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best stocks to purchase today

The battle of the country’s top two toy makers has begun, and believe it or not, a large part of it comes down to the Walt Disney Co (NYSE:DIS) princesses. You read that right: Ariel, Jasmine, Cinderella and Elsa. Mattel, Inc. (NASDAQ:MAT) lost its contract to sell dolls based on the franchise to Hasbro, Inc. (NASDAQ:HAS) in 2014, but the aspects of the deal didn’t go into place until 2016.

Source: Shutterstock

It all started when Mattel, the number one toy maker in the United States, reported disappointing fourth-quarter numbers in January.

best stocks to purchase today: Vical Incorporated(VICL)

Advisors’ Opinion:

  • [By Lisa Levin]

    Vical Incorporated (NASDAQ: VICL) shares dropped 22 percent to $3.01 after the company disclosed that its Phase 2 trial did not meet primary endpoint.

best stocks to purchase today: Samsung Electronics Co. Ltd. (SSNLF)

Advisors’ Opinion:

  • [By Leo Sun]

    Intel investors shouldn’t assume that Apple’s battle with Qualcomm indicates that the two longtime partners will part ways anytime soon. Apple and Samsung (NASDAQOTH:SSNLF) have been suing each other for years, yet the Korean tech giant is still one of its top suppliers. Therefore, Apple is likely trying to get Qualcomm to lower its chip prices and licensing fees instead of completely parting ways with the chipmaker.

  • [By Adam Levine-Weinberg]

    Put simply, Apple has over-exploited the goodwill of its customers, it has failed to generate significant revenues from newer products such as the Apple Watch and cannot demonstrate that genuinely innovative technologies desired by consumers are in the pipeline. Its brand has lost its luster and must now compete on an increasingly level playing field not just with traditional rival Samsung (NASDAQOTH:SSNLF), but a slew of Chinese brands such as Huawei and OnePlus in the smartphone market, Apple’s key source of profitability.

  • [By SEEKINGALPHA.COM]

    Among the major updates introduced by Facebook with regards to how it was going to monetize video was the revelation that it would be rolling out a dedicated video app for TV that would initially be available on Apple TV (NASDAQ:AAPL), Amazon Fire TV (NASDAQ:AMZN) and Samsung TV (OTC:SSNLF). Furthermore, it would be testing a new mid-roll ad format, which would give publishers the chance to insert ads into the clips after users engage (right now after they watch for at least 20 seconds).

  • [By SEEKINGALPHA.COM]

    What do we know about the 835? Well, first of all, it’s based on a 10nm process built on Samsung’s (OTC:SSNLF) 10nm FinFET process. This is impressive, as even Intel doesn’t yet have chips on 10nm out (these are likely to arrive by the end of the year).

  • [By SEEKINGALPHA.COM]

    Who are the likely candidates? This comes down those firms that we feel have the appetite and the size to add new deposition equipment products to their line, namely Lam Research (NASDAQ:LRCX) and Applied Materials (NASDAQ:AMAT). Or, LED/OLED consumers and producers that want to bolster their competitive advantage by going more vertical, namely Samsung (OTC:SSNLF) and LG Corporation.

best stocks to purchase today: Shutterfly Inc.(SFLY)

Advisors’ Opinion:

  • [By Chris Lange]

    When Shutterfly Inc. (NASDAQ: SFLY) released its fourth-quarter earnings report after the markets closed on Wednesday, the company said it had $2.63 in earnings per share (EPS) and $561.2 million in revenue. The consensus estimates had called for $2.84 in EPS and revenue of $586.4 million. In the same period of last year, it posted EPS of $3.57 and $548.1 million in revenue.

best stocks to purchase today: McEwen Mining Inc.(MUX)

Advisors’ Opinion:

  • [By Lisa Levin]

    In trading on Wednesday, basic materials shares fell by 1.24 percent. Meanwhile, top losers in the sector included Haynes International, Inc. (NASDAQ: HAYN), down 12 percent, and McEwen Mining Inc (NYSE: MUX), down 9 percent.

  • [By Lisa Levin]

    Basic materials shares climbed 2.06 percent in trading on Wednesday. Meanwhile, top gainers in the sector included Gold Resource Corporation (NASDAQ: GORO), and McEwen Mining Inc (NYSE: MUX).

