Next Generation of Semiconductor Design (part 1)

semanticzen — Mon, 12 May 2008 02:36:26 +0000

I recently finished a paper on investment opportunities in the next generation of semiconductor design and how it favors Xilinx, Altera, and to a lesser extent Microchip. Since this is a blog I will micro-chunk the papers content over several posts. The thesis of this paper is that semiconductor design will be based more around an integrated design and manufacturing platform than the historical approach of cobbling together various vendors’ offerings based on best of breed research. Similar to how IT departments have consolidated around only a handful of vendors semiconductor designers are consolidating around the major vendors’ platforms.

Since the bursting of the .com and telecom bubbles in 2000 the technology infrastructure market has evolved from a high growth industry into the cash cow phase. Winners such as Cisco, EMC, and Xilinx have tremendous free cash flow. While losers like 3Com and LSI are struggling to survive. With technology products especially there is little value purchasing second tier products so the leading companies only grow stronger until the next major secular inflection point. New startups are reduced to only attack market niches. For digital semiconductor chips as well as IP networking and storage the next secular inflection point is probably a decade or more in the future.

In this paper (and subsequent blogs) I will explain how the structure of the semiconductor market is going vertical due to the dramatic increase in semiconductor complexity requiring semiconductor design integration and how this favors the two leading FPGA (Field Programmable Gate Array) companies. The next generation semiconductor products will be designed using Xilinx and Altera‘s platforms.

A major acceleration in growth of the FPGA market should occur in 2010 based on several factors listed below. The two companies that control approximately 85% of the FPGA (Field Programmable Gate Array) market are positioned to exploit this inflection point in growth.

When 65nm devices go mainstream
- FPGA’s as SoC (for embedded systems), especially with ARM and MIPS soft-core processors
- The continued acceleration of FPGA’s stealing market share from ASICs and ASSPs
FPGA’s in new markets
- x86 servers and PCs
- Industrial & Automotive
- Consumer devices
Beginning of construction for the next generation communication network driven by
- The communication equipment is nearly half of the FPGA end market
- The glut of dark fiber from the .com bubble will be in use
- The explosion of true mobility due to 802.11n, WiMax, LTE, etc
- The explosion of interactive TV (through high definition video over IP) enabled by fiber to the home
- The virtualization of the data center, including desktops
The end of the global slowdown, re-invigorating world-wide growth of capital goods products, which are increasingly designed with digital devices like FPGAs

EMC & VMware – Solid Results for Q1 2008

semanticzen — Wed, 23 Apr 2008 23:58:29 +0000

Today was a big day for enterprise technology stocks particularly for my holdings with EMC, VMware, Xilinx, F5, and Zebra all reporting results. With the exception of Xilinx, who had decent numbers, all the companies exceeded expectations. I was particularly impressed with EMC because it is such a bellwether for enterprise technology.

EMC is available for a tremendous valuation. On its balance sheet, it has net cash and short term investments of $4.35B: Cash ($5.6B) + LT Investments ($2.25B) – LT Debt ($3.5B). It has a market cap of $33.8B (2.1M shares * $16). The 86% of VMWare that EMC owns is worth $20.6B. Giving EMC a market cap of only $8.85B for a company, that without VMware, had revenue greater than $3B this quarter and net margin easily above 10%.

Metrics for EMC’s Q1 2008

Revenue = $3.47B up 17%
- A record and the 19^thconsecutive quarter of double-digit growth
Net Income = $268.8M / $.13
- Includes a $79.2M non-cash charge for in-process R&D resulting from acquisitions completed in Q1 (excluding charge, $348M / $.16)
Operating Cash Flow = $918.3M up 14%
Free Cash Flow = $717.5M up 22%

Financial Highlights

Repurchased 36M shares for $557.2M, expect $1 – 1.5B in share repurchases for 2008
Q1 2008 acquisitions = $338M
Cash & Investments = $7.9B ($4.2B overseas and in VMware)
VMware within EMC: Revenue = $438M, Non-GAAP EPS = $.03

Revenue Mix by Divisions

EMC systems up 10% (41% of revenue)

Symmetrix up 8%
- The first enterprise storage vendor integrating flash-based solid state drives into core product portfolio (for Symmetrix DMX-4)
CLARiiON up 19%
Celerra (NAS) up 50% (this bodes well for NetApp)

Software license & maintenance up 18% (41% of revenue)

Software license growth (without VMW) = -5%, but overall good growth on deferred revenue
VMware = $438.2M million up 71%
Content Management & Archiving = $185.2M up 8%
RSA Data Security = $134.9M up 13%

Other services up 30% (18% of revenue)

Revenue Mix by Region

North America up 14% (57% of revenue)

International up 21%, double-digit revenue growth in each of EMC’s regions -Europe, EMEA, Asia-Pacific & Japan (APJ) & Latin America

Metrics for VMware’s Q1 2008

Revenue = $438M up 69%
- US up 65%
- Intl up 74% (triple-digit growth in Australia and emerging markets including BRIC)
- Software license revenue = $294M up 73%
- Service revenue (support, subscription, and professional services) = $144M up 62%
Operating Income = $48M vs. $46M (Non-GAAP operating income = $106M up 62%)
Net Income = $43M / $.11 vs. $41M / $.12 (Non-GAAP net income = $88M / $.22 vs $.16)
Guidance
- Continues to expect 2008 Revenue up 50%
- Expects 2008 Q2 Revenue up 55%