Travelling On The Silicon Road

Georges Penalver, chief strategy officer for ST, told the analysts community recently that ST is being constructed as two product-oriented business segments organization. The first block encompasses ST’s sensor, power and automotive products and is essentially ST’s successful analog business and its digital automotive business. The second block is ST’s embedded processing business and is the non-automotive digital business including microcontrollers and processors for digital consumer applications.

Focusing on the Embedded processing segment and ST’s manufacturing strategy, let’s look into some statements from the earnings call last month:

·       The 1^st segment i.e. Sensor, Power & Automotive represented 56% of net revenues and the 2^nd segment (Embedded Processing Solutions) 44%

·       Wireless saw a significant decrease due to ST-Ericsson and this will continue. LTE Modem development activity and biz has moved to Ericsson

·       ST will not compete in the application processor market in smartphones

·       Microcontrollers are a key driver in the Embedded Segment; the others are STB (set top boxes), TVs, digital ASICs, Imaging etc.

·       ST will focus on 2 segments in Microcontrollers. The first one is wearable electronics (healthcare, automotive, gaming) where it caters to diverse and small size customers (requirement is for low power microcontrollers, sensors and connectivity). The second one is secure microcontrollers (which is more for smartphone applications (NFC), banking - both contact and contactless) catering to a smaller number of customers but for a likely high volume

·       Digital biz will be in 300mm wafer fab in Crolles

·       Manufacturing distribution in Crolles: 1/3^rd each into MCU, CMOS image sensors and dig consumer products

·       ST is betting big on FD-SOI tech. It has second source agreement with GlobalFoundries for selected customers for this techno. Here it is working aggressively on 2 fronts – 1^st is communication infrastructure where low power dissipation is important along with strong performance. The other is portable equipment (outside smartphones, tablets)

Add to that the fact that the major semiconductor growth (last year and projected this year too) are the mobile consumer devices especially smartphones and tablets as well as the wireless communication sector.

Keeping the above in mind, it will be a big challenge for the company to support leading edge technologies in Crolles and that too with an allocation of a third of its capacity for digital consumer products – case of an expensive leading edge digital technology without targeting aggressive margins. So, how ST can keep its IDM model, especially on the leading digital edge with this kind of a product segment organization strategy, economically viable – that’d be interesting to watch.

What are your thoughts?

Another one on Qualcomm (QCOM)

Lead in mobile integrated chipset and wireless – Snapdragon series, wireless technology patents/licensing
Announced CMOS Power Amplifiers alternative to GaAs PAs for mid-high tiered 3G/4G smartphones

China market focus
- Well positioned to ride on China Mobile’s LTE wave (China Mobile announced spending $6.7b in 4G tech this year)
QCOM chips were in 14 of the 31 terminals selected for trial by China Mobile in Dec ’12 - nearest rival with 4 was Sequans.
- Biz model with local mobile chipset design companies and the system/handset manufacturers for licensing royalties

Major Revenue segments – licensing and sales
While in the last couple of years, QTL’s revenues were higher than that of QCT, QCOM is looking at double digits growth for both biz segments and QCT’s growth to be substantially higher than that of QTL.

Strong focus & investment in R&D
R&D in Q1 fiscal 2013 was 1.1B (18% of revenues)

Vertical integration for mobile eco-system
- Accelerating the commercialization of its Pixtronix MEMS displays using Sharp’s IGZO tech – Note however that the deadline for giving Sharp the 2nd half of $120m investment from QCOM has been extended now to June (due to some specs conditions not being met by Sharp)
- Ride on Internet of Things: Amongst others - Alljoyn and FlashLinq
- Moving beyond devices into wireless backhaul – DesignArt acquisition last year

Strong Financials
- Q1 ’13 earnings: $6b quarterly revenues (a 29% y-o-y increase), $1.91b profit (36% increase over previous year)
- Full-year revenue guidance to a range of $23.4 billion to $24.4 billion from its previous target of $23 billion to $24 billion.

Going through some of the equity research notes, apart from the contents, one of the things that struck me the other day was the brief succinct way the main content is put out. And so, I thought, why not do a series with my take on some of the stakeholder companies and application markets in the semiconductor eco-system. Appreciate your feedback, comments, thanks!

So here goes the first one…

Intel (INTC)

• Intel’s technology lead
- Pros: Increased capex to maintain the lead (at least 2.5 years ahead from competition), Intel’s stake in ASML for 450mm and EUV R&D
- Cons: The increased capex that could also result into high end fabs running under capacity. Intel needs to monetize its leading edge technology and also needs numbers and breadth of various types of chips to be fabricated in its fabs in order to fine tune its processes.
- As per IC Insights, Intel’s forecasted capex for period 2010-2013 is $40b, second to Samsung’s ($46.9b) – together to account for 42% of the total industry

• Intel’s foundry principle seems to be - Open Intel fabs for non-Intel chips but not for competing chips (“chips for mobile biz”). Altera deal is seen as step forward. However, point to be noted is that while (reportedly) this deal does not allow Intel to let other FPGA vendors (Xilinx?) on its 14nm fabs, Altera can still continue to work with TSMC and others. Second source foundry options may not reel in 100% of Altera’s total fab requirements to Intel

• Semiconductor growth drivers and Intel’s market share in it
- Slowing down/Cannibalizing of PC biz (Intel’s main revenue generator)
- Mobile chips being the major driver now for semiconductor growth and Intel’s not too effective efforts till date in this space.

• However lately, we are seeing Intel making good in-roads in this space. Mobile biz requires connectivity plus good power management solutions besides the performance factor. Two announcements from Intel this year point positively in this direction – Dialog deal (for power management in its Bay Trail (22nm)) and XMM7160 (multimode, multiband 4G LTE global modem solution) for an integrated SoC solution end 2013/early 2014.

So, is connectivity to internet necessary for all smart connected devices/applications? A lot depends on the application; for example in a multiplayer gaming app with players physically in the same room, a peer-to-peer network without connecting to the net can do. Qualcomm’s AllJoyn software and FlashLinq are a good fit in this space.

AllJoyn debuted last year and Qualcomm announced the extension of this to new core interoperable services at the Mobile World Congress this week. An application, in its present avatar, it may soon get integrated into the firmware for consumer electronic devices by their manufacturers, should the wave catch on.

And once that happens, I believe Qualcomm would like to see FlashLinq (their peer-to-peer PROPRIETARY technology) too get entwined into this. For while AllJoyn will run across various hardware platforms, AllJoyn apps will be able to run directly over FlashLinq without using Wi-Fi/Bluetooth etc. So if AllJoyn takes off in a big way, we can also look at chips with FlashLinq integrated within them flooding the market – another licensing revenue generator for Qualcomm.