  • [By Dan Caplinger]

    The stock market lost more ground on Friday, but major market benchmarks still managed to post healthy gains as 2016 drew to a close. Double-digit percentage gains for the year continued the bull market, and investors generally enjoyed positive momentum despite the sluggish levels of trading activity during the inter-holiday week. Nevertheless, some stocks suffered more precipitous declines, and U.S. Steel (NYSE:X), EnteroMedics (NASDAQ:ETRM), and McEwen Mining (NYSE:MUX) were among the worst performers on the last trading day of the year. Below, we’ll look more closely at these stocks to tell you why they did so poorly.

best stocks to purchase today: 8point3 Energy Partners LP(CAFD)

Advisors’ Opinion:

  • [By Travis Hoium]

    8point3 Energy Partners LP (NASDAQ:CAFD) and TerraForm Global Inc (NASDAQ:GLBL) were supposed to be two of the renewable energy industry’s leading yieldcos. 8point3 Energy Partners was supposed to be a way for First Solar and SunPower to fund solar projects in the U.S. and TerraForm Global was central to SunEdison’s growth plans abroad.

  • [By Travis Hoium]

    Leading the charge are two yieldcos — NextEra Energy Partners (NYSE:NEP) and 8point3 Energy Partners (NASDAQ:CAFD) — and utility company AES Corporation (NYSE:AES). Here’s a look at why they’re good dividend stocks to own today.

  • [By Laurie Kulikowski]

     We highlight CAFD as our top income oriented pick, a relatively safer, more conservatively-run company within our YieldCo coverage. The stock is yielding 7.5% on a FY16E DPS basis, and provides predictable income over the next several years, regardless of new projects beyond the initial portfolio. With two of the strongest companies in the solar industry serving as sponsors, enough liquidity on the balance sheet to fund growth-projects through mid-2016, and additional levers to pull in order to grow DPS if needed (e.g. payout ratio), we believe CAFD is undervalued.

  • [By J.B. Maverick]

    Recently added in January 2016 to the "strong buy" list at Zacks Investment Research, 8point3 Energy Partners LP (NASDAQ: CAFD) is a subsidiary firm with the support of major solar power companies SunPower and First Solar, and plenty of cash to fund 2016 growth projects. It should be well positioned to move forward in its business of acquiring and operating solar energy generation projects. In late January 2016, the stock is trading at $16.45, in the middle of its 52-week range of $10.26 to $21.15. The stock offers a dividend yield of 2.39%. It has been in a general uptrend since October 2015. Year to date in 2016, the stock is down 2.97%, which means it is weathering the market storm better than many other firms. With the backing of First Solar and SunPower, and a partnership agreement with Wells Fargo, 8point3 is in a stronger industry position than the majority of alternative energy companies.

  • [By Travis Hoium]

    Axiom Capital Management’s Gordon Johnson made a startling comparison this week, saying that yieldco 8point3 Energy Partners (NASDAQ:CAFD) looks a lot like the now bankrupt SunEdison and the recently bailed-out SolarCity. If he’s right and the yieldco is built on unstable ground, it could justify the stock’s drop over the last few months and be a warning for investors.

The Evolution Of NXP Semiconductors And The Future Of The Semiconductor Industry – Part 2

Note: In part 1 on this topic, I had explored why Philips (NYSE:PHG) had spun-off its semiconductor business and how large the Philips semiconductor business was at that time.

NXP Semiconductors (NASDAQ:NXPI) – Lessons from Adversity during The Private Years

In life, timing is everything. The time Philips picked to spin-off (September 2006) its semiconductor business turned out to be brilliant. On the flip side, Kohlberg Kravis Roberts & Co. and their business partners in private equity had a near disaster on their hands.

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Exhibit 1: Sales, Cost of Sales & Gross Profit before and after spin-off from Philips in September 2016 (Source: NXP Semiconductors and Philips filings, SEC.GOV)

Sales peaked in 2007 and then we had the great recession that, according to the US National Bureau of Economic Research (NBER), started in December 2007 and lasted until June 2009. Sales slid nearly 14% in 2008 and recorded another 30% decline in 2009. Overall, there was a 40% decline in sales in two years. Although, some of the sales decline in 2009 was attributable to the spin-off of certain businesses.

