Nvidia’s Earnings report and call

Nvidia reported another great quarter. Revenue was up and growth rates continued to be strong although slightly lower than earlier.

Operating income followed.

And for the first time Nvidia was able to generate over 1B$ in operating cashflow and in free cashflow.

The earnings release and conference call revealed the following:

  • The cryptocurrency mining impact on the business is hard to quantify but is reported as OEM revenue. Although significant in size, it is not going to distract Nvidia from the strategic business areas. It remains an opportunistic opportunity for the company. The revenue was 70m$ in Q3 vs 150m$ last quarter. Whenever a currency becomes too large or too difficult to mine it become viable to optimise it in an ASIC. 
  • The newly introduced Volta processor is delivering 10x performance in deep learning applications, far outpacing Moore’s law. Volta is already ramping significantly in all major cloud data centres.
  • The TensorRT platform suggests a Nvidia move into a more software-based approach in the hyper-scale data centre.
  • Three major Chinese customers have adopted the Volta V100. Alibaba, Baidu and Tencent will join Amazon, Facebook, Google and Microsoft in using the GPU for AI in their datacenters.
  • Volta has also penetrated the main server customers enabling server-based AI.
  • The attendance and downloads of AI-related conferences and software has increased by 5 to 10x over the last couple of years
  • Within the data centre, the main areas for GPU’s are
    • Supercomputing or high-performance computing. This is a 11B$ market in which Nvidia has a 15% (733m$) market share.
    • Deep Learning Training
    • Inference – the queries made by billions of internet users to the data centre. Today this is supported by CPU’s but GPU’s can increase the network speed by 100x
    • AI as a Service or Public Cloud AI Services – multi-billion dollar opportunity for Nvidia.
    • Vertical Industries: Automotive ADAS, Healthcare Diagnostics, Manufacturing, Robotics, Logistical industries
  • Nvidia sees the vertical industries as the largest opportunity and they are now ready to address them with the GPU capabilities in the cloud.
  • Volta is only in its infancy and the expectation is that it will continue to grow while the graphics part of the business is seasonal.
  • Cloud customers either have Volta capability or has announced it and the customer need is expected to be high.
  • GPU for graphics is sold one at the time, heavily influenced by seasonality and game launches. E-sports is becoming increasingly attractive and having the best gear drives down latency and impacts a players ability to win. The other element is high graphically attractive content. The last element is social – people want to share their brightest moments and that requires performance.
  • Volta is the single biggest processor that humanity has ever made. 20B transistors, 3D packing, the fastest memories available,  a couple of hundred watts replacing hundreds of CPU’s.
  • Nvidia is a one architecture company. This is not a limiting factor as there is so much software, numerical libraries, inference software, compilers and other. Jen-Hsun believes this is a massive advantage for Nvidia and makes the company perform at a level that requires much more people if you use multiple architectures.
  • Customers have many choices on what architecture to select. Jen-Hsun believes that the strong commitment that Nvidia has to a single architecture is convincing customers that Nvidia is a safe bet.
  • The world is experiencing computing problems on a scale we have not seen before and High-Performance Computing and AI have never been more attractive.
  • On the cooperation and announcements of AMD and Intel, Jen-Hsun believes Rodger leaving AMD is a great loss for the company. The Modern GPU is not a (G)PU’s anymore. They are not limited to graphical.

You can get the Q4-17 Strategic Factbook on Nvidia here

 

Samsung has approved a 7B$ investment in a new NAND fab in China

The memory market is red hot and it is time to invest in the next upturn. If you are a semiconductor memory company, you need bricks and machines. It has not yet been successful to move memory production to foundry so there is a direct correlation between capital investments and future revenue. Samsung is already dominant in the NAND market and has decided to keep it that way by approving a 7B$ investment in a new NAND fab in China.

The scale of this investment should be seen in relations to the capital investments of the other players in the industry. The chart shows the capital investments for the entire company and not a specific investment into memory capacity. However, it is still pretty obvious who is investing in the future and who is sitting watching. Western Digital became the 2nd largest NAND company in Q2 overtaking a struggling Toshiba. Both companies are investing very carefully at the moment and combined it would take both their entire group capital investment for 5 years to pay for the Samsung fab. Both number 4 and 5, Hynix and Micron are signicanlty more aggressive but still some distance from Samsung. Their investment is however fully made into memory capacity.

 

 

 

 

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ST has Changed Investment Strategy

Establishing if a semiconductor company is in expansion mode or not can be difficult as some companies own their own manufacturing facilities and others use outsourced manufacturing. The first thing to understand is how dependent a semiconductor company is of its own factories. Memory companies typically have Property, Plant and Equipment (PPE) value of close to 100% of yearly revenue, where Intel has PPE/Revenue ratio of around 60%. In the opposite end of the spectrum, you have fabless companies that fully outsource their manufacturing. They have very low PPE/Revenue ratios of 7-15%. In the middle, from 15% to 60% are the fab light models.

