedly this is also going to impact semiconductor revenue and jobs although it is unlikely that it creates significantly more manufacturing jobs in the US as the current immigration laws make it difficult to attract the right kind of skills. There are many more reasons than the tax rate that decides where to place a manufacturing facility.

All of the top 4 semiconductor companies are in a shape where they already can fund their own investments and return surplus capital to their investors. The question is what they are going to do with 80B$ in the US? We believe that we will see a couple of significant acquisitions in the semiconductor space involving US-based semiconductor companies, not only as a result of the cash but also it will be easier to get regulatory approval for two companies originating in the same triad.

 

What to buy for 80B$

If you have to buy a competitor, you might as well buy one that grows revenue. Either by selling attractive products or selling in attractive markets – or even better: Both!

Currently, there is one very attractive product area in the semiconductor market. Memories have grown from under 27% of the total market to over 37% in only 7 quarters. Certainly, some of this growth is based on inflated pricing that will return to a lower level at one point in time, but the memory market is a lot different from the last memory pricing cycle. From a market perspective, the two main growth areas are Smart Phones and the Datacenter, in particular, the hyperscale cloud datacenter. Part of this growth is based on increased memory pricing and will be reversed at a point in time. What is different in this memory cycle is that the data center has been able to absorb the increased memory pricing like no other application before. While PC and Smartphones are impacted directly by consumer decisions, the memory consumption in the datacenter is an investment decision. And you can be pretty sure Apple and Amazon are not going to run out of storage space.

 

 

Although it is not the optimum timing to buy a memory company at the peak of the memory cycle, we believe that memory is now a strategic component at the same level as processors used to be and it will be a vital growth area in the future.

If you were to acquire a US-based memory company, you would end up with a very short list, or with insignificant players. Memory revenue from US-based companies is concentrated in three companies: Western Digital, Intel and Micron. We believe Micron is the next large acquisition target and we believe that it makes a lot of sense for growth challenged Intel to attempt to become a DRAM company again. This aligns well with the company signalling a strategic change and more risk-taking.

 

 

Intel has a very clear market strategy, here illustrated by the 3 Horizons framework. Defending its two core markets, PC & Server, win the emerging Datacenter & Cloud market and then pursue future bets.

Eventually, Intel has a target to become a “Data” company, even if it will be true to its manufacturing roots, most of the future revenue could be generated by data, insights and knowledge.

 

 

 

 

Micron is a good match for Intel in all of its strategic markets. It has higher growth rates (some price-driven) and meaningful revenue in each market.

 

 

 

Micron is also sufficiently significant to make a difference on Intel’s numbers and they are perfectly aligned with Intel’s target markets and several large memory customers like Amazon and Apple are also repatriating a large amount of cash and could create a bidding war should they decide to engage. With so many potential buyers, we believe the chance of Micron coming under offer in 2018 is high.

While Qualcomm is unlikely to make a move given the current Broadcom battle and NXP integration it is likely we will see TI back in the M&A game after many years of absence. And there is a lot to choose from.

 

 

 

 

Should you be interested in our data and insights please contact Claus Aasholm for more information

 

 

Is Softbank milking ARM?

There was a lot of concern back in 2016 when Softbank bought ARM holdings for a record 32B$. Was the Japanese bank going to treat ARM as a milking cow or was it a big bet on the future as stated by the CEO of Softbank, Masayoshi Son. With the closure of 2017, it is possible to get an overview of a full year in which ARM has been fully controlled by SoftBank. The investment strategy and statements from Softbank still indicate an agressive investment philosophy but what is the verdict of the financial data.

 

 

 

The available data confirms that Softbank is not treating ARM as a cashcow. Rather than trying to optimise EBITDA, ARM is allowed to increase operational costs significantly even though the revenue growth is single digits. R&D has increased by a staggering 60% while the SG&A costs has been boosted 44%. The headcount has increased by 22% while ARM’s semiconductor customers are cutting headcount by 5-10% a year.

 

 

The revenue of ARM has three main categories. The chart below excludes software to show the increaseing importance of royalties from chips sold, over licenses bought up front when customers engage with ARM and design with their architecture. Although licensing revenue is going down ARM is confident the new licenses has higher royalty potential that the earlier licenses.

 

 

Being acquired by SoftBank looks like a very good move for ARM. The agressive increases in operational costs shows that this is truly a future bet for SoftBank.

 

Other highlights and snacks from the lastest ARM presentation:

The ARM business model is very solid and perceived fair by the company’s clients. This is quite difficult as Qualcomm can testify. Their business model is constantly challenged by their customers and authorities. What is also interesting about it is that it give a view into the semiconductor market that is not available from the semiconductor companies.

 

As semiconductor devices increasingly become more integrated, more devices are containing processors. Arm now estimate that 70% of all integrated devices contain processors and that ARM has penetrated a third of that market.

