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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The Great Memory Crisis of 2017?

The last year has been turbulent in the Semiconductor industry. It is not the first time that the semiconductor market is in memory bubble mode.  It is however probably the first time that the memory bubble is not created by consumers. In the good old days (last year) consumers would buy a lot of stuff with memory making the price of memory increase. This in return would increase the price of the stuff with memory and consumers would buy less stuff with memory making pricing fall again. The industry has been used to these boom and bust memory markets and knows how and when to invest.

Uncharted territory

However, this market situation is different. The semiconductor industry is entering uncharted territory. It is the rise of the data center that is creating the new situation. Not the enterprise data center where storage capacity is treated as a cost and should be minimised but the cloud data center, where storage capacity is an asset. The memory market is not controlled by the consumer anymore even though the consumers buy most of the memory. The memory market is controlled by the Cloud companies that treat storage capacity as a capital investment needed to win the cloud wars. Pricing is not an issue as long as the other cloud companies pay the same. Memory manufacturing capacity will not increase significantly over the next period at the same time as the cloud will need more memory. Other applications have already started to suffer from the price increases. Smartphones and PC’s are in a decline that will continue. This will affect the business of semiconductor companies selling into these markets. Will we talk about this situation in the future like we talked about the oil crisis? The memory crisis of 2017?

 

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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We have only one advice for a Harddisk Company

Buy a flash company as fast as possible. Western Digital’s smartest move in a long time was to buy Sandisk and introduce flash products to their solid customer base in PC, Server, Consumer and the datacenter. Not only is the traditional harddisk market under pressure – the markets served are also under pressure. PC’s and traditional server markets are not growing and in the cloud data center the need is changing. Traditionally data was trafficked into the data center, stored and trafficked out of the datacenter again when needed. 78% of the data traffic in the new AI and Cloud data centers are internal and require fast access to significant amounts of data favouring Solid State memory over harddisks.

The impact of Sandisk on Western Digitals results are selfexplanatory. What company do you need to buy?

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Semiconductor Business Results, July 2017

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Can you wait a year to understand the strategic actions of Semiconductor companies or do you need quarterly updates?

If you are a Semiconductor Professional, a Strategic Purchaser or a Supplier to the Semiconductor Industry you need to understand what the latest results of semiconductor companies really mean.
We provide the most comprehensive analysis of the Q4-16 results of the top semiconductor companies to be used as the foundation for your strategic analysis and decision-making processes.

63 pages packed with Charts, Analysis, Strategic Models and Infographics.

43 charts comparing the Q4 results of top semiconductor companies with each other and average results.

8 Infographics Including The Semiconductor Value Chain, M&A Overview, Synergies and Meger balance sheet.

3 Strategic Business Model Analysis: The Competition Map, The Price Efficiency Gap & The Operating Model Grid.

Semiconductor Purchasers Index for Strategic Selection of Semiconductor suppliers.

You can buy the Semiconductor Business Results Quarterly here: SBRQ July 2017

Guidepoint Semiconductor Consulting

 

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Claus Aasholm consults for Top Semiconductor Producers, Strategic Purchasers, the Investment Community and Companies selling equipment to the Semiconductor Industry. If you want to understand the latest developments in this fast moving industry, you need to talk to Claus.

He tracks all metrics of the semiconductor industry. He monitors the business models of top 30 semiconductor companies by tracking key financial metrics on a quarterly basis. Semiconductor companies reveal changes in strategy through financial metrics.

Semiconductor market metrics are also tracked by Claus. He has developed a new market metric that apart from traditional market models also is able to track new developing market like IoT, the Datacenter, GPU & Mobile market together with more established markets

You can get advice from Claus Aasholm through Guidepoint

Semiconductor Investment or Extraction?

It is expensive to participate in the Semiconductor industry. Billion dollar fabs are needed, full of equipment their weight worth in gold. Chasing the leading edge technology while being chased by obsolescence. Moore’s law has not created a linear market but an industry full of exponential increases. The cost of developing new technologies and new products are dramatically increasing as are the costs of manufacturing facilities and equipment. The only element of the semiconductor business model that is slowing down is revenue growth.

This development is changing the business models of semiconductor companies. Not all companies are participating in the technology race anymore. Some have become predators and live of acquiring other companies. Others have outsourced most of their manufacturing and other elements of their business hoping that the loss of value chain does not impact overall value creation. There are also companies that are consolidating their operation trying to make careful strategic bets hoping to create golden eggs – products that can withstand the technology race and deliver revenue for many years.

What used to be one business model has morphed into many different business models. For most stakeholders in the industry, it is important to understand the business model as it can predict the behavior of semiconductor companies in certain situations. If you work for, sell to or buy from a semicoductor company, you want to know.

One of the key financial metrics you want to follow is the R&D spend. If a company is not investing in the future there is a high likelyhood they are focusing on extracting value from their current relationships. You don’t want to work with semiconductor companies that want more of the cake, you want to work with companies baking bigger cakes. The largest spenders are not necessarily the best companies to work with, but there is a correlation.

