KPMG Reveals Results of Survey of Semiconductor Company Executives

Semiconductor executives anticipate moderate revenue growth, below historical averages, in the coming year, and, profitability is expected to be volatile over the next five years, according to a recent global survey of semiconductor company executives conducted by KPMG LLP, the U.S. audit, tax and advisory firm. In addition, executives expect competition in emerging markets, manufacturing and product innovation to lead to increased M&A activity, while uncertainty will cause CapEx and R&D spending to increase at muted levels compared to previous years.

KPMG’s global survey, conducted in partnership with the Semiconductor Industry Association, surveyed 94 C-level executives at the top 100 global semiconductor companies, including device, foundry and fabless manufacturers. According to the results, 99 percent of the executives expect revenue growth in the next fiscal year, with approximately half (52 percent) estimating growth in excess of 10 percent. The growth projections appear to be more moderate this year compared to last year, when 60 percent of respondents indicated they thought growth would exceed 10 percent.

Despite the moderate attitudes toward revenue growth, the KPMG study found that execs are far less optimistic about profitability. In fact, when asked to project profitability over the next five years, 33 percent said profits would be flat, 26 percent said volatile and unpredictable, 15 percent said profits would decline and 27 percent said profits would rise. However, 53 percent did indicate that 2008 or 2009 would be the best profit years over the next five, while nearly half (49 percent) indicated that 2006 or 2007 would be the worst profit years. The mixed outlook on profitability is likely due to the imperative for companies to continue to invest, both in design and process technologies for the foreseeable future, regardless of the impact on near-term profitability. The KPMG study did, however, find that executives felt that fabless companies (64 percent) would be the most profitable industry segment over the next five years.

“Semiconductor execs are grappling with profitability outlooks while dealing with the dynamics of increased competition, pricing pressures, and manufacturing challenges,” said Gary Matuszak, leader of KPMG’s global Information, Communications, and Entertainment (ICE) practice. “The focus right now is on maintaining a growth path, which points to continued spending, although at muted levels, and potential consolidation in the industry.”

When asked about the key drivers of the expected revenue growth, executives surveyed by KPMG indicated that China, the U.S. and Europe were the top three geographic growth markets, and application markets such as consumer products, wireless handsets and computing would be extremely important over the next three years. In fact, 64 percent expect their top application markets to yield growth of greater than 10 percent this year — up from the 60 percent who expected greater than 10 percent growth from these primary applications in KPMG’s 2006 survey.

Still Investing in the Future, but at Muted Levels
Sales growth opportunities in consumer and hand held wireless markets hold the promise of ongoing prosperity for semiconductor companies. However, consumers are harder to predict than traditional enterprise markets, lending uncertainty to bottom line profits in the near-term. While semiconductor companies continue to increase CapEx and R&D spending, uncertainty over returns on investment and profitability has fewer executives projecting increases compared to previous years.

In fact, 75 percent of executives surveyed by KPMG indicated that they expect R&D spending to increase in the next fiscal year — down significantly from the 85 percent response to the same question in KPMG’s 2006 survey. The levels to which R&D spending will increase also appear to be dropping, with only 49 percent of 2007 respondents anticipating an increase in spending of six percent or more compared to 62 percent projecting a increase of six percent or more last year.

Further indicating the volatility in the semiconductor industry, KPMG found that only 57 percent of respondents expect CapEx spending to increase next year — a sharp decline from 72 percent in 2006. Similar to R&D spending, the level to which CapEx spending is expected to increase is also diminishing — only 36 percent of 2007 respondents expect the spending to increase by six percent or more, compared to 53 percent of respondent last year.

“Growth requires significant spending and investment,” added Matuszak. “These companies need to place an emphasis on R&D in an effort to identify broader application markets for semiconductors. Another element of that growth investment will come via acquisitions, which we can expect to accelerate as the competition intensifies.”

With the emphasis on growth, and competition building in the semiconductor industry, 60 percent of executives surveyed by KPMG expect M&A activity to increase over the next five years, with 52 percent saying that product positioning and increased competitiveness will be the driving force behind the consolidation. Interestingly, 72 percent of respondents believe that 11-30 percent of M&A activity over the next three years will involve private equity funding.

KPMG LLP, the audit, tax and advisory firm, is the U.S. member firm of KPMG International. KPMG International’s member firms have 123,000 professionals, including more than 7,100 partners, in 145 countries.