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Market analysis

The Semiconductors companies in our sample reported strong numbers in the fourth quarter with average year-over-year revenue growth of 15%. Net income grew by 8% year over year, but declined 5% sequentially. Strong fourth quarter performance for Applied Materials, Texas Instruments and TSMC led to the positive numbers. On a sequential basis net income was relatively flat for the group except for Applied Materials, which reported 15% growth and Qualcomm, the only company reporting a sharp decline of 57% in net income.

Worldwide semiconductor revenue totaled US$339.7 billion in 2016, a 1.5% increase from 2015 revenue of US$334.8 billion and the industry’s highest ever annual sales. The top 25 semiconductor vendors' combined revenue increased by 7.9% compared with 2015, and accounted for 75.9% of the market. The start of 2016 was relatively slow, but the second half of 2016 was fueled by inventory replenishment and improved demand and pricing.1

Intel remained the market leader with 15.9% market share. Samsung Electronics maintained the No. 2 position with 11.8% of the market. Broadcom Ltd had the strongest performance in the top 25, climbing 11 places to reach the fifth position as a result of Avago Technologies’ acquisition of Broadcom Corporation.1

Fourth quarter worldwide sales of US$93.0 billion were 12.3% higher than the total from the fourth quarter of 2015 and 5.4% more than the third quarter of 2016. Market growth was driven by the increasing amount of semiconductor technology in devices. Regionally, annual sales increased 9.2% in China, followed by Japan with 3.8%. All other regional markets—Asia Pacific/All Other (-1.7%), Europe (-4.5%), and the Americas (-4.7 %)—saw decreased sales compared to 2015.2

Logic was the largest semiconductor sales category with US$91.5 billion in 2016, or 27.0% of the total semiconductor market. Memory (US$76.8 billion) and micro-ICs (US$60.6 billion) rounded out the top three segments.1

The semiconductor outlook has improved in comparison with early 2016, owing to the stronger pricing and expanding footprint of the smartphone market. A recovery in memory and changes in vital applications are anticipated to lead growth in 2017.

Global semiconductor capital spending is expected to increase 2.9% to US$69.9 billion in 2017, down from 5.1% in 2016 and it has been predicted that semiconductor capital spending will witness a slump by 2020 where it will fall to US$75.7 billion after reaching a peak of US$78.3 billion in 2019. The year 2019 has also been predicted as the year seeing the highest overall growth in semiconductor equipment spending.

The stronger growth in 2016 was fueled by increased spending late in the year and is attributed to a NAND flash shortage which is predicted to persist though most of 2017. NAND spending increased by US$3.1 billion in 2016 due to a stronger smartphone market. Several related wafer fab equipment segments also showed stronger growth than previously forecast. In particular, the thermal, track and implant segments are expected to increase 2.5%, 5.6% and 8.4%, respectively, in 2017.2

In company news, Applied Materials’ last quarter’s new orders were US$4.24 billion, up 86% year over year and its net sales of US$3.28 billion were up 45% year over year. Operating margin grew 8.9 points year over year to 24.6%, and diluted earnings per share (EPS) grew by 160%. The margin improvement resulted from a smaller increase in R&D and marketing and sales expenses (11%) compared to revenue (45%). The company generated US$646 million in cash from operations and returned US$238 million to shareholders through stock repurchases and cash dividends.

Qualcomm’s revenue increased by 4% year over year to US$6 billion in the fourth quarter. Operating income decreased by 54% year over year to US$778 million. Net income of US$682 billion was down 55% year over year and 57% sequentially. This sharp decline in income was due to “Other Expenses” including the US$868 million charge related to the Korea Free Trade Commission (KFTC) investigation, US$159 million of acquisition-related charges, US$30 million of impairment charges and US$8 million of restructuring-related charges related to Qualcomm’s Strategic Realignment Plan. The definitive agreement to acquire NXP Semiconductors NV for an estimated US$38 billion in cash is expected to close by the end of calendar 2017 and is subject to receipt of regulatory approvals in various jurisdictions. During the fourth quarter the company returned US$1.2 billion to stockholders, including US$784 million of cash dividends and US$444 million in share repurchases.

Texas Instruments (TI) reported revenue of US$3.41 billion and net income of US$1.05 billion. Revenue increased by 7% year over year due to demand for its products in the automotive market. Analog revenue grew by 1% and Embedded Processing grew 6% year over year. Gross margins increased to 62.5% led by TI’s improved product mix and efficiency of manufacturing strategy, including the benefit of 300-millimeter Analog production. The company returned US$3.8 billion to shareholders in 2016 through stock repurchases and dividends.

1., Jan 2017

2., Jan 2017