 

 

Although the revenue from licensing has been decreasing the licensees has higher royalty potential:

 

 

 

Like the semiconductor companies we follow, ARM is also seeing a slowdown in the number of mobile units sold. The other markets have grown quite healthy and above the average non-memory market growth.

 

 

While ARM dominates the slow-growing market segment for mobile processors they have close to zero market share in the fast-growing server and data center market. This market, dominated by Intel and challenged by Nvidia, will be the next big target area for ARM.

 

 

The automotive market is changing from a power/discrete/microcontroller centric market to also include high-performance computing. ARM has a low market share but well positioned to get a significant share of the new opportunities. The chart below is a great overview of how ARM views the opportunity.

 

 

That ARM is interested in the IoT market is no suprise. However the company has a very interesting view on how the IoT market is going to be monetised. Semiconductor companies might enable this market but they will not derive the most value.

 

 

ARM have some interesting figures on the 4G to 5G deployments and the benefits that will be derived.

 

If you want direct access to our Semiconductor product, market and business data, please contact Claus Aasholm

 

Why would TSMC’s “collaborate” with Samsung on Bitcoin?

The ongoing transition of processing power from the PC to the Enterprise Datacenter and then to the hyper-scale cloud, is being joined by a new processing category. The meteoric rise of the value of Bitcoin has a significant impact on the Semiconductor Processing revenue. Although from a small base, the processing mining revenue has grown over 500% year over year, dominated TSMC customers and Nvidia. In Q4 the Cryto Mining share had risen to over 3% of the total processing market.

 

 

(Q4-17 numbers lack companies that have not yet reported – will increase PC and DC but not Crypto)

 

Already a key memory supplier to the Cryptocurrency mining market, Samsung is preparing to act as manufacturing foundry for the ACIS’s needed for processing. This might not be a major surprise but the statements that this is going to be a cooperation with TSMC does not make immediate sense. Samsung and TSMC are competitors in the foundry market and TSMC is without rivalry the largest manufacturer of processing ASIC’s to the Bitcoin mining market. Why should they “collaborate” with Samsung?

 

 

Bitcoin miners have traditionally been using Grapics Cards as they are better suited for mining that traditional server and PC processors. This has benefitted both AMD and Nvidia that has been the main suppliers of the cards to a level where there is a shortage. In order to protect its graphics customers, Nvidia has created and sold dedicated mining platforms during the last year but have stated that Bitcoins are best mined by specialised ASIC’s. This is confirmed by the rise of specialised mining rig manufacturers using proprietary ASICS’s. The main foundry for this activity has been TSMC that were willing to share their Crypto revenue figures last quarter but did not want to disclose them in Q4.  This is likely as a result of the pending “collaboration” with Samsung. It is obvious that this is not in TSMC’s interest and that they are not doing this voluntarily.

The reason for the cooperation is in our opinion driven by TSMC’s customers and more specifically by the largest Bitcoin mining Company, Bitmain Technology Inc. The company is claiming to deliver 70% of all the mining rigs to the Bitcoin miners and have had all of their BM1384/7 chips made on the TSMC 16nm process. Delivering in excess of 200K units a year with 100+ ASIC’s in each, they are likely behind most of TSMC crypto revenue. We believe Bitmain is now buying for more than 1.5B$ yearly run rate with TSMC and is now so powerful they can force TSMC to help Samsung 2nd source their ASIC’s. This could have a significant impact on both TSMC’s and Samsung’s revenue if the Bitcoin valuation stays high.

 

 

The top Bitcoin Mining ASIC companies:

Bitmain: Incorporated in Hongkong, the Beijing startup Bitmain Technologies Ltd is controlled by a trust in the Cayman Islands. Bitmain designs the silicon that goes into its bitcoin mining rigs, assemble the machines, then sells them to customers around the world. It also operates the machines for its own account, runs vast bitcoin mines that it rents out on contract to others, and, finally, manages several of the world’s largest mining “pools”—agglomerations of processing power so huge that they greatly improve the odds of successfully mining a bitcoin block. Bitmain manages Antpool and BTC.com, account for 28.9% of all the processing power on the global bitcoin network. Last four days results shown below.

 

 

Bitmain produces and sells hundreds of thousands Antminer rigs a year. According to Bitmain, they sell 70% of all mining rigs to the market, effectively providing 70% of all the processing power on the network. The latest Antminer rig is based on the BM1384/7 chip.

BitFury: Bitmain considers BitFury their main competitor. Although predominately a blockchain company, BitFury also delivers hardware for bitcoin mining: BitFury is basing their hardware on a proprietary 16nm ASIC manufactured by TSMC called BF8162C16

Canaan: Another Beijing company creating mining rigs based on their Avalon Blockchain ASIC

Article: Bitmain