Transcript US SemiConductors - Beedie School of Business

U.S. Semiconductor Industry
Sebastian Budijanto
Siantoro Chandra
Emily Chiang
Ambrosio Lina
Industry & Market Analysis
Definition
Materials that has electrical conductivity
between a conductor and an insulator
The most common semiconductor
materials are silicon and germanium.
Example: Computer chips, both for CPU
and memory
Product Categories
Integrated Circuits (IC)
85% of market
CPU and PC memory (DRAM, SRAM, Flash
Memory)
Discrete Devices
Transistors, diodes, resistors
Optoelectrics
LED, Optical coupler, laser diode
Business Models
Fabless
Focus on marketing and product development
Foundries
Manufacture and sell to other companies
Integrated Device Manufacturer (IDM)
60% of market
Develop, produce and market products
Intel and AMD
Industry Characteristics
Short product lifecycle
Moore’s Law
The number of transistors in IC doubles every
18 months
Increasing R&D expenditure
Development of nanotechnology
Increasing foreign consumption
In 3rd Quarter 2004, Asia Pacific has nearly
40% market share
Industry Characteristics
Large IDMs start shift to fabless
E.g. Broadcom & Xilinx
Outsourcing production to foundries
E.g. TSM and IBM
More concentrated customer bases
Growth direction parallel to PC and
telecommunication industry
Annual Sales
Annual Industry Sales 1994-2003
250000
200000
150000
100000
50000
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Industry Statistics
Market Capitalization = $ 556 B
Revenue (est.)
= $ 180 B
Financial Ratios
Profitability and management
effectiveness
Financial Ratios
Price /Earnings
Price/Book
Current Ratio
Debt/Equity
27.263
3.645
4.007
0.102
Profitability and
Management Effectiveness
 Gross Margin
 Operating Margin
 Net Profit Margin
 ROA
 ROI
 ROE
 YoY Qtrly Rev Growth
 YoY Qtrly EPS Growth
 Dividend Yield
53.076%
22.065%
22.415%
13.678%
11.604%
15.022%
32.7%
42.8%
0.6%
Cost Structure
Leaders by Market
Capitalization
1.
2.
3.
4.
5.
Intel Corp
Texas Instrument Inc.
TSM Co. Ltd.
Applied Materials Inc.
STMicroelectronics NV
21. AMD
$ 147.7 B
$ 42.7 B
$ 38.2 B
$ 27.7 B
$ 17.2 B
$ 6.02 B
Microprocessor Market
share
Rank Supplier
1
Intel
Market Share
81.90%
2
AMD
15.10%
3
Other
2.30%
Flash memory market
share
Rank Supplier
Market Share
1
Spansion
27.30%
2
Intel
18.10%
3
ST Microelectronics
12.30%
4
Sharp Electronics
11.50%
5
Toshiba
5.40%
6
Renesas Technology
5.00%
7
Silicon Storage Technology
4.50%
8
Samsung
3.90%
9
Macronix International
3.50%
-
All others combined
9.50%
Source: iSupply Market Analysis (September 2004)
Leaders by Sales
(2003 Annual Report)
1. Intel Corp.
2. Flextronics Int. Corp.
3. Texas Instruments Inc.
$ 30.1 B
$ 15.9 B
$ 12.2 B
8. Applied Materials Inc.
$ 4.5 B
10. AMD Inc.
$ 3.5 B
Market Composition
Year 2003 Recap
US Sales = $80 Billion
U.S Market Share = 48% of $163 B
U.S. Jobs = 226,000 (estimate)
% of Sales Outside U.S. = 73%
R&D Investment = $22.82 Billion, 14% of
Sales (estimate)
Global Market Share
Philadelphia Semiconductor
Index (SOXX) – 5 year
SOXX – 2 Year Range
SOXX – 1 Year Range
SOXX & DJI – 5 Year range
SOXX & GSPC – 5 Year
Range
Environment
R&D Developments
Tariffs and export regulations
Broadband internet
Emergence of China
R&D Developments
Increase in R&D funding by Congress
$5.6 billion for NSF (increase of 5%)
20% projected increase in 2005 for
nanotechnology
$12.6 billion for Department of defense
(increase of 12%)
R&D tax credit and Equipment
depreciation tax reforms
Tariffs & Export
Regulations
Elimination of semiconductor tariffs in
2002
SIA is lobbying for PTA (President Trade
promotion Authority)
Negotiating free trade agreement in Latin
America and Asia Pacific
Broadband Internet
Availability of broadband benefits US
economy by hundreds of billions dollars
High Tech Broadband Coalition won over
FCC in deregulation of broadband.
