Semiconductor Gross Margin update Q4-2016

The strong end of 2016 for the semiconductor market almost certainly had a significant impact on the gross margin of most companies. Overall the average gross margin grew 0.8% from 51.4% in Q4-15 to 52.2% in Q4-16. The high end of the spectrum is dominated by FPGA and analogue semiconductor companies. This would have included Altera prior to being acquired by Intel, with a pre-merge gross margin of 66.7%.

 

The next group of companies is focused on computation and communication, including Intel that heavily dominates the average gross margin for the industry. At the other end of the spectrum is Micron that plays the memory market with a low margin model. Also On Semiconductor has a low gross margin although is looks more like a conscious decision given their very low R&D and selling costs. 

Some companies have experienced a significant change in Gross margin Q4-15 to Q4-16. In the case of Marvell, it relates to significant extraordinary costs they had in Q4-15 that does not impact the last quarter. The Gross margin improvement of NXP is related to the acquisition of Freescale and divestiture of other assets and is likely to settle unless the Qualcomm merger gets a final approval. Similarly for Cypress that is trying to digest Spansion. 

The increase in gross margin of Hynix is related to the increase in memory pricing although this did not seem to impact the gross margin of Micron that stayed relatively flat.

A key competitive driver of semiconductor companies is their gross margin. Gross margin gives insight into the manufacturing efficiency of a company as it represents the revenue less the cost of goods sold. Cost of goods sold represents all of the costs associated with the manufacturing process but does not include any of the R&D, Sales or administration costs.

There is no right gross margin, it is an operating decision or a business result based on how you run your business. For semiconductor companies, their manufacturing decisions can have a significant impact on their gross margin. That said, you want to keep your gross margin as high as possible as it is the fuel for R&D and Sales activity, it pays for your administration and it creates the return to your shareholders.

If you are a customer of semiconductor companies you want to select a supplier with the right kind of gross margin. If the gross margin is too high, it could mean you are paying too much for the product and should find a better supplier.  Low gross margin companies are targets that can be improved by competitors in a takeover. Acquisitions are not your friends if you are buying.

Acquisitions in not a friend of the employee either. The chance of an employee surviving without loss of job, title or pay is low when you are in the target company. It is important to work in a company that has a high gross margin as such a company has difficulties in finding an acquisition target that meaningfully can add to the business as high margin businesses have high price targets.

 

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