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    VLSIinsiders’ Cloudside Chat — November 04, 2020

      Nov 4, 2020
    • Current business conditions

      • Planning cycle has started
      • Equipment business is accelerating
      • Korea DRAM equipment surge vs NAND mix shifts
    • The Outlook –
      • Order visibility pushing into the first half
      • Guidance
      • Could we be fooling ourselves?

    About VLSIinsiders: Every week our analysts have a cloudside* chat to discuss current events and key issues of concern, while sharing what they’ve heard over the past week from the semiconductor industry insiders.

    * cloudside chat: A fireside chat without the fire and is across the clouds of the internet

    Other VLSIinsiders

    Transcript

    VLSIinsiders’ Cloudside Chat — November 04, 2020

    DAN HUTCHESON: Welcome to this week's VLSIinsiders. This is Dan Hutcheson.

    JOHN WEST: This is John West from Europe.

    RISTO PUHAKKA: This is Risto Puhakka.

    DAN HUTCHESON: So, thanks for coming today you guys. We've had a pretty interesting discussion so far. So, what are you seeing in the current business conditions?

    RISTO PUHAKKA: Well, just looking at the latest results reporting, unfortunately, Andrea can't be here because a lot of his work but clearly equipment sales, equipment business is accelerating again. So, we see businesses that keep growing and improving going forward.

    DAN HUTCHESON: Yeah, it's kind of interesting because what we've seen is there's been a softness and lithologic market around the notebook business kind of softening and then enterprises is softening. So, where's the demand coming from?

    RISTO PUHAKKA: Primarily, we saw actually a few weeks ago, we started to see Korea starting to pick up. I did some follow up discussions and it’s clearly memory in Korea seems to be also DRAM that's a little bit driving more that. So, I'm kind of, we were actually in a summer of this year forecasting next year's WFE, our equipment business in general, just made a comment that the memory needs to participate substantial way to have a positive year 2021. So, looks like our forecast in memory cycle is ongoing three to six month earlier than we expected. So, but that seems to be the key driver there. I don't know. John, what's your view on that?

    JOHN WEST: Yeah, well, we've been getting quite a lot of questions from the subs, well, supply chain subsystem companies. And they're really doing a lot of planning work for next year, really looking at the sensitivity to memory, in particular, trying to figure out for different companies for every million dollars that they invest in memory, what does that mean for subsystem supply? And those questions are just really popped up over the last two or three weeks. So clearly, I think something shifted. I think they're expecting memory to pick up again and really getting a good understanding just how sensitive their businesses to any pickup in memory equipment demand for next year.

    DAN HUTCHESON: Yeah, it's interesting, the way you guys are framing it, because for months now, you know, since January, all we've heard is COVID, COVID, COVID.

    RISTO PUHAKKA: Yeah.

    DAN HUTCHESON: Sounds like now it's going back to business as normal. Right? They're looking at demand drivers and trying to find which sectors are hot, that sort of thing. Is that what you're seeing out there?

    JOHN WEST: Yeah, I think, again, the conversation. So, any questions about COVID really are to do with supply chain security, nothing to do with end demand. It's just, you know, what are the consequences if a factory has to shut because somebody gets infected? So that's, that was a conversation that we've been having over maybe two or three weeks ago. But that's been that's now disappeared. You're right. The question is now is what happens next year because the 2020s already, it's done, that you think they're pretty sure of what their numbers are going to be. So, on average subsystem suppliers are reporting 10 to 15% growth this year, but there's an increasing number of subsystem guys who are reporting 20, 30, or even 40% growth for 2020. And they've seen their orders accelerate throughout the year. So, the focus now is going away from 2020. That's now done. And the quite big question is what happens next year? And that, again, I think a lot of that revolves on what happens with memory capex to 2021?

    DAN HUTCHESON: Well, people have been giving more guidance to it. Did they?

    JOHN WEST: Yeah. So last quarter, nobody was giving guidance for 2021. But now, I think almost everybody has a view on it. Most of them very positive. So yeah, I think that's been the biggest change, literally, from before the last call and today, is that 2021 people are now starting to predict publicly what they think about next year.