Emergence of China
3rd largest market share for semiconductor
products
Predicted to be 2nd highest in 2010 the U.S.
Subject to WTO regulations
Anti-dumping law
Patent, standard, and quality enforcement
Trading and investing regulations
Industry Forecast
Development for industry
sectors
PC industry
Projected 14% growth
Technological advancement
Telecommunication
Projected 14 % growth
Increase use of wireless telecom products
Consumer products
Projected 30% growth
Increase use of digital technology
Consumer Products
Advanced Micro Devices Inc.
(AMD)
Company Overview
Founded in 1969, based in Sunnyvale,
California
Global supplier of integrated circuits (IC)
Personal, network computer, and
communications
Facilities in US, Europe, and Asia
Mission Statement
Purpose
“We empower people everywhere to lead
more productive lives.”
Executives
Date joined
Hector de J. Ruiz, Ph.D.
Chairman of the Board, President and Chief Executive Officer
January
2000
Dr. Bertrand Cambou
Executive Vice President and President and CEO, Spansion
January
2002
William T. Edwards, Ph.D.
Senior Vice President and Chief Strategy Officer
January
2004
Thomas M. McCoy
Executive Vice President and Chief Administrative Officer
January
1995
Dirk Meyer
Executive Vice President, Computation Products Group
1996
Patrick Moorhead
Vice President, Global Marketing, Microprocessor Business Unit, Computation Products
Group
2000
Iain Morris
Senior Vice President, Personal Connectivity Solutions Group
2004
Henri Richard
Executive Vice President, Worldwide Sales and Marketing
April 2002
Robert J. Rivet
Executive Vice President and Chief Financial Officer
2000
Marty Seyer
Corporate Vice President and General Manager, Microprocessor Business Unit,
Computation Products Group
2002
Fred Weber
1995
Products Overview
 Microprocessors
 Desktop PC
 AMD Athlon 64 FX, AMD Athlon 64, AMD Athlon XP, AMD
DuronTM
 Mobile:
 AMD Athlon 64, AMD Athlon XP-M
 Servers & Workstation:
 AMD Opteron, AMD Athlon MP
 Flash Memory
 Spansion memory, Multi-chip packages
 Personal Connectivity Solutions
 AMD Geode, AMD AlchemyTM
Competition
 Microprocessor
 Intel
 Flash memory
 Intel, Samsung, Toshiba, ST Microelectronics N.V.,
Sharp Electronics Corporation, Renesas Technology,
Silicon Storage Technology, and Macronix
International
 Personal Connectivity Solutions
 Hitachi, Intel, Motorola, Inc., NEC Corporation,
Toshiba, Transmeta, and Via Technologies
Strategic Partners
 Formed FASL LLC (now Spansion LLC) with
Fujitsu Limited
 Design, produce, and market flash memory products
 Agreement with IBM
 Jointly develop new logic process technology
 Formed AMTC and BAC with Infineon
Technologies AG and Dupont Photomasks, Inc.
 Constructing and operating advanced photomask
facility
Sales and Marketing
 Distribution:
 Direct sales force
 Third party distributors
 Avnet Inc. accounted for 13% of 2003 consolidated net sales
 Fujitsu Limited accounted for 13% of 2003 consolidated net
sales
 Independent representatives
 International sales
 80% of net sales in 2003
 73% of net sales in 2002
 67% of net sales in 2001
Sales and Marketing (cont)
Expanding to China
Regional headquarter
Established relationship with OEM in China
Pricing
AMD sells to distributors under terms allowing
the distributors certain rights of return and
price protection on any inventory of our
products held by them.
