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Since these statements are based on factors that involve risks and All Rights Reserved ANALYST INTERVIEW A Bullish Outlook for the Semiconductor Industry JOHN PITZER — CREDIT SUISSE JOHN PITZER is a Managing Director, Global Technology Strategist, Technology Sector Head and Semiconductor Analyst for Credit Suisse. He joined the group in March 2000, and until the end of 2005 he was the semiconductor capital equipment Analyst. Institutional Investor ranked him number-two Analyst for semiconductor capital equipment in 2005 and 2004; number-one analyst for 2003 and 2002; and runner-up in 2001. From 2002 to 2005, he was ranked the number one or two Analyst in the Greenwich Associates polls. Prior to joining Credit Suisse, he was Vice President and the semiconductor capital equipment Analyst at Prudential Volpe Technology Group. He previously was an Analyst at Deutsche Bank Alex.Brown and Needham & Company, LLC, covering the semiconductor, semiconductor capital equipment and contract manufacturing industries. Mr. Pitzer holds a B.A. from Harvard University. SECTOR — SEMICONDUCTORS growth to get from where we were to normal. (ACM806) TWST: What is your coverage in semiconductors? Coming into the 2011, we’re still below normalized lev- Mr. Pitzer: I currently han- els but not by the same amount. So opti- dle the devices. I previously handled cally the cyclical call on semis has been both equipment industry and devices. Highlights harder to buy into. Now, that would But since about 2006, I’ve just been make the pragmatic call to look for John Pitzer discusses his coverage of handling devices. I cover the chips that more stock-specific criteria and don’t the semiconductor industry and some go into PCs, handsets, analog, digital, depend upon the cycle. However, we’re the whole gamut. of the specific names he follows. He kind of making the nonpragmatic call. TWST: What are the major says the global growth of the middle We are saying we believe structurally themes in the space right now? class benefits semiconductor the trend lines are moving higher. So Mr. Pitzer: This is a space companies, as middle class growth our bigger-picture thesis is that this is usually translates into higher demand that’s dominated by where are we in an industry which for the last seven to the cycle call, and there are cyclical for electronic goods. Mr. Pitzer also says nine years has demonstrated a revenue metrics that investors look at to try to the semi content per device is increasing, CAGR of about 5% to 7%. We think with smartphones, automobiles and monitor the health of the industry. You we’re in year two of the market figuring look at things like inventory levels, industrial goods requiring more out that there is a new revenue CAGR semiconductors to perform an ever- how much capex are we spending rela- that’s more like 9% to 11%. increasing number of functions. tive to the revenue we’re generating, TWST: Why is it higher what does year-over-year unit growth Companies include: Intel Corporation than people think? look like, what does unit growth look (INTC); ARM Holdings plc (ARMH); VIA Mr. Pitzer: When you look like relative to long-term trends. One Technologies (2388.TW); Linear Technology back and look at the 5% to 7%, reve- of the issues I think investors are hav- Corp. (LLTC); Avago Technologies Limited nues are always a function of supply ing this year is that relative to normal- (AVGO); NXP Semiconductors NV (NXPI) and demand. On the supply side, for the ized levels at the beginning of 2010 and Apple (AAPL). last seven years this industry has had from most of those metrics, we were structurally too much capacity. And the well below normalized levels. So opti- reason behind that is, starting about 952-7400 (212) Wolfrath permission contact Kenneth reproduction material: For Copyrighted cally you can make a strong cyclical call that there was a lot of 2001 right after the tech bubble burst, the semi industry went ANALYST INTERVIEW — A BULLISH OUTLOOK FOR THE SEMICONDUCTOR INDUSTRY through a manufacturing change to larger wafer sizes. If you look at hear about emerging markets, what you hear is about wage infla- how a semiconductor is made, it’s a square chip, but they’re made tion. That’s a great thing for semis — i.e., you’re starting to see on a round wafer. There are many of these square chips on a single the global middle class accelerate, the growth in the global mid- round wafer. Every 10 years or so, the dle-class accelerate. The reason that industry goes through a wafer size middle class growth is good for transition as a way to improve manu- semis is the middle class buys a lot facturing efficiency. In fact, at the be- “If you look at semiconductors as a of electronic stuff, one. And two, the ginning of this transition, we covered percent of global GDP over time and you middle class also tends to demand semi cap equipment. And as bullish as chart that out, the chart you actually see more services in their economy, and I am now, I was bearish back then. is you go through these waves where the services economy has spent a lot Our call was that the semi cap guys semi content of the economy more on IT infrastructure. The way mispriced the tools. They were giving accelerates and then consolidates.” to think about this is, even if global away capacity too cheaply. And we growth going forward is flat over the saw that the math didn’t work in our next four years versus that 2004-to- models, and we thought we would go 2008 period, the composition of that through a multiyear period of having too much capacity. And in fact growth is better for tech and semis. that’s what’s played out. Now, the bottom-up thesis, just look at a lot of the end The best way to quantify that is a metric that measures the markets that semis go into, and you can actually start to quantify that capital intensity of the industry, which is simply how much capex semi content is going up. The easiest end market to talk about is do you need as a percent of the revenue you’re generating. And back handsets. When you go from a dumb standard feature phone to an before 300 millimeter, the capex-to-rev ratio was about 22%. Dur- iPhone or any other smartphone, the amount of silicon content goes ing the transition, our models were indicating that capital intensity from “x” to about 5x to 8x. So even though you’re selling one unit was going to drop to at least 15%. It actually went down to 10%. At of phone, if it’s a smartphone, you’re selling five to eight more units one level, that’s a good thing because when capital intensity goes of semiconductors, because you’re dealing with more content be- down, your ROI should go up. The negative offset is it’s much cause you’re asking that phone to do more. Now interestingly, I easier to add capacity, hence it’s much easier to screw things up think investors get all that when it comes to handsets, but it’s just as from a supply perspective.