Semiconductors
Market analysis
The Semiconductor Industry Association (SIA), announced that worldwide semiconductor sales for 2012 were US$291.6bn, the industry’s third-highest yearly total ever but a decrease of 2.7% from the record total of US$299.5bn set in 2011. Total sales for the year narrowly beat expectations from the World Semiconductor Trade Statistics (WSTS) organization’s industry forecast. Global sales for the month of December 2012 reached US$24.7bn, a decline of 3% from the previous month when sales were US$25.5bn. Fourth quarter sales of US$74.2bn were 3.8% higher than 4Q11 at US$71.5bn. Despite substantial macroeconomic challenges, the global semiconductor industry outperformed forecasts and posted one of its highest yearly sales totals in 2012 due to strong demand in several market segments. Logic was the largest semiconductor category, reaching US$81.7bn in 2012, a 3.7% increase compared to 2011. MOS microprocessors (US$60.2bn) and memory (US$57bn) rounded out the top three segments, but both lagged behind 2011 sales totals. Optoelectronics was the fastest growing segment, increasing 13.4% in 2012 to reach US$26.2bn. NAND flash – used in a host of mobile devices, USB flash drives, memory cards and related products for the storage and transfer of data – grew at the second-fastest rate at 4.1% to reach US$25.4bn.1
Mobile is forecast to be the leading growth segment for semiconductor spending among original equipment manufacturers (OEMs) in 2013, with expenditures rising by a double-digit margin to support the burgeoning markets for smartphones, media tablets and mobile infrastructure gear. OEM spending on semiconductors for wireless applications is set to rise by 13.5% in 2013 to reach a value of US$69.6bn, up from US$62.3bn in 2012. This represents the highest rate of growth of the seven major application markets, with the others set to undergo annual changes ranging from 6.5% expansion to 1.7% decline. The growth in wireless semiconductor spending this year reflects the strong and sustained consumer appeal of smartphones and media tablets—as well as the robust corporate infrastructure expenditures required to support this trend. Mobile handsets continued to be the leading category for wireless semiconductor spending, but tablets are on the rise, with the new slate computers surpassing wireless infrastructure in 2012 for the first time ever.2
Intel delivered 4Q12 results largely in-line with guidance and expects 1Q13 to return to normal seasonality, in-line with expectations. Intel continues to see strong demand for its high-end products and continued growth in blended ASPs. Despite slow revenue growth, Intel continues to invest heavily in fabs and R&D and this is likely to put pressure on free cash flow in 2013. Intel has also started production on its next generation micro-architecture product, code-named Haswell, which is expected to qualify for sale in the first quarter of 2013.
Applied Materials generated orders of US$2.11bn and net sales of US$1.57bn. Semiconductor orders were up over 80% from the previous quarter. Higher exposure to foundry and solid execution in the Silicon Systems Group (SSG) resulted in increased bookings and EPS. Applied Material’s ability to sustain foundry bookings in the second half of the year is in question leading to an expected erosion of margins and earnings over the next cycle.
Texas Instruments’ free cash flow of almost US$3bn grew 20% and revenues increased 23%. The company returned 90% percent of this free cash flow to shareholders through share repurchases and higher dividend payments. Strong free cash flow is the result of revenue from Analog and Embedded Processing, which offer solid growth and high margins and have low capital needs. The company has substantial manufacturing capacity available to support future growth, which means Texas Instruments can keep capital spending at very low levels in the years ahead.
TSMC’s 28nm grew from 13% to 22% of sales in 4Q12 and is expected to be more than 30% in 2013, led by improved product mix due to shift of 28nm to High K-Metal Gate process, which carries higher ASPs to support high-end graphics and 2GHz+ multi-core smartphone processors. Blended ASPs continued to rise. The company expects 20nm to ramp even stronger in 2014/15 as well, pointing to a good share position with its existing customers and possible two-year Apple led demand through 2014/15.
Qualcomm’s revenue from chips was 68% of 4Q12 revenues and it grew 32% QoQ due to higher unit shipments. Licensing revenue, which was 29% of sales, grew 12% QoQ due to higher volumes and better than expected smartphone pricing. Overall, CDMA device prices increased to US$227 in Q4 12. Handset/device sales grew 15% QoQ to US$53.3bn. Qualcomm’s volumes were robust at 182mn units in the quarter showing increasing levels of customer diversity. The company is set to dominate the baseband market led by the company’s dominant LTE lead, strong IPR (intellectual property rights) position, and exposure to strong customers (Apple/Samsung).