Exhibit 2: NXP Semiconductors Sales Per Segment (Source Company Filings)

M&P – Mobile & Personal Market

A&I – Automotive and Identification Market

MMS – Multimarket Semiconductors

IMO – IC Manufacturing Operations

In 2006 and 2007, NXP Semiconductors had significant revenue serving the mobile and personal products such as cellular handsets, portable media players and cordless phone. In fact, their mobile and personal business segment was their largest in terms of revenue. They were very optimistic about the future of the business given that cellular handsets and portable entertainment devices were converging and that created increased demand for handsets with application processing and video processing. They had acquired the cellular communications business of Silicon Laboratories Inc. to strengthen their position in the cellular business. But greater demand or market leadership does not always lead to greater profits.

Exhibit 3: NXP Semiconductors Income from Operations (IFO) (Source: Company Filings)

But the income from operations from their mobile products (M&P) unit was substantially less than that of automotive and identification or multimarket semiconductors.

The home market focused on semiconductor applications in the digital TV, set-top box and PC-TV markets. NXP already had leadership in the analog television market and they felt they would be able to leverage that leadership in the digital television business. There was substantial growth in this digital TV business partly because of the government mandate to include digital tuner in every television and the proliferation of digital broadcasts. But, the home business unit was posting operating losses and the analog TV business was in a steep decline.

In September of 2007, NXP had sold their cordless phone system-on-chip business to DSPG. In July 2008, they contributed their wireless activities to t he ST-NXP Wireless joint venture. NXP subsequently sold their stake to Ericsson and was renamed ST-Ericsson.

Around this time, NXP was beginning to realize that their operating strength was in automotive and identification markets. They were also able to see the long-term potential that these markets offered. Semiconductor applications in automotive and identification markets offer a number of advantages that NXP found very attractive. Let’s first consider the automotive market:

Automotive semiconductor market was growing at a consistent clip and at a higher rate than the overall semiconductor market. This was despite the slow growth in sales of automobiles. This was due to the following reasons: Increased integration of consumer electronics in cars Increasing focus on safety and comfort Increased governmental regulations like car safety obligations (tire pressure monitoring in the US) Replacement of mechanical devices with semiconductor

NXP Semiconductors had gained significant competitive advantages in the automotive sector due to the following reasons:

Long pro duct lifecycles Zero-defect requirements of auto manufacturers

In the identification business, these were the drivers of growth:

New governmental requirements for secure identity documents Increasing prevalence of cashless transactions This trend gave rise to Near-Field Communications (NFC) technologies More sophisticated supply chain management models This trend gave further impetus to use of Radio Frequency Identification (RFID).

NXP’s key customers in automotive and identification were:

Bosch Bundesdruckerei Continental (including former Siemens VDO) Gemalto G&D Oberthur Card Systems Smartrac Sony Visteon

Exhibit 4: NXP Semiconductors Sales Per Segment (Source: Company Filings)

Exhibit 5: NXP Semiconductors Income from Operations (IFO) 2007-2008 (Source: Company Filings)

In 2008, NXP Semiconductors sold the wireless operations of its Mobile & Personal business unit to STMicroelectronics (NYSE:STM). They took a 20% ownership in the resulting joint venture. In 2009, STMicroelectronics exercised its option to buy NXP’s 20% ownership in the joint venture. The remaining parts of the Mobile & Personal group was moved into their Multi-Market Semiconductor business.

In their Home business unit, NXP completed the combination of its CAN tuner module operations with those of Thomson. This resulted in a new venture (September, 2008) named NuTune, which is included in the home business unit. NXP had a 55% ownership in that unit. With NuTune, NXP expected to maintain a leading market position in analog TV while overall market for analog TV was in decline and thus extract profits.

Exhibit 6: NXP Semiconductors Sales Per Segment 2007-2009 (Source: Company Filings)

Div. Wireless – Divested Wireless Business Unit.

Exhibit 7: NXP Semiconductors Income from Operations (IFO) 2008-2009 (Source: Company Filings)

“You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”

– Rahm Emanuel, Mayor of Chicago.

In the midst of one of the deepest recessions of our times, the private equity owners showed an attitude that was very similar to the one echoed by Rahm Emanuel.

Rick Clemmer, CEO of NXP Semiconductors, wrote this in the annual report for 2009:

“In 2009, NXP’s flexibility and rigorous execution were critical factors in dealing competitively with the effects of the severe global economic and financial crisis. We took the challenges head-on, made many bold decisions, and will continue to do so.”