 

Semi R&D Compare to other industries report

 

 

The semiconductor industry outspends most other industries, even the pharma and biotek industry that do a good job of telling everybody how much they invest. The R&D spend is increasing although the Q4 spend was down compared to the same quarter last year. We believe this increase will continue givent the challenges the industry is facing from a product development perspective and technological perspective.

What looks like an impressive spend in another industry can be unambitious in semiconductors. You need to compare the spend to other semiconductor companies to get any insights. The large spread of R&D spending in the semiconductor industry combined with other information can uncover different business models. There are investor and extractor companies in the semiconductor industry.

We believe this matters to all stakeholders in the industry. We are currently working on a report that dissects the Q4 results and the business models of the top semiconductor companies. Sign up for a notification here.

 

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Micron and Hynix will not be catching Toshiba Semi

The air is thick with rumours about Toshiba’s semiconductor division. Toshiba has massive losses on their nuclear operation and desperately needs cash. The only division in Toshiba that makes a meaningful profit is the semiconductor division. After having announced the Semiconductor division is going to be divested into a separate company, Toshiba has opened for outside investors to buy a share in the new company. Their want to base the investment on a valuation of the company of 17B$.

 

Negotiation tactics.

Toshiba knows very well that nobody wants to buy a share, only a complete acquisition will make sense. A valuation of 17B$ would require the company to have a consistent revenue growth rate of 5%+ (last decade has been negative) and a Gross Profit margin of 23%+ (last quarter the GPM was 12.4%). The current business model is not even cash flow positive as it is estimated that the unit has a capital expenditure of over 1.5B$ a year. The semiconductor division needs to be combined with another company to unlock the required value.

Toshiba can attract investment in their memory division but not in their supervision of its operation.

 

Scale of economies

Amongst the suitors are two of Toshiba’s largest competitors, Micron and SK Hynix. If any of the companies succeeded, they would both make it to number two spot in the NAND flash market behind Samsung. They would triple in revenue in the process which is likely to create scale of economies that could unlock the value of Toshiba’s Semiconductor division, so an acquisition could make sense from a financial perspective. But would it be approved by the authorities?

 

Establishing market concentration

The Herfindahl-Hirschman Index or HHI sounds like a terribly complex financial parameter but really is a simple way of understanding the concentration of a market. In its simplest form, HHI is a percentage between 0% (Infinite number of small companies and 100% (A perfect monopoly of 1 company). A low HHI indicates a highly competitive market and a high HHI suggest that the market could be non-competitive. The US Department of Justice considers a market above 15% as moderately concentrated and a highly concentrated market has an HHI over 25%. Generally, the US DOJ will not accept mergers that create markets with and HHI above 25%. EU are interested in markets with HHI’s over 10% and will bar a merger that creates an HHI change over 2,5%. The US and EU can base their decision on other reasons than HHI alone but the current environment is not very merger-friendly. The semiconductor industry has become strategic to governments and trade blocks around the world. China has made no secret of this with their ambition to become the leading manufacturer of semiconductors and is already well underway. A violation of HHI rules is all the excuse a government need to block a merger.

For the semiconductor market as a whole, the HHI is 6% and should cause no anti-competition problem but for the NAND market it looks very different:

HHI Toshiba-01

 

The current HHI of 22.7% is above the EU radar horizon but below the US assigned threshold of 25%. As can be seen on the chart, both a Micron-Toshiba and an SK Hynix-Toshiba merger would trigger the HHI thresholds of both EU and the US. With a change in HHI of 3.9 to 4.1%, well above the EU trigger point, these mergers would create a new market with an HHI of 26.6 to 26.8% well above the US trigger point.

We do not believe Micron or SK Hynix will be allowed to acquire the semiconductor division of Toshiba, no matter how much they would like to.

 

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Memory on a silver platter?

Toshiba has once more demonstrated that Conglomerates with semiconductor divisions behave very differently from pure-play semiconductor companies. Business issues elsewhere in the corporation are forcing Toshiba to sell the only part of their business that makes money. Although the bait was for 20% of the division, everybody knows that Toshiba will have to sell it all. The value of the standalone semiconductor unit is less than the value of the division combined with a business in another company.

Toshiba For Sale-01

 

 

 

The hierarchy of memory

Toshiba is a big player in non-volatile Flash memory. Although not sufficiently fast to replace the DRAM that processors need close by, Flash is a lot faster than hard disks and placed between the two. A lot of flash memory between DRAM and Hard Disk Drives (HDD) in the memory hierarchy, drives the total performance of the memory system closer to DRAM and the price per bit closer to HDD memory. Market leader Intel has made no secret of their big bet in Flash Memory. They know processors, and fast memory is in love and wants to be close.

