I am taken to task by a financial analyst for my remarks in Giving The Finger To Wall Street.
'Semi industry workers don't get Wall Street - and their stock price declines', says the analyst who wants to remain anonymous, 'the truth is the industry has done a poor job converting from a 10+% growth industry to a less than 5% CAGR growth rates. While consolidation does not fix ASP pressure it does help with market share. We have a bunch of managers getting paid to run slow growth, no share gain, companies that are still getting paid like high growth companies.'
There seems to be a disconnect between Wall Street and the semiconductor industry. Wall Street says the semiconductor industry has low growth, so they punish semiconductor shares. The semiconductor people say
Cost cuts - i.e. sackings, remuneration cuts, overhead cuts and R&D cuts - affect a semiconductor company's ability to compete long-term and to pursue long-term projects and that destroys a semiconductor company's long-term competitiveness.
Growth, of course, is something everyone wants, but growth is dependent on price and involves going after high growth markets, and high-growth markets are usually crowded, commoditising and profitless.
To keep his business profitable, which is the only way a business can survive long-term, the semiconductor CEO invests long-term, and targets markets where he can make a profit.
And even then, the Silicon Cycle means he won't make a good profit all the time.
So the CEO is stuck with conflicting demands: to go for growth markets which will hammer margins; or to eschew growth markets and maintain a profitable company.
On the other hand, Wall Street analysts cannot recommend the shares of companies which don't grow.
'If I gave you $5 in 1990, and you put it in NSM (National Semiconductor) you would not be happy today', says the financial analyst, 'they have been a $2bn company for 20 years.'
Some might say that National's bids for growth like microprocessors, buying Cyrix and digital ICs in general were a drain on its resources.
So a disconnect has opened between the semiconductor industry and the financial community. Does it matter?
Does the disconnect matter to the semiconductor industry? Not really, so long as the semiconductor industry can find ways of rewarding its people sufficiently without need for stock options.
And there's always the choice of going private. Richard Branson did that with Virgin saying he couldn't grow his companies by investing long-term while analysts pummelled his stock because they wanted short-term returns,
Earlier this month, Pasquale Pistorio, a great semiconductor CEO, told the IEF2009 conference:
"The role of the CEO is to: create a vision; build a team, set a culture; define a road map and drive execution. You must create an environment which is conducive to innovation which means it is tolerant of mistakes and gives projects time to succeed", said Pistorio, "the CEO is the custodian of the company's assets. If you make decisions to please the financial community for the next quarter you are wrong. You have to think of your company as an on-going concern. For instance we started investing MEMS in 2000 and now it is a flourishing profitable business."
Incidentally, Pistorio grew ST from a $100 million revenue company to a $10 billion revenue company.
Hi David ... to misquote JS III ... NUTS!
Whoever this so-called financial analyst is, the fact he wishes to remain anonymous speaks volumes, as does the banal superficial piffle he trots out, the same old time-expired, tired old platitudes, all with absolutely no factual basis.
He clearly has absolutely no understanding of chip industry, or what it takes to build a strong chip company ... all he knows is how to feed the lemming casino-style stock market dynamics … buying and selling shares on a turn, not for the long-term investment in a company.
Let him declare himself and then let's have a real public debate. Mr Financial Analyst, whoever you are ... you are talking complete and utter waffle ... come public and challenge me if you dare to a one-on-one live public debate. I'm sure EW would love to set one up!
Malcolm Penn, Chairman & CEO, Future Horizons
David,
I exist with one foot in each camp, I guess if I'm honest I'm paid by Wall St but my heart belongs to Silicon Valley.
I had an interesting conversation last weekend with a couple of industry Analysts and VC's. The gist of the conversation was that IC vendors needed to wakeup and smell the coffee. All that the analysts saw that valley CEO ego's were getting in the way of worthwhile mergers and consolidations. For the analysts the only road forward was to consolidate and thereby to create uber dominant players in essential sectors, (lets call it by the correct name Monopolies)
What I found interesting was the unwillingness of the Analysts to even accept that there are still growth companies in the IC sector. Companies returning 30% CAGR and 30% PFO. What is important is that,over the last 5 years, the model of a successful startup has changed and indeed the model of a successful IDM has probably disappeared completely.
The good news is that this is still a multi hundred billion dollar industry, so the death of some big IDM's will feed a lot of hungry start-ups.
I left the analysts with the simple thought, What's a startup, with 25% PFO, worth that blasts to a $500MUSD revenue in under 5 years? what if it shows no signs of slowing as it punches through the $1B pa revenue barrier?
Dying IDM's are creating these opportunities, I'm confident that entrepreneurs with real B**** will step in and covert one, or more of these $20B UsD semiconductor sectors. The rest will be history.
I'm sure we could do it, Malcolm, but I'm pretty sure your would-be opponent doesn't fancy a public debate!
Well absolutely Robert, look at Inphi and Imagination both growing at 30% a year and there are many others. The fact that the collective market share of the top 10 has declined over the last 20 years shows that consolidation is not the answer. I couldn't agree more that the IDM model is dying, that the fabless start-up model is threatened, but that doesn't mean there won't be new ways of taking ideas to market, and those new ways will be found by engineers not financial people.
1. The semiconductor industry is a maturing industry
2. Growth in any mature industry (for the industry as a whole) will start to track world GDP growth
So if share prices can not be sustained by growth (or growth prospects) anymore then the obvious solution is to start paying decent dividends. It is the semicon industry itself that needs to recognize that it is not high growth anymore and just like other mature industries need to start paying dividends. Or of course go private (and stay private!).
I think i's absolutely true, Paul Derks, that if you want a high share price and growth isn't achievable, then high dividends are the only way to get it. But I don't think most of the semi industry recognises that it's a low-growth industry, and the currently forecast period of high ASPs might prompt a return to high growth rates. Meanwhile, as always in the semi industry, there are some high growth companies in nice niches while most of the consolidations have failed to deliver growth. So I think it's rather complex. Neither the financial guys trying to impose their generalised models for high-growth/low growth, consolidating/emerging industries on the semiconductor industry, nor the semi industry people themselves who think growth will return with new markets (as it always has done) have the answer. Meanwhile the financial guys and semi guys seem to be at a stand-off.
Dear All
I'm an educated man or so I thought and I have more than a passing interest in the financial state of 'our' industry. However can someone please attempt to further my education by telling me what these dratted acronyms mean..
CAGR, PFO, IDM, ASP ?
Yours sincerely
The kid who put his hand up inspite of maybe looking a fool.
Well, James S, you've stumped me on PFO but CAGR is compound annual growth rate, ASP is average selling price, IDM is integrated device manufacturer (i.e. chip company with its own factory)
PFO profit from operations,
typically inside IDM's they track the actual profit generated by each of the businesses as PFO, this usually does not include any "corporate allocations" or other expenses unrelated to the operation of the business sector.
Earnings can be completely meaningless because it depends on things like tax rate and debt, cost of debt, options... things over which the sector manager has absolutely no control, So PFO is a much better metric.
A lot of start-ups like to keep internal accounts in a manner similar to IDM business sectors, sometimes just so they can easily show what their contribution would be, if they were acquired.