In 2009, NXP sharpened their focus on High Performance Mixed Signal (HPMS) Strategy. They were rigorously cutting costs by selling off wafer fabs and by redesigning their operations and were improving their capital structure by paying down debt. Their debt reduction in 2009 totaled $814 million that was fueled by $500 million in bond exchange and the rest in tender offer and other privately negotiated transactions.

At the end of 2009, they transferred their System on a Chip business to Virage Logic. This gave them the ability to focus their innovation efforts on HPMS while still having access to leading edge CMOS technol ogy without having to bear the R & D burden.

Despite the downturn of 2009, NXP reported some key successes:

RF Base stations, thanks to our ability to offer many of the key High Performance Mixed Signal products needed for complete solutions; Lighting, with our new driver and controller ICs for Compact Fluorescent and Solid State lighting that enable dimming and consumer-friendly form factors; Computing, where our GreenChip family is making it easier and more cost-effective for power supply manufacturers to comply with energy efficiency specifications such as 80PLUS and ENERGY STAR; Smart metering, home automation, white goods and digital power with some significant 32-bit microcontroller design wins with application specific microcontrollers based on the new ARM cortex M3 and M0 technologies; Consumer electronics, where our market leading Silicon Tuners and HDMI interfaces enable new features, connectivity, and convenience; Automotive, with our solutio ns enabling new features and capabilities such as HD radio, toll road pricing, and low power in vehicle networking and sensors; Medical applications, with ultra-low power radios that enable implantable devices and RFID solutions that ensure secure and cost effective delivery of pharmaceuticals; and Identification, where we won a supply contract for Chinese ePassport based on our SmartMX chips, where we were rated # 1 in the Contactless Transaction IC Vendor Matrix for the third year in a row and ranked # 1 in the Top 10 of the most influential foreign RFID brands from RFID World.

(Source: Company Filings)

In 2009, total sales were $3,843 million compared to $5,443 million in 2008. Out of the $1,600 million drop in sales, $792 million was due to the divestment of wireless activities in July 2008. The rest $808 million was due to the financial crisis and the weak economic environment. In the fourth quarter of 2009, NXP saw year-on-year growth for the first time in the last 6 quarters.

In 2010, with their focus on HPMS, NXP combined their digital television and set-top business with Trident, with NXP retaining a 60% ownership.

Click to enlarge

Exhibit 8: NXP Semiconductors Annual Revenue and Growth Rate 2009-2015 (Source: NXP Semiconductors Company Filings)

Note: The difference in the 2009 sales revenue between the exhibit 1 and exhibit 8 is due to the exclusion of the revenue from the sound systems business in exhibit 8.

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Exhibit 9: NXP Semiconductors Gross Margin (%) Before and After Spin-off from Philips (Source: NXP Semiconductors Company Filings)

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Exhibit 10: NXP Semiconductors – High-level Overview of Automotive and Identification Business (Source: Company Filings, Author Calculations)

For all the flaws of private equity, one thing that they bring to the table is a relentless focus on financial discipline. The following reasons helped NXP Semiconductors survive this severe downturn:

Focus on financial discipline led to complete revamp of the executive management team Richard Clemmer was brought in as CEO from Agere Systems, Inc. Karl-Henrik Sundstrom was brought in from Ericsson as CFO. Mike Noonen joined as Executive Vice President of Sales. He led global sales and marketing at National Semiconductor and is credited with leading gross margin expansion there. In total, 9 of the twelve members of the executive management were new after the spin-off from Philips. Focus on high-performance mixed-signal solutions Mixed-signal solutions were becoming more prevalent in sectors such as automotive. Renewed interest in automotive safety, growing trend of autonomous driving and increased importance on reducing emissions led to use of more software and se miconductor solutions in cars.

In December of 2010, NXP Semiconductors sold their sound solutions business which was a leading provider of speaker and receiver components for the mobile handset market to Knowles Electronics for $855 million in cash.

