Earnings Roundup Week of 2/4/2022: Part 2
AMZN, FORM, F, SITM, MXL, IFX, MCHP, NOD, SYNA, TXN. This one is a long one.
First I would be remiss to not briefly mention Facebook. Facebook’s huge IDFA related miss has absolutely punished the entire market. I want to reiterate that their capex spending plan is still in-line, so that’s good for Semis but bad for Facebook’s margins.
Amazon Capex Conversation
This is the first time they have ever broken out the magnitude of AWS’s spending I believe.
Let's talk a little bit about capital expenditures. And I'm going to do this with the inclusion of equipment finance leases. So when you look at those numbers and how they've grown over the last few years, its about 40% -- just under 40% of that CapEx is going into infrastructure, most of it's feeding AWS.
If I look to the future, we're still working through some of our plans 2022, but it's coming into focus a bit. We see the CapEx for infrastructure going up. We still have a very fast-growing business this growing globally, and we're adding regions and capacity to handle usage that still exceeds revenue growth in that business. So we feel good about making those investments
No context of magnitude, but all of the hyperscalers point to “increasing” capex in 2022.
Texas Instruments Capital Management Day
I’m kind of shocked that Texas Instruments’ capital plan was taken “poorly”. They are pretty explicit about the why for their new aggressive capex growth plan, and while FCF margins might be taken down, FCF per share growth is going to be supported by higher growth.
Here’s their slide:
And a meaningful part of the investment is in 300-millimeter, an area where they have a 40% less expensive chip! Even if it’s more expensive the blended cost of goods sold is much better. All of their investment will be at 300 millimeters of course.
Their long-term growth guidance is actually in excess of their historical 10-year revenue growth, further supporting the secular case. Yes FCF margins might suffer in the terminal years, but they just told you that they more than expect to make up for it with growth driven by content increases. They also aren’t even accounting for the CHIPS act for any of these investments, which they will be a large beneficiary from.
The company is making a big but not that bold bet on their future, and they are saying the terminal value of the company is going to be growing at a much faster rate. Investors of course are concerned about what that means for the next 4 years of FCF, as they will be spending more. I think it’s a moot point, they will earn a great cost on the capital deployed and they believe they have an opportunity to deploy more capital, especially post CHIPS act. And now the stock is 10% cheaper for it.
I hate to use the word “long term” so repetitively, but if you’re in it for the long term the company is guiding you to a better future with higher revenue growth but the market will of course punish their FCF degradation in the short term. There’s nothing wrong here, and I think investors should relish this opportunity. A little bit of volatility in a bad tape makes this an opportunity.
Infineon was odd. They had a beat and raise which most automotive companies did, but by far the oddest part is their capex plans. Let’s first talk about their FY outlook - 17.5% revenue growth.
For the entire fiscal 2022, we are increasing our revenue guidance, taking account the stronger dollar from EUR 12.7 billion to EUR 13 billion, plus or minus EUR 500 million. In the middle of the range, this would mean growth of 17.5% compared to the previous year.
When you consider their growth and their guidance to $1 billion in FCF, this is where I go “hmm”. Last year they did ~$1.8 billion in FCF, and they didn’t nuke their margin estimates either, yet are guiding down FCF. They guided up their Capex growth by 35%, but their FCF down by ~80%. They talk about how some of this will go to supply agreements, but I don’t completely buy it.
I'd be glad to answer your question. From a purely arithmetic point of view, you're absolutely right. If you push up revenue to EUR 2 billion and push up earnings, it should have a slight improving effect on free cash flow.
There are 2 reasons why we didn't do this. We have an around in front of the figures and I think that, that would cover slightly higher values as well. Secondly, in terms of substance, in order to secure the supply side, especially with external partners, here and there, we are in talks where we are asked to make advanced payments to participate in investments.
Since this risk exists, since we are exposed to this risk and accepted in order to secure future growth, this would weigh on free cash flow. This is why we have introduced a small risk position.
I think analysts were also surprised, and their first question on the call is why not spend more? They said well they are limited by their ability to acquire tools, and they even broke out their expected value of the $2.4 billion is $1.5 billion shells. Yet no meaningful capex for tools.
The key part in my opinion is they explicitly say that their investment plans are not including the CHIPS act or any kind of subsidies. If you’re reading between the lines they expect to spend more post-EU CHIPS act. I found this move extremely odd given everyone else is investing heavily and now Infineon is not.
Before we move on, I want to just highlight some comments they have on Automotive. They note that they think that SAAR will return to similar to pre-2019 levels, and even if a supply-demand shortage was resolved production still needs to increase.
Global car production in 2021 was 76.4 million units, which is only slightly higher than the level of 2020. The analysts at IHS Markit thinks that because of bottlenecks with semiconductors and other components and different problems in the supply chain, about 10 million cars were not built.
The following interaction is also important here. The shortage of semiconductors means that the car manufacturers prefer to use the chips available to them in higher-value cars. As a rule, they need more semiconductors than vehicles in the compact class, such as advanced driver assistance systems. This prioritization will have a further effect of holding back the total number of new vehicles.
For 2022, a gradual reduction in the bottlenecks is expected, which IHS has forecast for this year, namely 82.9 million vehicles, but that would still be well below the production level for 2018 and 2019. The supply bottlenecks are, therefore, far from over and will continue well into 2022.
Ford on Semiconductors
The best semiconductor transcript surprisingly goes to…. Ford! The entire blurb is worth reading.
Perhaps the biggest gift for all the pain we're going through now in semiconductors is that we have very painfully learned the lesson that we cannot manage the supply chain for these key components as we have. In fact, you could argue that in the change of transition to these digital electric vehicles that supply chain could be one of the biggest advantages a particular company has or doesn't have.
The way we look at it is the key electric components, memory chips, semiconductors. I would break semiconductors into 2 types. Feature-rich chips that we still use a lot. A window regulator doesn't need to have a 4-nanometer chip. And the advanced -- but we also have sensors, power electronics for our inverters, the batteries themselves all the way back to the mine, the inverters of different battery. Chemistries itself have different raw materials and kind of ecosystems that support them. So this is a very important topic for the company.
How different it is? It's really different. We need different talent at the company. We need physical inspection of the actual producers. We need direct contracts with them. We need to design the SoC ourselves. We need to direct in the case -- in some cases, to even direct prefer build to print or actually use supplier XYZ to get out of where we've been. And this takes talent. It takes a different approach. It takes more resources.
On GlobalFoundries, it's kind of the first big bet, but there'll be many, many more coming for us. We're very dependent on TSMC for our feature-rich nodes. Obviously, the capacity is at risk over time as the industry moves to more advanced nodes, including us. And as I said, we're going to need feature-rich nodes for many years to come. GlobalFoundries knows how to build them. They know to build them in the United States. We can partner with the government, depending on the CHIPS Act to capacitize here. It will be a few years until we benefit from that, but it's a really big thing to descale ourselves on the feature-rich chips from the current ecosystem that we depend on around the world. And I think GlobalFoundries is a really interesting deal when we get into the details.
We have to put cash up when we participate. Those feature-rich semis will be used by other companies, industrial companies, not just Ford. It's a really interesting deal. And I was talking to the U.S. government today about how critical this is for our company. You can expect the same kind of thing on advanced nodes and all the other components I mentioned, including more deals on the raw material for various types of battery chemistry. And this is a culture change at Ford. As I said, this is part of the rhythm change between ICE and BEV.
Ford pretty much said they are culturally becoming a semiconductor-focused company. Love it.