Edgewater Research: High Performance Analog Digest - July 2023

 Component Insights – July 2023

Important Disclosures in the Appendix

2Q Flat to Down Q/Q, No Signs of 2H Demand Rebound, Auto now Seen Moderating in 2H

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Key Takeaways

• 2Q seen as finishing flat to down Q/Q, relatively in-line with targets. Suppliers seen as aggressive pulling demand in to meet targets.
• 2H demand projected flat to down vs 1H on weak orders and cont. inventory rebalancing, with more downside than upside risk.
• Auto seen as having inflected in June. 2H demand seen as flattening on moderate digestion in ICE SKUs but cont. strength in EVs.

Top 3 Channel Comments:

1. All suppliers were more aggressive than normal, pushing product to us (a disti) at the end of June. Saw it from STMicro, Infineon, Renesas, Diodes, and Nexperia. It is a clear sign that demand is soft, and everyone is trying to meet their quarter-end targets.
2. For ICE, golden screw problems are gone and there are now pockets of high inventory, but it is not a broad glut. That is because it was uneven during the upcycle with shortages appearing and disappearing in different areas.
3. In Auto 15-20% of the backlog for the year has been pushed out recently. Despite that we see demand up 15-20% for power semis and less for other semis. Without the pushout, we think power semis procurement would have been up 30-40% this year.

Other Datapoints of Interest:

• On avg 15-20% of ‘23 Auto backlogs seen as pushed out; digestion seen as more limited for MCUs, power semis (IGBT/MOSFET).
• Suppliers holding firm on 2H auto pricing but some (NXP/STMicro) seen agreeing to ‘24 cost downs in return for higher share/volume.
• MPS & others noted facing increased competition (TI/Analog/Infineon) across geos/markets.
• At least one more supplier has qualified as a 2nd PMIC source for Nvidia’s H100 platform in June. Ramp seen late 3Q/early 4Q.
• TI still price aggressive in direct deals, but execution still spotty. Share gains seen in 2Q from Asian peers, limited from Western.
• Inventory still a primary concern; signs of progress across channel and customers very limited; digestion projected through YE.
• Pricing still relatively stable; seeing some concessions in 2H23/2024 and some distis starting to run one-off deals to move product.
• Military/Aero, Medical, Energy still strong, PC/CE at best stable, other Industrial, DC, Telco weaker into the 2H.
• Microchip 16/32 bit supply seen rapidly improving; inventory at customers seen as elevated; users cont. to move away from Microchip LT.
• Altera/XILINX supply noted as up significantly in 2Q; feedback highlights signs of excess inventory buildup in distis/customers.

Conclusion

High Performance Analog fundamentals continue to weaken, as backlogs continue to decline, end market demand remains muted, inventory remains stubbornly high, and supply continues to improve all driving a weaker outlook for 2H23. While forward looking fundamentals continue to soften, we are most concerns that we are starting to see signs of rebates/pricing declines return to the industry, most notably driven by TI as the work to regain lost share/opportunities as the company continues to recover from the prolonged shortage. With fundamentals remaining under pressure near-term, we remain cautious on the direction of the industry through the balance of 2023 and into early 2024 as cyclically the inventory burn, we believe, will likely take longer than expected. Over the intermediate to longer-term, fundamentals remain healthy as the industry clearly has secular growth tailwinds in several end markets, including but not limited to, Automotive and several sub-categories of Industrial. 

APPENDIX

We, Kevin Rottinghaus, Sean Muir, Dennis Reed, and Nik Todorov hereby certify that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities referred to in this research report. We certify that no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. The analyst(s) responsible for the preparation of this report have no ownership stake in this company.  Edgewater Research Company provides no investment banking services on this or any company. Proprietary research and information contained within which forms the basis for findings or opinions expressed by Edgewater Research Company may be used by Edgewater Research Company for other purposes in the course of compensated consulting and other services rendered to third parties. The information transmitted by this email is intended solely for the person or entity to which it is addressed. If you are not the intended recipient of this message, be aware that any use, review, retransmission, distribution, reproduction or any action taken in reliance upon this message is strictly prohibited. If you received this in error, please contact the sender and remove the material.