 

Screen Shot 2017-03-02 at 15.22.55

 

Intel investing in Flash means they do not consider it a commodity and believe they will have commercial advantages by being able to sell both the processor and the flash at the same time. In short, memory is worth more in a CPU company than it is stand-alone.

 

The suitors and their reasons

SK Hynix, Micron – Both playing in the Flash market Hynix and Micron is interested in Toshiba for “scale of economies” reasons. An acquisition would make them stronger in the flash market and would allow them to command larger R&D budgets and CAPEX expenditure. Memory fabs and technology is expensive. Intel’s big bet on memory is founded on the argument that memory is worth more when sold together with processors. If this is right, Toshiba will be worth less in Micron and Hynix than it will be in some of the other constellations. What something is worth and what somebody wants to pay for it is two different things, and Toshiba could end up here.

Westen Digital – Being a key player in Hard Disk Drives, Western Digital is well positioned at the low end of the memory hierarchy and want more. They have already demonstrated their appetite for flash by acquiring SanDisk recently.

Foxconn, Softbank – Both companies are significant stakeholders in Apple. Foxconn handles most of Apple’s manufacturing, and Softbank owns ARM – the processor IP of Apple’s CPU’s. They are interested in Toshiba as Apple are one of the largest consumers of Flash for all their products. This Apple Mafia has announced a joint venture investment company this week, undoubtedly to bid for Toshiba and command even more of Apple’s need. It would be a miracle if Apple were not part of these conversations.

Bain Capital – As an investment company, Bain has already made some investments in cloud-based companies, cloud computing and SAS companies. For them, it is a datacenter play in line with their existing technology investments.

SilverLake – Investigating SilverLake’s investments reveals a couple of interesting positions. Broadcom, also a player in the processor and datacenter space and Alibaba – the Amazon of China. (Also Softbank has a stake in Alibaba). Alibaba wants to be the future trade platform for companies selling to consumers and know this will rely heavily on cloud computing. Currently, only 8% of Alibaba’s revenue is associated with the cloud.

Tsinghua Unigroup – The preferred semiconductor investment vehicle of the Chinese authorities are undoubtedly interested in Toshiba, but is not likely to receive approval from the Japanese authorities.

Any of these suitors are possible winners of the bid for Toshiba, but we believe the Apple Mafia is likely to be able to unlock most value from the deal.

 

Full article in the Korean Herald here

 

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Semiconductor bubble?

It has been a great year for semiconductor stock. This is important to the industry as stocks are often used to finance acquisitions and major investments. The industry is also known for its extensive use of options and warrants to keep executives and key people locked in. There is no problem in connecting results to rewards unless the increasing stock price is a result of speculation and not underlying results. A stock bubble might benefit a couple of lucky bankers but to most stakeholders it is damaging. The value created by the bubble will have to be paid back, and then some. People will get great bonuses and then get fired. Investments started and stopped.

 

Screenshot 2017-02-24 08.49.57

 

The obvious question

Nobody wants to spoil the fun and ask the obvious question: “Why are semiconductor stocks growing when the semiconductor revenue is not?”

Although revenue growth is one of the most important value drivers there could be other reasons for stocks to climb. One of the valuation methods used by financial analysts is the Shareholder Value Analysis (SVA). The analysis values a company based on its ability to deliver future cash flows. The model has 7 value drivers (as can be seen in the graphic) that create the valuation of a company. If the market change opinion about a company’s future revenue growth rate, the SVA shows a higher value for the company and the market respond immediately by adjusting the stock price accordingly. In theory at least. If the stock market and the underlying value drivers are out of sync, there is a high probability of a depression or a bubble.

The 7 drivers are:

  1. Revenue Growth.    Although there was an uptick in Q4-16 revenue the industry has been in low single digit growth for some time. This is not likely to change.
  2. Operating Margin.   Operating margins fell by 170 basis point from Q4-15 to Q4 -16
  3. Taxes.   The tax environment has two opposing forces: It is becoming more difficult to offshore profit for lower tax reasons and potentially lower corporate tax in the US.
  4. Working Capital Investments   The investments in working capital are likely to be flat following the revenue growth.
  5. Fixed Capital Investments     It is not becoming cheaper to participate in the industry. Both investment in replacement and new equipment only goes up.
  6. Cost of capital.    After many years with access to cheap captial, there are signs of increasing costs.
  7. Life of strategy.   There are many signs the current strategies are coming to an end. Exploding costs of chip design and the end of Moores law.

 

Value Drivers Bubble-01

 

From our perspective, there are no value drivers for the industry that warrants the current increase in stock prices. This does not mean that investing in individual companies still can be a good idea. All markets have winners and losers.

Article in Fox business here

 

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The GPU, CPU battle has reached the Economist

The Economist has decided to compare Intel against Nvidia and the result is as always interesting. With a level of simplification, they highlight the issues that Intel is facing. A competitor from a niche Intel should have been able to control is now starting to eat Intel’s future meal – the data centre.

Screenshot 2017-02-23 23.05.47

 

Read the article here

 

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