Sunday, August 20, 2006

Technology / Semiconductor / Performance Metrics 0 comments

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Given the volatility of the electronics industry, it is useful to be aware of the industry metrics used to track the fortunes of the industry. In particular, the fortunes of the semiconductor industry is critical to an investor vested in any link in the entire value chain --- for semiconductors are, essentially, the primary commodity of the electronics industry.

I shall divide the metrics along two lines -- industry/company performance metrics and company manufacturing metrics. Note that these are often not near-term predictive metrics ie. they are not leading indicators.

Industry Performance

Book-to-bill ratio
Book-to-bill ratio = (Product orders during a period)/(Product shipments)

A book-to-bill ratio that is greater than one indicates that industry backlog is building and that increasing revenues are likely in future periods. Conversely, a book-to-bill ratio that is less than one is an indicator of declining demand and may foretell declining sales.

Take note that this ratio is not seen as a leading indicator. At best, it is a coincident indicator of what's going on in the industry.

Average selling price (ASP):
Pricing in the electronics industry is volatile. The erosion of ASPs of established products is typical of the industry. Cost reduction activities and new product introductions are typical strategies to maintain margins, as newer products typically yield larger gross margins.

That ASPs will decline rapidly is an implication of Moore's Law, which is the empirical observation that the complexity of integrated circuits, with respect to minimum component cost, doubles every 2 years. Hence obsolescence of existing technology always depresses their ASPs.

End-of-period backlog is one indicator of future sales and an indicator of committed sales (which can then be compared with inventory to determine if inventory accummulation is healthy). Included in backlog is typically open orders that have been released by the customer for shipment in the medium term, say the next twelve months.

If demand falls below customers' forecasts, or if customers do not control their inventory effectively, they may cancel or reschedule the shipments that are included in the backlog. Therefore, the backlog is not necessarily indicative of the results to be expected for future periods.

Company Manufacturing Performance

Semiconductor manufacturing is capital-intensive. For general reference, in the fabrication of advanced digital products, investment in processing equipment and manufacturing facilities account for about 65% of manufacturing cost, utilities account for about 15%, materials account for between 10 and 15%, indirect labor accounts for between 5 and 10%, and direct labor accounts for 5% or less (see Reference 2). The two most significant performance factors determining manufacturing cost are the manufacturing yield and the equipment throughput.

The metrics below are meant to give a qualitative understanding, with no real rule-of-thumb typical numbers. A direction-of-change approach (whether increase or decrease) to monitoring these metrics is the most appropriate to assessing company performance.

Perhaps company manufacturing metrics might give a better indication of competitive strengths, and hence a better leading indicator (my personal opinion).

Manufacturing yield measures the fraction of input to the manufacturing process that is transformed into salable product. It expresses the fraction actually produced of the total amount of product that theoretically should have been produced from the given input of blank silicon substrates (“wafers”).

Equipment Throughput
Simply the units of output per machine per day. It is a measure of machine productivity, and is typically determined by percentage utilisation rate, setup and processing times (the latter two a function of labour productivity).

(1) Form 10-K for Vishay Technology
(2) Berkeley University Summary Report Jan 2002: Competitive Semiconductor Manufacturing
(3) Motley Fool interview with Vladi Catto Jun 1996




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