Semtech Seeks Margin Expansion in Analog World
Analog products do not require leading edge manufacturing process
In general, digital semiconductor OEMs’ products are differentiated on cost of production rather than application. Therefore, digital semiconductor OEMs usually utilize leading-edge manufacturing equipment, with correspondingly higher embedded capital equipment costs. This results in higher depreciation expenses and higher foundry utilization requirements in order to recover the capital equipment investments.
Being a fabless analog company, Semtech (SMTC) has to spend relatively smaller amounts on capital equipment. Moreover, a large portion of the manufacturing is contracted to outside foundries, which further reduces costs for the company.
Analog products possess longer life cycles that support higher margins
Analog and mixed-signal products tend to be more customized, with relatively longer life cycles than digital components. Analog and mixed-signal OEMs differentiate their product lines based on specific applications or vertical end markets.
The large upfront design costs embedded in these customized devices act as a barrier to entry for competitors, making it harder to compete successfully with firms such as Semtech. Consequently, its older analog products can keep contributing to revenue for longer periods of time and generate higher margins (due to pricing power) than corresponding digital products.
Revenue growth is always an area of concern for analog companies
While the business model supports outstanding margins, the highly specialized products do not make for very strong revenue growth. Additionally, the long lead times for customized devices require a relatively longer sales cycle than a digital semiconductor company.
Management has been rethinking its strategy. The focus has now shifted to identifying customer requirements and defining products to suit these requirements. This is gradually converting Semtech into a more consumer-centric company. In the first quarter, management announced the breakout of consumer as a separate segment, most likely because of its increasing importance in the total mix of business.
New high-volume products are expected to be the future drivers of revenue and margins
The company continues to build research and development (R&D) resources to maintain growth levels and improve margins. Semtech introduced 12 new products in the last quarter. One of the important power management products introduced recently was a miniature, feature-rich 10-amp synchronous buck regulator platform, which enables complex system loads. New products in the protection category are being targeted at the cell phone market.
In the last quarter, the company introduced an ultra-thin protection device for memory card interfaces in smart phones and 3G USB modems. Another recent introduction offers the high attenuation and low clamping voltage needed for high resolution color LCD interfaces in GSM and CDMA based 3G handsets. Other protection products introduced recently include the industry’s first high voltage ESP protection solution for hand-held USB charging, and a broader range of protection devices for Ethernet protection platforms.
Recently introduced advanced communications products include a number of industry firsts — a multi-channel wide band low noise amplifier for set top boxes; a low voltage general purpose I/O expander platform for low-power consumer products; and an integrated RF acquisition and processing platform targeted at ultra low voltage ISM band systems integrating two RF transceivers, an ultra low-power microcontroller, and a 16-bit data converter. Management stated that the highly integrated ultra low-power ISM band transmitter effectively reduces the BOM cost by around 40%. The platform is already gaining traction at several industrial customers.
The company also announced a new timing synchronization platform for femtocell and picocell base stations used in office buildings and apartment complexes targeted at replacing expensive DPS systems. These products are not expected to gain traction until the second half of the fiscal year.
Sejuti Banerjea contributed to this post.
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