New Business Segments

In 2010, NXP Semiconductors reorganized into four reportable segments. Two of these segments were market-oriented business segments:

High-Performance Mixed-Signal Standard Products

The two reportable business segments were:

Manufacturing Operations Corporate

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Exhibit 11: NXP Semiconductors Revenue Mix in 2010 – Mixed Signal was 77% of total revenue (Source: Company Filings)

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Exhibit 12: Mixed-Signal Key Applications, Market Leadership Positions and OEM Customers across market Verticals (Source: Company Filings)

The adversity caused by the great recession of 2007-2009 helped the company find its focus and purpose in the business world. High-performance Mixed-Signal solutions were proliferating in automotive, identification, wireless infrastructure, lighting, industrial, mobile, consumer and computing. They were able to focus on their strengths and leverage their leadership positions in these markets.

Click to enlarge

Exhibit 13: Standard Products – Applications, Product Markets & OEM Customers (Source: Company Filings)

Strategy Analytics estimated the total market for automotive semiconductors to be about $16.7 billion in 2009. According to Strategy Analytics, NXP Semiconductors was the fifth largest supplier of automotive semiconductors worldwide in 2009. NXP had increased its market share from 5.8% in 2005 to 6.4% in 2009. In 2015, by acquiring Freescale Semiconductor, NXP was able to become the top vendor in the automotive semiconductor market with a 14.2% share (Source: Strategy Analytics: NXP Tops Automotive Semiconductor Vendor Rankings). I will look at the evolution of Freescale Semiconductor’s business in a subsequent article. If the top company in a sector controls under 15% of the market, there is probably room for further consolidation.

On August 6th, 2010, nearly four years after it went private, NXP Semiconductors priced its IPO and l isted on NASDAQ. The share price was $14 with 34 million shares offered and raising about $476 million (Source: NASDAQ). Lockup expiration was set for February 2nd, 2011.

Macro Trends Driving Growth

NXP Semiconductors is in the early innings of riding the following macro trends that will drive growth for many years to come:

Energy Efficiency Mobility & Connected Mobile Devices Security Healthcare

These macro trends bode well for Qualcomm (NASDAQ:QCOM) in the long term when they complete their acquisition of NXP Semiconductors.

The Lessons

Some of the management and investment lessons that we can learn from the exploits of NXP Semiconductors are:

Market share does not translate into profit share. Apple (NASDAQ:AAPL) is a great example where their market share in the smart phone market is lot less compared to the likes of Samsung (OTC:SSNLF), but they garner 80% of all the industry profits. There is likely to be more consolidation in the semiconductor industry given the low concentration ratio (Also, read more on this topic here – Market Concentration). NXP teaches us the importance of understanding revenue and operating income of individual business units and learning about macroeconomic trends. Be decisive, as Warren Buffett would say, don’t dawdle. And, never let a crisis go to waste.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Google Re-enters China Through The Back Door

The end is in sight for Google’s (NASDAQ:GOOG) (NASDAQ:GOOGL) seven wilderness years in China. With none of the theatrics that accompanied its voluntary withdrawal from the country due to web-search censorship in January 2010, Google is now firmly on a path not only to return to China but also to potentially seize a spot alongside Apple (NASDAQ:AAPL) as one of the most profitable tech companies there.

This is a likely outcome of Google’s announcement last week that it is entering with full force the global consumer hardware industry. Google Pixel mobile phones, Google Home artificial intelligence-enabled speakers, Google Daydream View virtual reality headsets – these will be the engines of Google’s revival in China. Based on what Google has so far revealed – including pricing – these products may find a large market among Chinese consumers.

The company has made no specific mention of plans to re-enter China. China’s government will not likely strew the ground with rose petals to welcome Google back.

Instead, Google can rely on China’s enormous grey market for electronics hardware to bring its products into China’s on-and-offline retail network. Hong Kong is usually the main transshipment point, not only because prices are lower than in the PRC, but the quality of hardware sold there is considered to be higher.

There is a precedent here. Apple took six years after the iPhone’s launch to ramp up its official sales channels in China by doing a deal with the main carrier, China Mobile (NYSE:CHL). By that point, an estimated 30m to 50m grey market iPhones were already in use in China.

Mobile phones running Google’s Android system already dominate the Chinese market, with about 300m sold this year. Most are sold unlocked without carrier subsidy. None can freely access Google search, storage or maps. The Google Pixel will likely have similar limitations.

But Pixel will have huge advantages no other Android phone can match of closely integrating the operating system and device hardware to optimize the performance of everything else on the phone.