Miscellaneous
Intellectual properties
5,900 patents and 2,000 pending patents
Employees
7,400 non-unionized employees (AMD)
6,900 partially unionized employees (FASL
LLC)
Restructured in 2001 and 2002
AMD’s Demand
Expectations
Worldwide demand for PC
microprocessors will increase in 2004
Replacement cycle for older PC system
Lower-priced PC system
Enhanced product features
Improved economic condition
Goal
Microprocessor
Increase market acceptance
Flash memory
Increase market acceptance
Personal Connectivity Solutions
Continue provide cost-effective product
Financial
Financial cont’d
Financial cont’d
Financial cont’d
Financial cont’d
Company Snapshot
As of Nov. 5, 2004
Market Capitalization
Close Price (As of November 5, 2004 16:04 ET)
52 Week High
52 Week Low
$6,016,830,000
$17.09
$18.50
$10.76
Shares outstanding
-basic
-diluted
354,348,000
417,576,000
Price to book value
-basic
-diluted
2.36
2.78
Current book value
-basic
-diluted
$7.24
$6.16
Stock Performance (1yr)
Stock Performance (2yr)
Stock Performance (5yr)
Balance Sheet Analysis
Book value per share
Price to Book ratio
Current Ratio
Quick Ratio
Debt to Equity Ratio
Asset Return
ROA
ROE
Q3 2004
2003
2002
2001
$6.16
2.78
1.6198
1.1913
1.8320
0.1740
0.0062
0.0170
$7.03
$7.21
10.69
1.9971
1.5167
1.9095
0.1374
-0.0107
-0.1126
1.6759
1.3324
1.3144
0.1187
-0.0574
-0.5281
1.7909
1.5013
0.5855
Income Statement
Analysis
Gross profit margin
Net profit margin
Operating margin
RD&E
SG&A
EPS
-basic
-diluted
Price to earning
-basic
-diluted
Q3 2004
2003
2002
2001
0.4046
0.0354
0.0552
0.4605
0.4032
0.3387
-0.0780
-0.0663
0.7148
0.4927
0.2193
-0.4831
-0.4543
1.3800
1.1331
0.3346
-0.0156
-0.0150
0.4999
0.4762
$0.1234
$0.1050
-$0.7912
-$0.7912
-$3.8063
-$3.8063
-$0.1822
-$0.1822
138.46
162.75
-$21.60
-$21.60
Value Drivers
Research and development
Market share of Spansion Flash memory
Semiconductor demand expectations
Analysts Recommendation
Recommendations
Current
1 Month Ago
2 Months Ago
3 Months Ago
Strong Buy
5
5
5
7
Moderate Buy
0
0
0
0
Hold
12
12
12
11
Moderate Sell
2
2
2
2
Strong Sell
3
3
3
3
Mean Rec.
2.91
2.91
2.91
2.75
(Source: MSN Money)
Recommendation
Analysis:
Too much debt
No clear business plan
Intense competition
Conclusion
Sell
Applied Materials Inc.
(AMAT)
Company Overview
 Established in 1967
 The world’s largest supplier of products
and services to the global semiconductor
industry (develop, manufacture, market,
service)
 One of the leading information
infrastructure providers
 Subsidiary: AKT Inc. & Etec Systems Inc.
 Hasn’t declared or paid cash dividends
Top Competitors
Tokyo Electron
Nikon Corp
KLA-Tencor Corp
ASLM Holding N.V.
Canon Inc.
LAM Research
Sales Comparison
Note: Intel Corp (13% of 2003 Net Sales)
12000
APPLIED
MATERIALS
Revenue
10000
8000
TOKYO ELECTRON
6000
KLA - TENCOR
4000
LAM RESEARCH
2000
0
1998 1999 2000 2001 2002
Year
Q3
2003
Management Overview
 Michael R. Splinter, CEO
Joined April 30, 2003. 30 years in the industry; 20 years with Intel
 James C. Morgan, Chairman of the Board of
Director
Joined 1976
 Nancy Handel, CFO & Group VP
Joined 1985. Named CFO October 2004
 Franz Janker, Senior VP Sales & Marketing
Joined 1998
Firm Objective
To be the leading supplier of semiconductor
fabrication solutions worldwide-through
innovation and enhancement of customer
productivity with systems and service
solutions.
