Microsft Investor article. "What's in the Cards for Chips?
H&Q analyst Rob Chaplinsky tells why the "chipless" microprocessor
firms have a bright future
[Article discusses steep growth in chip manufacturing for
networking firms]
Excerpt: "Instead of microprocessors,
memory chips and graphics chips driving
growth, he sees networking and
communications applications used in
modems, routers, switches and the like
as the sector's biggest growth
opportunity.
"Steeper growth will
come from the communications and
networking applications side of the
business. Companies that are selling
digital-signal products,
programmable-logic devices or ASICs --
which stands for application specific
integrated circuits -- to the Ciscos
(CSCO), Nokias (NOK/A) and Ericssons
(ERICY) of the world will be the big growth
drivers for semiconductors in the next
three to five years."
investor.msn.com
Posted 4/9/98
Archived 4/16/98
Interviews
What's in the Cards for
Chips
H&Q analyst Rob Chaplinsky tells why
the "chipless" microprocessor firms have
a bright future and finds something nice to
say (sort of) about Intel.
By Eneida Guzman
What's to become of the semiconductor
industry? It's stumbling over slowing
sales, shrinking margins, intensified
competition and fallout from Asia's
economic crisis. And share prices are
suffocating at several chip makers that
have been Silicon Valley leaders for
years.
Highlighted
Companies
3 Yrs. Vs. S&P
Altera
DSP Group
Intel
Rambus
Xilinx
Rob Chaplinsky, semiconductor analyst
at high-tech boutique brokerage
Hambrecht & Quist, admits that the
group's near-term future looks rather
bleak. But he sees promise in newer,
less-traditional areas for growth in the
sector that are just beginning to take
shape. Instead of microprocessors,
memory chips and graphics chips driving
growth, he sees networking and
communications applications used in
modems, routers, switches and the like
as the sector's biggest growth
opportunity. He also likes a group of chip
stocks that are known as the
"semiconductor intellectual property"
group, or SIP for short.
In an interview from H&Q's San Francisco
headquarters, Chaplinsky told Investor
about the latest innovations at the
"chipless" semiconductor companies, the
difficulties of running a chip company
without a fabrication plant to call your own
and Intel's business prospects.
The SIP Model
What do you see as the most
significant trend in the semiconductor
intellectual-property industry right
now?
The most interesting trend is that a lot of
companies are pursuing the new chipless
semiconductor business model because
the cost of capital and the requirements
to compete in next-generation devices is
just escalating. So some companies are
pursuing this software-like semiconductor
model as opposed to actually distributing
and selling chips.
Describe the business model.
The SIP companies basically just design
and distribute chip design via software or
database. Someone else integrates the
design, makes the chip, sells it and
distributes it. This party usually pays a
licensing and royalty fee to the SIP
company. The SIP company is almost
like a software company, but instead of
selling a CD-ROM, they are selling
semiconductor logic.
Details
Company Facts
1-yr Chart
* Earnings Estimates
* Advisor FYI
In this group, I like Rambus (RMBS). It is
a high-speed memory interface company
for next-generation memory-chip
technology. They have unbelievable
patents and a very strong royalty-based
semiconductor intellectual-property
model.
Do you expect this model to be
successful?
Yeah, I actually do. I think there are some
natural hurdles that will happen because
sometimes just connecting all the
different parts of a chip together and
hoping that it all works is pretty difficult.
You have to implement a lot of standards
and interfaces to make it work. But it
does help companies come to market on
next-generation devices faster because
they don't have to reinvent every piece of
silicon or transistor in there. They can
reuse existing, proven blocks of
transistors, and that's really what's
attractive about it.
The new deep-submicron
semiconductor-fabrication process
will enable companies to design
systems on a single chip. What is the
cost savings?
A leading-edge, 5- to 7-million-transistor
device takes several years to design,
develop, verify and get into production.
What the new process does is really
shorten the design and layout and
verification process by one-third or
one-half. It's a significant savings of time
and money.
The SIP company is
almost like a
software company,
but instead of
selling a CD-ROM,
they are selling
semiconductor
logic.
People are moving from motherboard-level
solutions to chip-level solutions, and
that's what they're calling a complete
system on a chip. In many cases that's
where the value of these new
intellectual-property kind of
semiconductor companies come into
play, because designing one big system
on a chip is very complex. So if you can
reuse proven and existing technology,
what they call cores of transistors, you
get to market much faster.
Programmable Logic
I understand that you believe the
programmable-logic sector is one of
the most attractive investment
segments of the semiconductor
industry. Tell us why.
Programmable logic is where you can
actually make adjustments to your chips
and tune your chips in the field after
manufacturing. The hardest thing about
semiconductors is once you actually
fabricate, it's basically fixed and you can't
change it. However, if you have a
programmable-logic device, you actually
have some memory and programming
capability in the chip to alter its
functionality and tune it for a specific
application after the actual chip is made. I
think this will to continue to be used and
become more important as the product
cycles continue to accelerate.
Details
Company Facts
1-yr Chart
Company Facts
1-yr Chart
Company Facts
1-yr Chart
Are you concerned about price
erosion in this segment?
Yes. It's becoming very competitive. There
are a couple of players who have large
market share. And everyone is trying to
grow market share. You have an
environment where these programmable
devices are trying to penetrate new
markets where typically they are at a
price disadvantage because they are
offering this programmable premium, if
you will. So, when they try to penetrate
new markets, they have to be very
aggressive in their pricing. That's what
happened in '97 to this sector. The
companies in this group were
over-aggressive in their pricing. They have
been trying to manage their pricing
models a little more prudently in '98. I
think the price erosion we saw in '97 will
slow down in '98.