All of China’s many Android brands will be impacted, but none more so than the current market leader, Huawei. It now dominates the high-end Android market in China, even more so with Samsung’s (OTC:SSNLF) recent woes. The Pixel will be priced to compete directly with Huawei’s flagship models.

It is not only in its home market of China that Huawei may get battered. It has also set great store on becoming the world’s leading Android phone brand in Europe. That will certainly be far harder to ach ieve now.

As it happens, Google’s announcement came at a time when just about everyone at Huawei, along with everyone else in China, was enjoying a week-long national holiday. They return to their desks this week to find the tech world disrupted. No one quite predicted Google would amp up its hardware strategy to this level.

Google had toyed around before, selling small volumes of its outsourced Nexus-branded mobile phone to showcase more of Android’s features. Huawei was one of the companies making Nexus phones. Google also bought Motorola’s mobile phone business in 2011 and unloaded it two and a half years later to China’s Lenovo (OTCPK:LNVGF) (OTCPK:LNVGY), a deal that has not worked out at all well for the Chinese company.

But this time, Google says it is not dabbling. It defines its future strategy as becoming, like Apple, a fully vertically-integrated hardware and software business, but one with the world’s most powerful system of proprietary voice and text-enabled artificial intelligence.

Google int! roduced three hardware products last week. More are certain to follow, including perhaps a mid-priced phone that will take aim squarely at China’s Xiaomi (Private:XI) (among others), already reeling from falling sales and an inability to crack the more lucrative higher-end Android market.

Google’s advantages run so deep they can seem unfair. Not only does it own and develop the Android software its competitors except Apple rely on, it also already has one of the world’s best and most recognizable brands. Also worth noting, Google now has about $70bn in cash, mainly sitting outside the US, looking for new markets to conquer.

As for the other new Google hardware products – the home speaker and virtual reality (VR) headset – the market seems ripe for the taking. Despite billions of government dollars invested into Chinese companies working on machine-learning, artificial intelligence and VR, none has come to market in any significant way.

Even if they now do, none can match Google’s enormous breadth, capability and experience in human-machine dialogue.

Though a success in the US, Amazon’s (NASDAQ:AMZN) Echo home speaker, which is capable of interacting with the human voice, is a non-entity in China. It does not understand spoken Chinese. Google, on the other hand, is quite adept at Chinese. While Google Maps, Gmail, Drive are all blocked in China, Google Translate is not.

Indeed, the Chinese government quietly stopped blocking it about a year ago. It’s the only one of Google’s major online offerings that can be readily accessed in China. The reason: Google Translate has become an essential tool for Chinese companies active internationally, as well as for many of the 150m middle class Chinese now vacationing abroad each year.

If Sundar Pichai, Google’s CEO, is correct, the world including China is moving from a “mobile-first to an AI-first world.” Google is already miles farther down this path than any Chinese company. It need not reestablish its search engine business in China to be a major force there.

As for China’s government, however it chooses to react to Google hardware products sweeping into China, its own aspirations to nurture globally-competitive indigenous tech companies proba bly just got a lot harder to achieve.

In the seven ye! ars since Google departed, China became in many areas even more of a tech Galapagos. Poised now to reenter China by the back door, Google should like the way the competitive landscape looks there.

If Google takes just 1 percent of the China Android market – and my prediction is it will do markedly better – it will have $2bn of annual revenues in China, a business larger, more valuable and unassailable than when it pulled out.

Peter Fuhrman is Chairman & CEO of China First Capital, a boutique investment bank

As published in the Financial Times

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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The Evolution Of NXP Semiconductors And The Future Of The Semiconductor Industry – Part 1

When Qualcomm (NASDAQ:QCOM) announced that it has agreed to pay $39 billion for NXP Semiconductors (NASDAQ:NXPI), I had a number of questions pop-up in my head.

What was the founding story of NXP Semiconductors? How did the company from the small country of Netherlands end up on top of the ultra-competitive semiconductor industry? What can we learn about the end markets served by NXP Semiconductors? How big was Philips Semiconductors before the spin-off to private equity? What do these lessons tell us about the future? Why was this the right time for Qualcomm to make this acquisition? Will this be a successful acquisition?

Birth of NXP Semiconductor

The road to NXP Semiconductors goes through Philips (NYSE:PHG). I had remembered Philips as a consumer electronics brand that was in decline. I remember the time when they used to manufacture and sell televisions using CRT. I had assumed that their days of glory wer e well behind them. I had assumed that they had been surpassed by the likes of Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF).