AM’s long-term growth strategy requires
continued development of new
manufacturing products
Operating Costs
Operating Costs
Research,
development and
engineering
19%
Marketing and
selling
48%
General and
administrative
16%
17%
Restructuring,
asset impairments
and other charge
(2003 Annual Report)
 Gross margin: $1,604,455 (35% of net
sale)
 Research, development and engineering:
$920,618 (20.6% of net sale)
 Marketing, selling, general and
administrative: $625,865 (14% of net sale)
RD&E Investment
(% of Revenue)
Products Overview














Chemical Vapor Deposition (CVD)
Chemical Mechanical Planarization (CMP)
Electrochemical Plating
Epitaxial and Polysilicon Deposition
Inspection
Ion Implantation
Manufacturing Execution Systems (MES) software
Mask Pattern Generation, Etch, and Inspection systems
Metrology
Physical Vapor Deposition (PVD)
Plasma Etching
Rapid Thermal Processing (RTP)
Systems to make Flat Panel Displays (FPDs)
Wet Cleaning
Financial Highlights
Net Sales (Year)
(in thousands)
8000000
7,343,248
7000000
6000000
5062312
5000000
4477291
4000000
3000000
2000000
1000000
0
2001
2002
2003
Financial Highlights
Net Sales (Quarterly)
(in millions)
500
400
300
200
100
0
440.6
373.3
15.5
Q4'03
82.4
Q1'04
Q2'04
Q3'04
Financial Highlights
Net Income (Yearly)
(in thousands)
507829
600000
400000
269004
200000
0
-200000
2001
2002
2003
-149117
Financial Highlights
Net Income (Quarterly)
(in millions)
2500
2000
1500
1000
500
0
2018.1
2236.2
Q2'04
Q3'04
1555.4
1221
Q4'03
Q1'04
Financial cont’d
Operating Income
800
600
400
200
515
613.5
Q2'04
Q3'04
97.4
4.3
0
Q4'03
Q1'04
Net Sales by Region
Note: 58% to Asia
12%
26%
North America
13%
Japan
Europe
Korea
Taiwan
15%
18%
16%
Asia-Pacific
Bookings by Region
Business Trend
As of
Nov 5,
2004
Market Capitalization (000)
$7,641,271
Close Price
$16.28
52 Week High
$25.62
52 Week Low
$15.36
Price Change - 5 Day
1.1%
Price Change - 4 Week
0.4%
Price Change - 26 Week
-12.8%
Price Change - 52 Week
-35.5%
Price Change - YTD
-25.7%
AMAT Stock Price
(1yr)
AMAT Stock Price vs. SP500
(4yr)
AMAT vs. Industry
AMAT:US
(return)
S5SEEQ:IND
Summary Balance Sheet
(unaudited)
Balance Sheet Highlights
(2003 Annual Report)
Cash, Cash Equivalents, and Short-term
investments total $5.5 billion (53% of total
assets)
Total liabilities total $2.2 billion(21% of
total liabilities and shareholders equity)
Retained Earnings total $5.8 billion (56%
of total liabilities and shareholders equity)
Cash & Revenue Trend
Summary Income
Statement
(unaudited)
Analysis of Financial
Statements (Nov 5, 2004)
Enterprise Value: $21.61 billion
Revenue: $7.03 billion
Gross profit: $1.60 billion
Market Cap: $27.65 billion
Beta: 2.305
Price to book value of equity: 3.03
Data Provided by Reuters
Analysis of Financial
Statements Cont’d
 P/E: 30.78 (Estimated EPS $0.53 for 2004)
(EPS negative in year 2003)
 EPS: 0.26 (Q3, 2004)
 ROE: -1.9% (2003 Annual Report)
 Shares outstanding: 1,698,233,000
 Free Cash Flow: $536,474,000 (2003) ($0.32/share)
 Cash Flow from Operation: $801,754,000 (2003)
Value Drivers
 Research and Development
Strong Cash Flows
Dominant Player in the industry
News
Metron Technology N.V., a leading global
service provider of marketing, sales,
service, and support solutions to
semiconductor materials and equipment
suppliers and semiconductor
manufacturers, had entered into a
definitive agreement pursuant to which AM
would acquire the worldwide operating
subsidiaries and business of Metron.
Cont’d
Q1’05
Revenue: $62.7 million
Gross margins: 21.8%
Net loss: $0.6 million
Fair P/E Raito
Using Graham’s model:
P/E Ratio: 22.68
P/E Estimate (2004):30.78
Slightly overpriced
Recommendation
HOLD
 Cash Flow; Debt
 Rebound (New Orders increase to $2.46B, Net
Sales increase to $2.24B)
 Industry expectation
 P/E Ratio
 Return vs Industry
 Acquisition
 2004 Final Report
Intel Corporation
(INTC)
Background
Incorporated in California in 1968 (rise of
the computer age)
World’s largest semiconductor chip-maker
Currently, most of their products are sold
or licensed worldwide.
