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Market analysis

The Semiconductor industry group of companies reported strong numbers this quarter with aggregate revenue growth of 14.7% and sequential growth of 14.2%. Net income grew by 25.2% year over year and 52.5% sequentially. Strong third-quarter performance for Applied Materials, TSMC and Qualcomm led to the positive numbers. Intel also reported sharp sequential growth of 16.6%, and strong year over year revenue growth of 9.1%. Intel’s growth was driven by Client Computing Group revenue of US$8.9 billion, up 21% sequentially; Data Center Group revenue of US$4.5 billion, up 13% sequentially and Internet of Things Group revenue of US$689 million, up 20% sequentially.

Worldwide sales of semiconductors reached US$88.3 billion in Q3 2016, marking the highest-ever quarterly sales and an increase of 11.5% compared to the previous quarter. The three-month moving average sales for the month of September 2016 were US$29.4 billion, an increase of 3.6% over the September 2015 total of US$28.4 billion and 4.2% more than the previous month’s total of US$28.2 billion. The global semiconductor market has shown a resurgence, with most regional markets and semiconductor product categories contributing to the gains. Indications are positive for increased sales in the coming months, but it remains to be seen whether the global market will surpass annual sales from last year.1

Regionally, month-to-month sales increased in September across all markets: China (5.4%), the Americas (4.6%), Asia Pacific/All other (4.2%), Japan (2.3%), and Europe (1.6%). Compared to the same month last year, sales in September increased in China (12.0%), Japan (4.2%), and Asia Pacific/All other (1.7%), but decreased in the Americas (-2.4%) and Europe (-4.0%). China was the leading region with growth of 5% month over month and 12% year over year. In terms of product categories, NAND flash and microprocessors posted solid month-to-month growth in September.1

While sales were strong in Q3, worldwide semiconductor capital spending is projected to decline 0.3% in 2016, to US$64.6 billion. This is down slightly from the estimated 0.7% decline forecast in the previous quarter. The market is expected to return to growth in 2017, increasing 7.4%. In the final quarter of 2016, it is expected that growth will return to the semiconductor manufacturing industry due to a slightly improved capital investment outlook. China’s announcement of multiple fab projects will aid overall growth, while strong performance of the US dollar in 2016 will be a key factor in determining revenue growth of semiconductor manufacturers in 2017.2

Worldwide semiconductor revenue is forecast to total US$332 billion in 2016, a decrease of 0.9% from 2015. This represents two consecutive years of revenue decline, which has happened only once in history. But the outlook for the semiconductor market is improving. The worst, analysts believe, is over, with a stronger outlook for the remainder of 2016 driven by inventory replenishment and increasing average selling prices (ASPs) in select markets. The commodity memory market contributed the most to the improved outlook and is based on stronger supply-and-demand dynamics.2

After an inventory correction started the year off slowly, the ramp up to the iPhone 7 launch and the build for the upcoming holiday season has led to recovery in the market in the second half of 2016. However, in many cases the inventory correction was too steep. The outlook for emerging opportunities for semiconductors in the Internet of Things (IoT) and wearable electronics remains choppy with these markets still in the early stages of development and too small to have a significant impact on overall semiconductor revenue growth in 2016 and 2017.2

TSMC reported revenue growth of 23% year over year to US$8.2 billion and 20% growth sequentially. In the third quarter, the revenue increase was due to stronger-than-expected smartphone demand, partially offset by an unfavorable foreign exchange rate. By application, Communication, Computer, Consumer, and Industrial/Standard increased 19%, 3%, 8% and 16%, respectively. In terms of technology, the combined 16/20nm contribution was 31% of total wafer revenue in Q3 2016. Advanced technologies (28nm and below) accounted for 55% of total wafer revenue. North America accounted for 68% of total net revenue, while revenue from Asia Pacific, China, EMEA (Europe, Middle East, and Africa) and Japan accounted for 15%, 6%, 6%, and 5% of total net revenue, respectively. Net income grew by 28.9% year over year and 36.1% sequentially to US$3.0 billion. This was due to margin improvement of close to 2.5%.

Applied Materials reported strong financial results. New orders were US$3.03 billion, up 25% year over year. A backlog of US$4.58 billion was up 46% year over year, and net sales of US$3.30 billion were up 39% year over year. The company recorded gross margin of 42.4% and generated US$797 million in cash from operations and returned US$279 million to shareholders through stock repurchases and cash dividends.

Texas Instruments (TI) posted Q3 2016 revenue of US$3.68 billion a 7.2% increase year over year and 12.3% sequentially. Net income of US$968 million was up 21.3%year over year and 24.3% sequentially. TI also increased its quarterly dividend by 32% to 50 cents per share. The increase reflects TI's continued strength in free cash flow generation. The demand for products continued to be strong in the automotive market and improved in the industrial market. Embedded Processing revenue grew 10% and Analog revenue grew 6% from the same quarter a year ago. Gross margin of 62.0% was supported by the benefit of 300-millimeter Analog production., Oct 2016
2., Oct 2016