But, life is full of surprises. As it turns out, while researching NXP Semiconductor, I stumbled upon Philips. The company that, I thought, was left for dead is actually alive and well. More importantly, they are thriving. They have made medical and healthcare solutions their mission in life. It turns out our NXP Semiconductors is a spin-off from Philips.

In the end of 1998, Philips was sharpening its focus on medical systems while preparing for the introduction of the Euro. During that year, Philips semiconductors had total sales of NLG 7.1 billion (expressed in Netherlands Guilders). On a constant currency basis, sales had grown 5% compared to 1997. It had healthy volume growth of 15% that helped offset price erosion of 10%.

The division’s growth came from consumer systems and telecom ICs. Europe and Asia accounted for the most growth. The prospects for the PC market were already gloomy and the economic condition in Asia was deteriorating. In the semiconductor leadership ranking by Dataquest, Philips had climbed to number to the eighth position. Philips Semiconductors had nearly a 20% operating income.

Exhibit: Philips Semiconductors Annual Sales – 1994-1998 (Source: Philips 1998 Annual Report)

To get a good sense for the size of Philips Semiconductors, I have converted Guilders to U.S. Dollars using the exchange rate on an arbitrary date in each fiscal year.

Exhibit: Philips Semiconductor Annual Sales Expressed in USD Based on Exchange Rate on a Specific Date for Each Fiscal Year. (Source: Author, Exchange Rates)

In 1999, Philips was still optimistic about their prospects in the semiconductor industry. It was considered central to their business strategy. They had acquired VLSI Technology for $1 billion in June of that year. VLSI made custom and semi-custom integrated circuits for wireless communications, networking, consumer digital entertainment and advanced computing markets. In 1999, Ericsson accounted for 28% of the total revenue for VLSI.

Click to enlarge

Exhibit: VLSI Technology Annual Revenue, Gross Profit and Gross Margins (Source: Company Filings, SEC.GOV)

In 1999, Philips had set itself a goal of doubling the revenue of its semiconductor division from its 1998 level by the year 2002. This division had accounted for 12% of the total revenue for Philips. Their optimism for their semiconductor business can be best summarized by this statement in their 1999 annual report:

“First, the outlook for the semiconductors market for the immediate future is distinctly promising. Second, we are in an excellent position to benefit from the fast-growing market for wireless communications. And third, the benefits resulting from the rapid integration of VLSI into Philips will become fully apparent in 2000.”

Exhibit: Philips Semiconductor Annual Revenue in 1999 (Source: Company Filings)

Exhibit: Philips Semiconductor Operating Income (Source: Company Filings)

Philips had a good start to the millennium. Their semiconductor business had posted an exceptional sales growth of 55%. They expanded on their IC manufacturing facilities by MiCRUS Semiconductor 8-inch fab facility in the USA. Philips had become the number 1 supplier of semiconductor in-car entertainment, information systems and in-vehicle networking systems. This segment of the business would years later prove to be vital for NXP Semiconductor.

Exhibit: Philips Semiconductor Annual Revenue (Source: Philips Company Filings)

The year 2001 was a grim year for Philips where things start falling apart in the semiconductor business. The bursting of the dot.com bubble brought a severe downturn to its semiconductor and the overall technology sector. Mobile telecom and all IT-related businesses were severely affected. The 9/11 attacks in the U.S. further exacerbated the downturn. Its semiconductor business unit saw a 25% drop in revenues. The downturn in the semiconductor market can be best summarized by the table presented below.

Exhibit: Downturn in end-markets and semiconductors in 2001 (Source: Philips Company Filings)

After a tough year, management still had immense belief in their semiconductor business.

Exhibit: Philips Semiconductor Annual Revenue (Source: Company Filings)

Exhibit: Philips Semiconductor Operating Income (Source: Philips Company Filings)

The year 2002 was another tough year for Philips. This year, the business had a fairly nominal decline of 7% from the 2001 level. This was a hopeful sign that things would stabilize in their semiconductor business. The continued weakness and the high fixed cost structure of that business was beginning to have an impact on the management mindset. The management started laying out plans to decrease their fixed cost by closing their own fabrication plants and entering into partnerships and agreements with external foundries.