Two lines of business: Chip (IC)
Manufacturing, and Communications and
Computing.
Business Profile
Provide key components for networking
and communications infrastructure
technology. Communication Components
 Design and provide products with faster
processor performance and improved
capabilities. Microprocessor
Mission: Become the preeminent
building block supplier to the Internet
economy
Major Products
Microprocessors, chipsets, boards, flash
memory, application processors used in
handheld devices, cellular baseband
chipsets.
Networking and communications products,
optical components and network
processing components, embedded
control chips
Major Customers
Computer system, cellular,
telecommunications and network
communication equipment manufacturers
(OEMs)
PC and network communication product
users (retail, reseller, OEMs)
Other manufacturers
Geographic Revenue
(millions)
Americas
Asia-Pacific
Europe
Japan
Q3 2004
Q2 2004
Q3 2003
$1,799
(21%)
$4,014
(48%)
$1,886
(22%)
$772
(9%)
$1,956
(24%)
$3,661
(45%)
$1,665
(21%)
$767
(10%)
$2,168
(28%)
$3,266
(42%)
$1,683
(21)
$716
(9%)
Product Revenue (millions)
Q3 2004
Microprocessor
$5,928
Chipset, Motherboard
and other
$1,210
Flash
$ 638
Q2 2004
Q3 2003
$5,751
$5,719
$1,023
$1,140
$ 587
$ 389
Operating Segment
(millions)
YTD 2004
Architecture Business
Revenue
$20,937
Income
$ 8,586
Communications Group
Revenue
$ 3,663
Income
$ (596)
Other
Revenue
$ 11
Income
$ (760)
YTD 2003
$18,481
$ 6,633
$ 2,893
$ (681)
$
26
$ (981)
Market Analysis
Wi-fi phenomenon – Intel’s PRO/Wireless
2915ABG adapter. Supports three WiFi
standards: 802.11a, b, and g (these are
the standards for the average home user)
Rising handheld industry – increasing
demands on handheld digital device (cell
phones, PDA’s) capabilities with more
powerful processors
Management
 Andrew Grove-Chairman
 Founder
 Craig Barret-CEO
 Came in 1974. Voted into BOD in 1992.
 Paul Otellini-President
 Came in 1974, became president in 2002.
 Andy Bryant-CFO
 Joined Intel in 1981. Became CFO in 1994.
 Sean Maloney-(ITC) Gen Mgr
 Joined Intel since 1982. Became head of ITC in 2001.
Price History (1 year)
Last price as of Nov. 7,2004: $23.360
Intel vs. Industry Returns
INTC:US
S5SECO:IND
Revenue vs Income chart
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$1998
1999
2000
2001
2002
2003
2004
(year
to
date)
Revenue
Net Income
Cash Flow Statement
Highlights
Year End Cash Flow
$$2,000
$4,000
Year End Cash Flow
$6,000
$8,000
$10,000
2003 2002 2001 2000 1999 1998
Fundamentals
Outstanding Shares: 6,323.00 Million
Earnings Growth Rate (quarterly): 29.3%
Market Cap: $ 147,705.3 Million
ROE:
15.389
Trailing P/E: 20.437
Last Dividend Reported: 0.04 cash
Dividend Yield: .685
Year estimated EPS: $ 1.11
Financial Model:
• FCFF= CF(operations)-Exp(C)+ Interest
*(1-tax rate)
– 2003: $ 8,004.54 (in millions) or $ 1.21 /share
– 2002: $ 4,569.84 (in millions) or $.69 /share
– 2001: $ 1,712.42 (in millions) or $.25 /share
Recommendation
P/Etrailing * FCFF = 20.43 * $1.21 = $ 24.72
• Therefore.. Since last price is $ 23.36,
BUY!
The Fisher Approach
 Company has had a stable operating structure
(ratio of revenue-income stayed consistent)
 All the head managers and officers have been
with the company for at least 22 years.
 Majority of revenue come from Asia-Pacific
Region which has steadily increased.
**Prospects look promising. Assuming no
unforeseen circumstances, buy and hold for the
long run.