- SIA, Jan 2013
- IHS iSuppli, Dec 2012
Revenue and gross margin
Intel, Applied Materials, TI, TSMC all reported flat to declining revenue growth of 0.1%, (4.4%) and (12.1%) and (4.9%) QoQ respectively. Qualcomm is the only company which reported significant growth of 23.5% QoQ. Qualcomm’s growth was led by strong demand for smartphones and 3G/LTE chipset. Qualcomm’s broad chipset licensing partnerships, including Qualcomm Snapdragon 800 and 600 processors has helped sustain strong growth. TI’s revenues dropped, led by lower demand for Analog, Embedded Processing and ‘Others’ segment by 9%, 10% and 25% respectively. Applied Materials’ revenues were down QoQ due to lower orders of 200mm equipment. TSMC’s revenue decrease resulted from lower demand due to inventory adjustments across the board, and Application, Computer, Consumer, and Industrial declined 24%, 21%, and 14% from 3Q12, respectively. Intel’s sales remained flat QoQ.
Gross margins (GM) were down QoQ by 527bps, 282bps and 165bps for Intel, TI and TSMC respectively, but improved for Applied Materials by 140bps and Qualcomm by 62bps QoQ. Applied Materials’ GM improved due to a more favorable product mix. Qualcomm’s improved GM was due to increased demand for chipset leading to improved product pricing. TI’s GM dropped to 49.65% due to underutilization. Intel’s GM fell to 58% impacted by capacity utilization and product launch timing. TSMC’s GM was relatively flat QoQ.
R&D expenditure
R&D expenses were flat QoQ for all the semiconductor companies except TI, which had an 8.2% drop in R&D expense to US$425mn. R&D expense for Intel, Applied Materials and TSMC increased by 0.92%, 0.33% and 0.84% respectively to US$2629mn, US$304mn and US$360mn.
R&D as a percentage of sales was flat for most of the companies except for Qualcomm, which decreased by 449bps. The sharp decrease in R&D expenditure as a percentage of revenue for Qualcomm was due to a sharp increase in sales sequentially, where as the R&D expense remained stable QoQ. For Applied Material the R&D expense as a % of sales increased by 92bps, primarily due to a relative decrease in quarterly revenue. Intel’s R&D expense as a % of revenue increased marginally due to lower sales sequentially. Texas Instruments and TSMC’s R&D as a % of revenue remained almost flat QoQ.
Net income
Intel’s net income decreased by 17% QoQ to US$2468mn, driven primarily by the aggressive tactical actions taken to reduce inventory levels and to redirect space and equipment to 14nm process technology resulting in excess capacity charges.
Applied Materials’ net income recovered to US$34mn from the net loss of (US$515) in 3Q2012. The turn around in net income was due to increased orders, significantly lower restructuring and asset impairment charges and no goodwill impairment charges which adversely impacted net income in 3Q2012.
Texas Instruments reported a decrease of 66.3% QoQ to US$264mn led by lower quarterly revenues and restructuring charges of US$363mn related to acquisition of National Semiconductor. The non-recurrence of a $144 million benefit in the prior quarter associated with a change in a Japan pension program also led to further a drop in profits sequentially.
TSMC’s net income declined by 13.7% QoQ due to lower capacity utilization and an unfavorable foreign exchange rate.
Qualcomm’s net income increased by 50% QoQ. The sharp rise in net income on a sequential basis is due to increased demand for its new chips (Snapdragon) and improved margins.
Inventory and receivables
Days inventory on hand (DOI) increased sequentially for most companies except Intel, which decreased QoQ by 22 days. The decrease was due to forecasted soft demand in PC segment and also due to continued reduction of inventories across the supply chain as OEMs reduced inventory of older generation products. Applied Materials’ DOI increased by 8 days, led by lower cost of sales QoQ. Qualcomm’s DOI was relatively flat maintaining a stable inventory in spite of surge in demand. Texas instruments DOI increased marginally by 2 days to 103days. TSMC Days inventory increased by 7 days, mainly due to higher level of work-in-process for 28nm ramping and increased stocks in raw materials.
Days sales in receivable/outstanding (DSO) decreased QoQ for all semiconductor companies. Intel, Applied Materials, Texas Instruments, TSMC and Qualcomm’s DSO decreased by 1day, 3days, 6days and 2days each respectively. This was due to decrease in receivables across the sub-sector as a result of revenue declines.
EPS
EPS for Intel decreased by 17.2% led by lower revenues and margins. TSMC’s EPS was relatively flat at US$0.06 cents QoQ. Texas Instrument EPS also decreased by 65.7% adversely impacted by restructuring charges. Qualcomm’s EPS increased by 49.3% led by improved product mix increased revenue and higher demand for 3G/LTE chipset. Applied Material’s EPS was US$0.03 cents this quarter compared to a negative EPS of (US$0.42) cents last quarter led by improved gross margins due to better product mix and increased sale of semiconductors and display equipments.
All the companies tracked in this sector except Intel were trading at a marginally higher P/E vis-à-vis the industry P/E. The lack of positives and no major demand from smartphone and tablet makers have led to the lower P/E of 9.7× for Intel. For Texas Instruments, TSMC and Qualcomm the P/Es were at 20.5×, 16.3× and 16.0× respectively.
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