Edgewater Research: High Performance Analog Supply Chain - May 2023

Component Insights – May 2023

Important Disclosures in the Appendix

Limited Change to Fundamentals M/M, Backlogs Supporting Shipments, Inventory Remains Problematic

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Key Takeaways

1. Demand in 2Q noted as tracking in-line at flat/down slightly. B2B noted as remaining <1 in channel and globally, HPA and MCU companies expected to continue shipping against backlog into 3Q.
2. Supply chain continues to express significant inventory concerns with end customers, channel, EMS all noted a record levels.

Top 4 Channel Comments:

• My region beat our plan pretty handily helped by much improved supply. Availability is better and we’re able to ship more against delinquent backlog. Some suppliers we think have a good six months of backlog left for sales into Auto, Industrial, and Aero/Defense.
• Locally both of the major distributors B2Bs were <0.75x exiting 1Q23. The hope for parity in B2B has pushed to 4Q, it doesn’t appear to be a demand issue as design activity is still very high, it’s an end customer inventory issue.
• We saw a pretty sizable rescheduling of orders from TI. Their original delivery plan was based on capacity coming online, but there appears to be some delays and sub-optimal yields impacting... (we’re expecting impact) through at least 2H23.
• Customers tell us they have record high inventory and demand has slowed in most end markets. Suppliers are saying similar – customers, EMS, and disti all have more inventory than ever, and demand is weak outside of Auto, Aero, Military, and Medical.

Other Datapoints of Interest

1. TI continuing to see execution/supply challenges, blamed on shifting supply b/w end markets and slower new test capacity ramp.
2. Pricing holding largely stable/steady for HPA for 1H23; some concessions in HPA/MCUs in 2H23 and 2024.
3. No change in TI aggression incl. via price, multiple suppliers noted as being forced to choose b/w matching price or losing socket.
4. Strongest end markets remain ATE, Military/Aero, Medical, Energy; other Industrial showing incr. signs of slowing.
5. Industrial design activity noted as remaining strong, suggesting positive real end demand being offset by high inventory.
6. Auto still proj. to steady growth throughout CY23 with OEMs still focused on supply, rebalance viewed as late 2023 or 1H24.
7. CE/PC/smartphone inventory noted as near balanced, some hopes for mild Q/Q growth in HPA/semi orders in 3Q.
8. Europe demand noted as primary driver to growth upside in 1Q23, viewed as having peaked and likely downside source in 2Q/3Q.
9. China demand noted as still not recovering and expected soft into 3Q+; US demand steady but inventory elevated and growing.
10. Lead times continue to improve across lines; catalog disti noted receiving more STMicro product in 1Q23 than all of 2021-2022.
11. Increasing concerns noted over distribution margins as they continue to take delivery of high-priced inventory ordered in 2021-2022.
12. Infineon supply into Auto expected impacted for next 1+ month(s) due to fire at plating facility in China.
13. Feedback continues to suggest customers working to move away from Microchip long-term due to less friendly price/supply practices.
14. Several suppliers noted as continuing to push product on channel including Maxlinear, Diodes.

Conclusion

High performance analog fundamentals are largely unchanged M/M, with shipments tracking largely inline with forecasts entering the quarter and at flattish to down slightly Q/Q. While shipments remain sub-seasonal, we are cautiously optimistic that the industry will navigate a soft landing as suppliers continue to ship to backlogs, B2B ratios remain well below 1, lead times continue to contract, supply ramps and inventory remains heavy across the supply chain. While the industry appears to be navigating a soft landing, it does come at the expense of a significant rebound, with our expectations of the inventory digestion lasting through 3Q23 and potentially into early 2024. We continue to expect overall industry sales to decline Y/Y in 2023 and we await better clarity on demand/inventory before becoming more optimistic on 2024.

HPA Insights; May 22, 2023; Kevin Rottinghaus, Sean Muir, Dennis Reed, Nik Todorov

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.