Micron Reporting

With Micron’s quarter ending ultimo may, it is possible to get a mid-quarter update on the memory market situation and with that the general market.

Comparing Micron’s Revenue to COGS, it is obvious that the price increases have not stopped yet. Both NAND and DRAM prices increased after a short decline in NAND pricing.

 

 

 

Although 6.1% quarterly revenue growth is certainly respectable, it is also the lowest growth in this cycle, indicating that the memory cycle might be over. The year over year growth is still over 40%

 

 

The divisional revenue shows that the CNBU division and MBU division are pulling the wagon. Interestingly it looks like the Mobil business is starting to outpace CNBU that have been dominant over the last cycle. This could mean that the smartphone manufacturers in China are starting to accept the inflated DRAM and NAND pricing. SBU is declining to indicate that Micron is not supporting the open SSD market anymore but preferring to sell to the Data center directly.

 

Microns business is still dominated by the Computing market (Datacenter up, Graphics up, PC down) and the Smartphone dominated consumer market. All markets but communications show healthy growth.

 

Our conclusion is that the Datacenter market has cooled slightly while the smartphone market has decided to ignore the high memory pricing and boost manufacturing again. The memory cycle could be at its end. The Cloud market can quickly change to high growth again as the revenue is based on very few large customers and their infrastructure decisions.

 

 

 

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The AI transformation of the Semiconductor Industry.

The overall market change.

What should have been the expected end of the current semiconductor cycle has transformed into a more complex market dynamic that has been experienced earlier. Since the beginning of the current cycle, most semiconductor product groups have generated significantly more revenue in growing end markets but a few have been on fire. We are now at a point where some product groups have stopped growing signalling an end to the cycle but one product group, in particular, has more fuel.

Two markets, in particular, has fuelled this growth cycle:

  1. The consumer market is driven by the semiconductor content growth in smartphones and the booming Chinese demand for cheaper local products.
  2. The computing market consisting of a mature PC market, a declining enterprise market and a data center cloud market on steroids.

 

 

From a product perspective, both markets have had a hunger for more memory, creating shortages and increased pricing. The memory market has generated more than double the revenue it did at the beginning of the current semiconductor growth cycle.

 

 

This development has favoured the large memory producers and forced Intel to abdicate the semiconductor throne to Samsung in Q2-17. Intel and Samsung combined are generating close to the same revenue as all the semiconductor companies outside the top 10 list.

 

 

 

The strategic rise of Semiconductor Memory Products.

A deeper dive into the market share data reveals how memories have overtaken processing products as the largest category dwarfed all other product categories.

 

 

Of the underlying product categories, only the main memory product groups, DRAM and NAND flash are gaining share, all other product groups are down.

 

 

The current DRAM boom is to a high degree driven by price increases. This is a result of the investment strategy of the main DRAM companies that all expected that NAND flash would be driving the next growth cycle in Smartphones and the Datacenter. The overinvestment in NAND flash and underinvestment in DRAM will take some time to correct. The market has not been able to get the DRAM needed and the response has been increased prices to a level where it is now limiting smartphone growth.

 

 

 

The Data Center is now dictating the semiconductor market

While the price of DRAM can suffocate Smartphone growth it can do little to limit the appetite of memory in the Datacenter. Amazon, Microsoft, Google, Apple and Facebook all invest heavily in data center infrastructure and with that – DRAM. The buying decision is a long-term investment decision and not consumer decisions as drove the memory markets in the early days. Amazon is not going to say no to an AWS customer because of high DRAM pricing.

The semiconductor revenue in the data center has grown quite dramatically in the current cycle and most of the growth has been in the Memory category.

 

 

 

As a result, Memory products are now more important than processing products in the Datacenter.

 

 

The memory revenue growth in the Data-center is close to a staggering 4x in only eight quarters.

 

 

This has caused a dramatic shift in the Semiconductor bill of material for a new cloud hyperscale datacenter.

 

 

 

Where the first call used to go to Intel for processing products, it might now go to a memory supplier.

 

 

 

As Semiconductor memories is a brute force investment game, it requires a lot of resources and guts – something only a few companies in the industry has.

 

 

Amazingly Nvidia has been able to generate similar growth rates as the memory companies in the data-centre. This is a piece of the puzzle that is transforming the Semiconductor industry.

 

Most of the top 10 Semiconductor companies now derive a significant proportion of their revenue from the Data Center Market.

 

The growth rates of the individual product areas give the last piece of the puzzle to how the semiconductor market will be transformed. It has long been known that datacenters are in the process of shifting their workload away from traditional processing storage and delivery of data to AI workloads of machine learning and inference. As a result, more of the total data in the Datacenter will stay in the datacenter and not be externally communicated. We believe the high growth rate of memory (even cleaned for pricing) and GPU’s combined with the low growth rate of processing is the first evidence that AI is now impacting the Semiconductor industry significantly and will change it forever.