Exhibit: Philips Semiconductors Annual Revenue and Net Operating Capital (Source: Philips Company Filings)

Exhibit: Philips Semiconductors Operating Income (Source: Company Filings)

Exhibit: Worldwide Semiconductor Market (Source: Philips Company Filings)

Exhibit: Philips Semiconductors Utilization Rates (Source: Company Filings)

Philips semiconductor was able to increase its utilization by selling or closing some of their fabs.

Exhibit: Philips Semiconductors Annual Revenue (Source: Philips Company Filings)

Exhibit: Philips Semiconductors Sales and Net Operating Capital (Source: Philips Company Filings)

Exhibit: Philips Semiconductors Operating Income (Source: Philips Company Filings)

While Philips’ semiconductors division was on a roller coaster ride from 2000, their healthcare business was growing and gaining a leadership position.

In the year 2004, after years of losses in their semiconductor business, Philips dramatically switched strategic focus to becoming a market-driven healthcare, lifestyle and technology company. This was the year in which they introduced their new brand positioning – ‘Sense and Simplicity’. For customers this slogan stood for more comfortable, more intuitive, more straightforward relationship with technology and with Philips.

Exhibit: Philips Medical Systems Annual Revenue (Source: Company Filings)

Philips had also built a robust and broad portfolio of healthcare products by making some great acquisitions. Their strength and leadership position in healthcare around the globe had led them to the decision to focus more on healthcare. The aging demographics around the world also offered them an opportunity to profitably serve humanity with some great, simple to use products.

Exhibit: Aging Demographics Around the World – % of People Over Age 60 (Source: Philips Company Filings)

In 2005, Philips took steps to create a separate legal structure for its semiconductor division.

Exhibit: Philips Semiconductors Annual Revenue 2003-2005 (Source: Philips Company Filings)

Philips came to the conclusion that they did not need to own a semiconductor division to have access to state-of-the-art of semiconductor solutions. The Philips Semiconductor division was internally valued at EUR 8.3 billion or approximately $10.95 billion (Exchange Rate: 1 EUR = $1.32 December 30th, 2006).

On September 29th, 2006, Philips sold a majority stake in its semiconductor business to a private equity consortium led by Kohlberg Kravis Roberts & Co. The sale price was EUR 7,913 million (approximately $10,445 million based on exchange rate of December 30th, 2006). Philips took a 19.9% preferred share stake in the newly recapitalized entity for EUR 854 million. Philips management must have been very satisfied with the transaction, given the price they received compared to their internal valuation.

The new company was called NXP Semiconductors.

The following reasons led to the decision by Philips to divest its semiconductor business:

Highly cyclical nature of the semiconductor industry. High volatility in both revenue and earnings. Inability for Philips to attain a leadership position (in the top 3). High level of capital expenditure needed to sustain the semiconductor business. Leadership position in healthcare gave Philips a potential for steady sustainable growth in both revenue and profits.

For people, genes matter! It turns out genes matter in business too. NXP Semiconductors got a great start as a private company because Philips had patiently spent billions of dollar over decades building the business. They were a top supplier to the automotive sector well before they were taken private. In recent years, semiconductors and software have become critically important to the new generation of autos with the increased importance of autonomous driving and safety features.

Because of their long history and relationship with auto makers, NXP Semiconductors was able to take advantage of the latest trends in transportation. They had nearly $5.4 billion in revenue even before they went private. So, NXP was no newcomer.

Is Qualcomm (NASDAQ:QCOM) buying NXP Semiconductors at the top? The automobile sales in the U.S. is showing signs of peaking and may start to decline. It seems like large rebates and proliferation of 72-month financing seems to be keeping the auto market alive.

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Exhibit: U.S. Light Weight Vehicle Sales (Source: St. Louis Federal Reserve – FRED)

In my opinion, the highly cyclical nature of the semiconductor has not changed. Qualcomm was the most successful fabless semiconductor company in the world. Now, with the acquisition of NXP Semiconductors, it will have to make large capital investments on a regular basis to keep up with the changing technology and markets. Besides that, they do not have much experience in managing fabs. What impact will this have on Qualcomm’s future earnings? It’s going to be an interesting next few years for Qualcomm.

In part 2, I will look at how NXP Semiconductors has grown since it became a public company. How has the company evolved given that they had such a great start under Philips?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.