With a PPE/Revenue of 33%, ST is in the heavy end of the fab light model. This means that their capital investments will reveal their strategic mode: Consolidation – Balance – Expansion.

Replacement Fixed Capital Investment (RFCI) is the investment level a company need to have to maintain the condition of the current revenue producing assets. The value of Fixed Capital Investments above RFCI contributes to an expansion of capacity and is called Incremental Fixed Capital Investments (IFCI).

IFCI is interesting to monitor as it directly tells you the strategic mode of the company. A negative IFCI implies consolidation and positive IFCI equals expansion. An IFCI of zero means the capital investments a just sufficient to maintain current level of activity and means the strategic mode is balanced.

Plotting the RFCI and the IFCI for ST shows that three quarters ago, ST changed their strategic mode from consolidation to expansion.

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Intel’s next acquisition?

The sudden increase in Intel’s cash position in Q2-17 is interesting and unexpected. There is no immediate cash need in the company so we might hear acquisition news from Intel soon.

It is not a secret that Intel is struggling to grow at market rates. 9% growth in Q2-17 (compared to Q2-16) is not stellar in a market that is growing 25% in the same period. Much of this is memory growth that only benefits Intel marginally. Excluding memory growth, the market grew 11% in the same period.

Intel has made an asymmetric bet on the future. The company want to win in Automotive, IoT and Data Center but organic growth will not get Intel meaningful revenue (compared to PC and server revenue) sufficiently fast. The acquisition of MobileEye was a move into the ADAS applications of automotive and the acquisition of Altera was aimed at the AI part of the Data Center. Even though Intel owns most of the processing in the enterprise and cloud Data Center, it has not had visible success in the fastest growing segment of the Data Center: Artificial Intelligence. From 0% two years ago, AI now accounts for more than 10% of the total processing volume in the Data Center and Intel has lost momentum to Nvidia in particular. The Altera acquisition has not changed this yet.

We don’t believe Intel is satisfied with the current momentum in the Data Center and could be looking to add other products attractive to in particular Cloud customers. With Nvidia out of financial reach, Intel could target smaller fish with success in the Data Center: AMD, Marvell and Microsemi could be on the shortlist.

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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Another Flash Acquisition by Western Digital

In one of the best acquisitions ever, Western Digital managed to capture SanDisk and with that a ticket back to the future. Although still important, the HD business of Western Digital and their competitors has been declining and increasingly moving into commodity land. The acquisition has had an immediate and visible impact on the financial results of Western Digital and given the company appetite for more acquisitions. Latest Western Digital has entered an agreement to acquire Tegile, a company developing and manufacturing leading edge storage solutions to Data Centers. The Data Center is the single most important market for Western Digital’s flash products accounting for close to 1B$ worth of revenue per quarter.

Western Digital is successfully ascending from the abyss of disruption.

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The Memory Market is not at Equilibrium yet.

WSTS has just released their semiconductor forecast for 2017 and 2018 suggesting that the memory market has peaked and will turn south from here. Our research on the demand and the supply side of the memory market points in a different direction.

The memory market has not yet reached an equilibrium and will continue to favour the producers of semiconductor memories. Although there has been invested significantly in increased supply, it will take time before the new capacity has a meaningful impact on the market. Hynix and Samsung started the investment cycle carefully followed by massive investments the last few quarters. Micron was out of the start block early but have now returned to a more conservative approach potentially expecting a turn in the market. Micron did add meaningful capacity by taking control of the Inotera, the manufacturing joint venture operated with Nanya but this does not add capacity to the market.

On the demand side, there have been two major surprises. Opposite to what should be expected of consumer products, the Smartphone and Tablet demand has remained solid irrespective of material price increases. The other has been the massive hunger of memory in the data Center, ignoring the price increases completely.

The move towards Big Data and Artificial Intelligence in the Cloud Data centre can be seen by Nvidia’s growing revenue. Nvidia cannot yet match Intel in the Data Center but seems to win most of the processor sockets for AI. Intel themselves believe 7% of the current processing capacity in the Data Center is associated with AI. Nvidia’s current share of processing revenue in the Data Center is slightly above that number. In other words, the current memory shortage could be a result of the 7% shift towards AI in the Data Center. It is safe to assume that this number will grow and have a significant impact on memory pricing.

The memory market could be entering uncharted territory.

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 Memory Market shares Q2-2017

All memory companies had a great Q2. From a revenue perspective, both DRAM and NAND is continuing the significant growth rates as seen the last few quarters. NAND has recorded 4 quarter growth of 56.1% while DRAM has grown 79.4%. Quarter over quarter growth was 12.3% for NAND and 15.9% for DRAM. From a market share perspective a year ago, Micron managed to grab additional 3% DRAM marketshare while Hynix was flat and Samsung slightly down. In NAND, Samsung managed to win 5% marketshare while Toshiba lost close to 6%. Micron was flat while Hynix captured 2% and Intel lost 1.5%. Western Digital entered the market through the acquisition of SanDisk.

