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Much To Be Learned From Earnings Calls

Al Gharakhanian

New member
Well we are in the middle of earnings season and a large number of semiconductor companies have already made earnings announcements. I truly cherish listening to certain earning calls not so much for investment purposes. I have learned to extract a wealth of data points that collectively can be translated to invaluable market and industry insight. Additionally one can usually identify a number of common themes and trends. This past quarter has not been any different. I have attempted to summarize some of my findings below. Let us start by the common themes and trends:

  1. IoT is big and growing fast but still not big enough to move the needle. Perhaps the major impact on revenues and earnings will come in 2017
  2. The demand for chips needed to build massive datacenters is certainly one of the very few shinny segments of otherwise muted semiconductor industry. The insatiable demand for cloud computing has shown no signs of subsiding
  3. The Automotive segment (specially the ADAS sub-segment) is yet another thriving segment aiding chip companies
  4. The China market is steady and certainly not as bad as what headlines suggest. The real weakness comes from other emerging countries that are heavily dependent on commodity prices (i.e. Oil, . . . .).
  5. Consolidation in the semiconductor industry has reduced product line overlaps in competing companies and this has created a new opportunities for FPGA companies
  6. 5G holds big promise but its timeframe is way out there
My universe of public semiconductor companies contain nearly 70 companies (including some IP, tools, and sales distribution companies). While the earnings calls contain mostly financial metrics, they also contain a wealth of valuable tidbits. I have attempted to pick a small number of companies and summarize some key takeaways.

Intel
In my view Intel is one of the most important technology companies in the history since the advent of microprocessors has enabled so many other technological revolutions that have impacted our lives profoundly. I have special affinity toward the company and I cherish their successes and cringe when I learn about their setbacks.

The news of their massive workforce reduction of 12k employees clearly overshadowed all else. As for other key points; I can enumerate the following. The drop in revenues in their client business (PCs, . . . .) has been more than expected. I am not very surprised given the recent published market estimates on laptops, tables, and desktops. The revenue growths in IoT, Datacenter, and Programmable Solutions (Altera) businesses have exceeded their expectations. No surprises there either. It is becoming increasingly clear that the Altera acquisition will bring huge dividends for the company predominantly in the Automotive and Datacenter markets in the years to come. The y-o-y quarterly revenue growth of the Datacenter and IoT businesses were 9% and 22%. Their memory business was strong unit-wise but weak revenue-wise due to massive drop of memory ASPs. Like many other companies Intel is banking on IoT, 5G, Datacenter, Memory, and programmable platforms to fuel their future growth.

I was somewhat disappointed to learn about their strategy to fend off the threat from ARM-based servers. Essentially their plan is to counter the threat by leveraging their Memory (3D X-Point) and Silicon Optics technology (as if the ARM-based server vendors don’t have access to these building blocks). Secondly as a company advocate, I want to see a much more aggressive attempt to catch up in the realm of mobile processors.

NXP
I was particularly interested to dissect their numbers to see how well Freescale is being integrated. I did not come across any indication of any issues there. It seems like that this marriage is working well, at least when it comes to serving the Automotive segment. They are the largest chip supplier to the car industry and were able to increase their market share to 14.5% from 13.5% last year. Big investments in the ADAS market making inroads into self-driving cars in the form of miniaturized radar modules. We will soon be driving cars equipped with 8 to 10 radar modules surrounding the car (Cacoonization of cars). The company also has a leadership position in Automotive Audio market. Impressive progress in the IoT segment. They are the suppliers of processors to Amazon’s Echo and Alexa.

In summary, it is all about Automotive, Security, Payment Processing, IoT, and moving away from non-core legacy standard products.

There are a couple of things that impresses me about NXP, one being their clear and focused vision of where they are going. Secondly is the diversity of their customer base and not being reliant on one or two tier-1s.

Xilinx
always become envious when I dissect the financials of FPGA and high-performance analog companies primarily due to their fantastic margins. Xilinx has consistently been able to generate 70% and 30% gross and operating margins. Not many semiconductor companies can claim such numbers. It should not come as a surprise that the shining aspect of their quarter was their strength in Automotive (especially ADAS) segment. I was blown away by their revenue growth rate in this segment (60% in 2 years). It was also interesting to learn that FPGAs are playing a major role in the processing unit of datacenter servers. Apparently certain cloud-based applications that require massive parallel processing, a reconfigurable and adaptive processing unit based on FPGAs beats standard CPU or GPU implementation.

The company is the clear leader; among the fabless companies, when it comes to using advanced process nodes. Their mainstream process nodes are 28nm, 20nm, 16nm while planning to debut 7 nm this year.

Avnet
Mixed quarter, revenues missed slightly. I was surprised to learn that their component business was strong and the culprit for the miss was coming from their System Solutions and more specifically the weakness in the sales of traditional storage systems (based on spinning media HDD). The sale of SDD-based and Hybrid systems were very strong but not enough to offset the weakness of legacy platforms. One clear trend in their datacenter business is that enterprises no longer buy just servers, storage, or networking. Instead, converged systems are in vogue. They contain storage, servers, networking, and virtualization management all bundled together. I also found it interesting to learn that Avnet has gone beyond components and systems and has created a platform to sell cloud services of various cloud vendors.

More to come later.
 
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