 

The transforming semiconductor market drivers:

  1. Computing is now the largest and fastest growing market segment in the market
  2. The Datacenter market is over half the computing market and the only one that is growing. PC is stagnant and the Enterprise datacenter is in decline.
  3. The datacenter makes investment buying decisions that are less price sensitive than consumer decisions.
  4. The Datacenter is only at the beginning of it AI revolution and will need a lot more GPU and DRAM in the future.
  5. The current semiconductor cycle is not over for DRAM. This is not likely to change for several quarters.
  6. DRAM supply might not be able to fulfil Data center demand for quite some time, maybe even years.
  7. Semiconductor companies that are not aligned with this market, might struggle to grow and to attract investors.
  8. The Datacenter market is dominated by a few very large tech companies that are experiencing significant revenue growth in their cloud data center revenue. For Amazon, AWS is much more profitable than the rest of their business.
  9. The tech companies are much more likely to increase their investments dramatically than cutting them back.
  10. We believe the semiconductor market will never be the same again.

 

We supply the visual data for your semiconductor or market strategy. We track the semiconductor business and adjacent markets in detail. Contact Claus Aasholm for more details.

 

 

 

 

 

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The Golden Age of Semiconductor Factory Ownership

As the costs of pursuing Moore’s law has spiralled out of control, more and more semiconductor companies have changed their manufacturing strategy to be less dependent on in-house process technology and to a higher degree, utilise the investments of Semiconductor foundries like TSMC and similar. Without the ability to compete with their process, fabless semiconductor companies must rely on their ability to design great chips, software and development systems. Despite having one less parameter to compete on, the fabless model has been promoted as superior to manufacturing models based on owned fabs.

The fabless model looks superior seen from the short-run financial perspective. With process costs embedded into the cost of sales and low capital investments, fabless companies can generate high free cash flow.  The long-run perspective could be different. Fabless companies could be commoditised or their products could become obsolete by being outperformed by products with superior process technology.

Although the fabless model is more often chosen out of the inability to participate in the intense capital investment game, there are many companies that have some or a significant proportion of manufacturing served at internal factories.

The 4 manufacturing models we track.

Understanding the different manufacturing models and how they perform over time an in different market conditions is an important element of Semiconductor Business Intelligence. Fab investments are B$ decisions as is M&A activity that might contain used factories that will require an operate, sell, close decision. Rather than making these decisions based on gut feel, it is important to get evidence and data support for decisions.

We track top 40 semiconductor companies (accounting for 85% of the semiconductor chips on the market) and have divided them into 4 categories.

Full Fab: Companies that are fully dependent on owning their own factories like Intel, Samsung and other memory companies.

Fab Heavy: Companies with over half the revenue manufactured in internal factories

Fab Light: Companies with less than half the revenue manufactured in internal factories

Fabless: Companies without internal semiconductor manufacturing capabilities.

As companies change manufacturing strategy over time, so does our categorisation. A good indicator of the fab- dependence is to track the revenue per dollar of Property, Plant and Investment on the balance sheet as seen below. Conglomerates are semiconductor companies that produce other products than semiconductors and need to be analysed differently. They are in general manufacturing companies though.

 

 

 

The current upcycle in the light of manufacturing strategy.

In the chart below it becomes quite obvious that the current upcycle has benefitted the fab owners which is not surprising given the dominance of memory. This has been dampened by the less than industry revenue growth of Intel Corporation. The large memory companies have all increased their revenue significantly based on price increases on DRAM and volume and price increases of NAND flash.

 

 

 

The Q1-18 revenue growth vs the same quarter last year shows that all categories have grown healthy with the fully fab’ed companies in the lead. Q1-18 growth vs last quarter was negative for Fullfab while the FabLight model was the only one that grew.

 

 

 

This semiconductor cycle has changed the manufacturing landscape significantly. Even though only a few companies now fully dependent on their own factories they represented more than 50% of the revenue in Q1-16. This has now grown to over 62% making the traditional manufacturing model the most common also.

 

 

 

 

A benefit of tracking the different manufacturing strategies is to be able to identify inflexion points and potential changes in supply and demand. We are able to track all significant financial parameters by manufacturing strategy.

The chart below shows the changes in revenue and in inventory compared to the beginning of the up cycle. The chart includes total inventory and revenue for conglomerates. The fabless model had an immediate spike in inventory despite negative revenue growth. The model requires careful planning and forecasting and gets influenced by foundry pricing. Part of the inventory increase could be a higher cost of products produced due to constrained supply from foundries. Similarly for the fab light model.

 

 

The fab heavy model seems quite robust in the upmarket. The companies using this manufacturing model are typically producing products that are less sensitive to process innovation like analogue, discrete and power products predominantly for the automotive and industrial markets.

You can

 

 

 

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