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 factbook on each of the top 30 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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The most important semiconductor in the Data Center

The data center is not a new invention, it originates from the mainframe older than the PC itself. Where the PC is dominated by consumer and B2B buying decisions the data center is a corporate support function designed to aid the value creation process of the company. As with all other support functions, the corporation will always try and optimise the cost in order to deliver a higher profit. In other words, data storage and computational capacity should be minimised to the level sufficient to support the business. This business perspective does not change by moving the enterprise data to the cloud, this is merely an outsourcing decision.

What has changed is the way that the new cloud companies treat data. For Amazon and Google and the likes, data is not “cost” – it is the new oil. The new internet giants store everything they can irrespective if they can use the data immediately. They will then mine this dark data for insights they can use to optimise their own business or sell to other companies. For these companies, data storage is not a support function but part of the value creation process itself. You will not see Amazon run out of cloud storage.

The increasing dominance of the cloud companies has also changed the supply and demand equilibrium in the memory market. A limited supply made pricing increase and dampened demand and ample supply did the opposite. Not only do the cloud companies need more storage to support their dark data, they also treat memory supply as a long term strategic need that will not be stopped by increased memory pricing. This is the main driver behind the current memory boom and it does not show signs of slowing yet.

The most important part in the Datacenter is now a DRAM.

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 factbook on each of the top 30 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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Mobile Share of NAND Revenue declining.

While the Mobile share of DRAM revenue has been declining for some quarters as a result of increasing memory pricing, the NAND share has continued to increase. There are two likely factors behind this discrepancy. The first one is that the pricing of DRAM has increased more than NAND pricing encouraging smartphone manufacturers to change the memory mix of their phones towards flash. The other factor is that the high-end phones (like iPhones)  have a higher content of NAND and with better margins, the phone manufacturers will accept higher pricing. The Q4 drop in the Mobile share of the NAND market shows that mobile consumption has reached an inflexion point. Most likely the Smartphone market is now in the early stages of significant decline.

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 factbook on each of the top 30 semiconductor companies at a fraction of the time and price your business intelligence team can compile it.

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DRAM consumption is being disrupted

The PC is still alive and it still needs to be stuffed with DRAM. Over the last few years, the DRAM market has been in balance as the decline in PC and the Enterprise data centre was balanced out with increasing sales of DRAM to mobile applications. A few quarters ago, the market was caught by surprise by the rapid and relentless rise of the Cloud data centre. A move to the cloud should in principle be memory neutral, but it is not. Where the enterprise treats memory as cost and wants to limit it, the cloud data centres are used by companies drilling for the new oil: Big Data. To drill you need parallel processing power (like Nvidia’s GPU’s) and massive amounts of memory, DRAM in particular. The memory companies are all investing in additional capacity but it will take time to come online. In the mean time, the wolves will have to fight over the limited supply and it looks like the Data Center wolf is the strongest as data centre decisions are based on long term capital investments and not consumer decisions.

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 own data and analysis of the top semiconductor companies and related markets. We create a factbook on each of the top 30 semiconductor companies at a fraction of the price your business intelligence team compile it.

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By far the most interesting Semiconductor Company

Samsung did not respond to the shortage in memory and the subsequent increase in memory pricing immediately. The company did not increase fixed capital investments above the replacement level in the first few quarters of 2016. This might have been a careful response to Galaxy self-ignition problems or a lack of belief in the duration of the memory boom. If the management team of Samsung doubted last year, they are on fire in 2017. Samsung requires a capital investment of approximately 4.2B$ a quarter to maintain the current activity level. In Q2 2017, they increased the investments to over 10B$. If sustained it would mean an increased capacity level of 152%. Not all of this investment is in semiconductors, but it is fair to assume it takes the lions share.

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 own data and analysis of the top semiconductor companies and related markets. We create a factbook on each of the top 30 semiconductor companies at a fraction of the price your business intelligence team compile it.

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One small step for Intel, one giant leap for Samsung

The quarterly results of major semiconductor companies are in and Intel is no more the largest semiconductor company. Helped by the overheated memory market, Samsung has added more than 5B$ in quarterly revenue in just four quarters. This is more than 27% of all the 18.5B$ semiconductor revenue added from Q2-16 to Q2-17. Even in a favourable market, this is a tremendous gain not seen before in the industry. The revenue gain is larger than the revenue of Samsungs key competitor Micron.

Our research reveals that most of the gains in the memory markets are not founded in shipments of more products but in pricing that is spinning out of control. No significant memory capacity has come online over the next few quarters and although the memory companies have increased their capital investment significantly, it will take time before it has an impact. Memory pricing used to be driven by consumer decisions and price increases were met with lower demand that dampened the increases.

This memory boom cycle is different. Our research shows that the Data Center is now the dominant force in memory pricing. The demand is driven by capital investments of a few cloud companies that will buy what they need irrespective of price. This was also the only market that was able to buy more memory products – all other areas received lower shipments even though revenue increased. The Smartphone and PC markets are shutting down and it will impact companies that sell other semiconductor products to these end markets.

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 own data and analysis of the top semiconductor companies and related markets.

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