    DAN HUTCHESON: Yeah, sounds good. You know, we're actually pretty positive about next year, mainly because we don't know any different. But what worries me is the decoupling from the macro economy does it, all of a sudden, recouple itself. It was like, you know, we know that the diffusion rates, the contract rates are really high. And if you know, I remember from my disastrous 95 forecast in which the content hit rates were high and we had a lot of things going on. And so, we thought, well 95 was going to be a bad year. Well, turned out, it was a great year because, you know, a video game came in called Doom and disrupted everything, like we saw COVID disrupt stuff, and sort of decoupled from the normal business drivers. Well, then 96 came along, and it was back to it was back to normal, and everything crashed. When you know, people, and I remember that year, we were sort of looking at it, and everyone was saying, why can't the contract rate go up higher? Why can't it be 30 or 40%? When it was close to 20? And? And, of course, it couldn't. But we just sort of said, we're going to throw out 20 years of data and say, “Okay, this time, it's going to be different.” And of course, it wasn't. And so, my worry, you know, I think a lot of the executives I've been talking to, really senior executives, they've been through this. And so, they're thinking, are we going to be like Wile E. Coyote that just goes running off the cliff chasing the Roadrunner off firm ground and all of a sudden we're treading air?

    RISTO PUHAKKA: Hasn't this industry done it a couple of times, so at various points. But, yeah, it's definitely a valid concern, you know, of course, you know, when the COVID hit, there was this day the industry is coupled with the economy and certainly it has not been test, it has not been this year. And then there always comes the, you know, the affordability issues into play, you know, when seven nanometre wafers may cost $20,000, you know, smartphones $1,200-$1,300 apiece. How you manage that affordability side of it, especially in the consumer side? In enterprise side, it's pretty straightforward, ROI type of calculations that justifies those. So those are those are the really, really the critical points there to also start to really look into and worry about. But on the other side, you know, manufacturing is getting more expensive when we look at, you know, the wafers out and billions spent those ratios are growing. And in parallel, that's really a fact of fact of how things are moving along.

    JOHN WEST: I think the interesting thing about this year is that it's been a good growth year for the industry, but it's not been excessive. The industry hasn't been pulled out of shape. So, we've got profitable growth. So, if something bad does happen, actually, it's in pretty good shape to survive a reasonable fall for 2021. So, again, that may be part of the reason why a lot of companies are cautiously confident, that if the market grows great, they're in good position to do that. But if it does collapse, they're not going to. It's not going to kill them. It won't be very pleasant, but at least they are well resourced this time around.

    DAN HUTCHESON: Yeah. And I think they're pretty well structured to deal with the variants. You know, in the field days, you see all these companies just go out of business. But, you know, most of them are now we go through downturns are profitable through the downturn. And, you know, yeah, they wreak havoc on the supply chain, who has also figured out how to be profitable through the downturn.

    RISTO PUHAKKA: Yeah. Yeah.

    DAN HUTCHESON: It's kind of an interesting thing these days. And, you know, if you've been in the industry, as long as I have, a lot of the senior executives that I talked to, we know there's always a cliff out there to run off of. It’s just…

    RISTO PUHAKKA: No, it's and the volatility. And the volatility is the nature of this of the equipment business. And the companies, like you said, are structured to deliver, you know, that 50-60% cross margins, regardless of cycle.

    DAN HUTCHESON: Yeah, it's what makes this business the extreme sport of business. Because, you know, when you get guys like Buffett or Jack Welch saying that they could never, it would never be in semiconductors because it was too difficult. Yet…

    RISTO PUHAKKA: Yeah.

    DAN HUTCHESON: …and they are a lot of some of the best management people, financial people in the world, right? I think there's a lot better ones in our industry because they survive…

    RISTO PUHAKKA: It's certainly true.

    DAN HUTCHESON: So actually, I think we thrive on that which makes it interesting.

    RISTO PUHAKKA: Yes.

    DAN HUTCHESON: So, hey, thanks for coming today and taking the time.