With orders slowing down, economic
conditions in Asia stalling market
growth and the fact that we are
moving towards a seasonally slower
period for the group, which
programmable-logic names make
sense?
I like companies that focus on the
networking and telecommunications of
semiconductors. The chip companies with
exposure there that I'd buy are Altera
(ALTR) and Xilinx (XLNX). Those are two
good industry leaders in the front of the
logic sector.
One of your favorite stocks, DSP
Group, is in the telephony space. Its
fundamentals are very impressive and
the stock is trading at a discount to its
growth rate. Tell us about this one.
I have a strong "buy" rating on the stock.
DSP Group (DSPG) develops and
markets digital-signal speech products
targeted at the consumer telephone and
computer telephony markets. Over 80% of
the company's revenue today is derived
from selling speech processors for use in
digital telephone-answering devices. It's
not very glamorous, but they have a
dominant market share there. I especially
like the company because of the other
20% of their revenues -- and 40% of their
earnings -- are from licensing and
royalties they receive from their DSP or
digital signal processing business. I think
the stock will experience
earnings-multiple expansion as royalties
ramp to comprise a larger portion of their
revenue mix.
Details
Company Facts
3-Year Chart
* Advisor FYI
* Earnings Estimates
* Insider Trading
Show Intel
You have lowered your estimates for
Intel for calendar-year 1998 and 1999
to $3.09 and $3.62 respectively. They
have limited visibility as far as a
rebound in orders, and revenues are
flat year-to-year. Do you see a
turnaround on the horizon?
In the past, Intel (INTC) used design
processors for performance and it was a
great business model as long as people
were buying up in performance and they
needed next-generation processing
power. But I truly believe the
application-software treadmill has really
slowed, and Intel's hardware treadmill is
exceeding the software treadmill --
meaning applications aren't consuming
Intel's MIPS (millions of instructions per
second) as fast as they used to. As a
result of that, Intel has to now head in a
different direction.
Low-cost computer chips must be high
on its list of options.
Yes. Clearly, the low-cost computing
trend is going to continue to accelerate.
So Intel needs to develop products for
those segments that are very profitable as
well as products for the high segments,
and that's a challenge near-term.
Intel sells $25 billion worth of products a
year. To sustain its historic growth, you
need to start finding $5 billion industries
where there are new opportunities for
growth. There are not too many $5 billion
industries around. As you get bigger, it's
very hard to sustain the growth. I think
what Craig Barrett will bring to the party
as the new CEO is that he will start
looking outside the box for new areas of
growth.
As far as a
turnaround, I think
there's still some
downward
adjustments coming
[for Intel].
As far as a turnaround, I think there's still
some downward adjustments coming.
Some of those downward adjustments are
already reflected in the stock price.
Investors seem to be waiting for signs that
orders will pick up and margins will stop
going down and stabilize. As soon as
there is evidence of that, a period of
growth will follow.
It will be interesting to see if Craig
Barrett's leadership can steer the
company to the same level of growth
that Andy Grove experienced at Intel.
Robert Noyce and Gordon Moore put Intel
on the map and Andy Grove put Intel on
top of the world. Tough to guess on how
Craig Barrett can repeat it. We'll know the
answer to that five years from now.
Facing the Coming Challenges
Because of your belief that that the
second quarter will be difficult for the
semiconductor group, you remain
fairly cautious. How much does the
Asian economic situation factor into
your caution?
Asia is a significant reason to remain
cautious on the group's long-term outlook.
Initially, people were just attributing the
correction to end-market consumption of
the region. We're becoming more global,
so I think that the impact on our domestic
markets and sales is going to be at
stake, too.
The growth in the semiconductor
capital-equipment area is definitely going
to slow down. Asian countries no longer
have access to capital like they used to.
And we're seeing significant cutbacks in
orders, as well as financial estimates of
these semiconductor capital-equipment
companies all related to Asia. At the
same time, with the weak currencies in
those countries, the costs for them are
significantly lower and as they lower
prices on exports that will make U.S.
products much less competitive. That will
dramatically impact us as well.
Asia is a significant
reason to remain
cautious on the
group's long-term
outlook.
In this environment, is it better for
chip companies to have fabrication
facilities or to be "fabless"?
Three years ago the fabless business
model, where you outsourced all your
manufacturing, looked pretty attractive;
however in the environment we're in, the
fabless model for memory companies is
pretty difficult because you need much
tighter integration between design,
manufacturing and logistics. In an
environment where you have very large
excess supply and inventory levels, you
need to balance your needs and be in
control of your costs so that you are
actually more profitable. It's just basic
economies of scale.
The semiconductor industry is
experiencing two below-average
years of growth. With lower PC sales
and falling chip prices, what is going
to be driving silicon demand in the
next few years?
The PC market is not dead. I'm still a
secular bull on the long-term growth of the
PC market. Pricing is going to continue to
play a role in that industry's growth rate.
But PCs will continue to be the dominant
consumer of semiconductors well into the
next millennium. Steeper growth will
come from the communications and
networking applications side of the
business. Companies that are selling
digital-signal products,
programmable-logic devices or ASICs --
which stands for application specific
integrated circuits -- to the Ciscos
(CSCO), Nokias (NOK/A) and Ericssons
(ERICY) of the world will be the big growth
drivers for semiconductors in the next
three to five years.
Links
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