Tech company management at Applied Materials, Cisco Systems and NVIDIA spoke of trends that bode well for a new era of technology in the not-too-distant future.
Last week the technology sector showed strong earnings results, with four out of five companies beating earnings. More importantly, several companies talked of trends that infer a new wave of technology on the horizon that starts with investment in computer chip factories and arrives at a new era, the “Internet of Everything.”
Applied Materials, Inc. (AMAT.O) expects investment in semiconductor equipment to be up in 2014. President and CEO Gary Dickerson said, “The foundries (companies that make chips designed by their customers) remain the biggest component of wafer fab equipment, as they ramp new factories to fulfill demand for advanced mobile chips and race to introduce new technology to enable devices with higher performance and longer battery life. We expect foundry investment to grow 10% to 20% this year, which is very positive for Applied, as we have our strongest share positions at these customers, and continue to make gains.”
Dickerson also sees growth in display. In regard to mobile, he stated, “In mobile, screen resolution is becoming an important differentiator, and we see significant growth in higher definition screens that require low temperature polysilicon backplanes. Consequently, we expect multiple Gen 6 LTPS (Low Temperature Poly-Silicon) factories to be built in the next 12 to 18 months to support this demand.” He also added the following comments related to TV display: “We expect the TV unit growth rate to be low single-digits for the year ahead. However, average TV sizes are growing at 1½ to 2 inches annually, which is significantly higher than historic norms. This is driving area growth in the 15% range, which we believe is sufficient to support investment in three new Gen 8.5 factories.”
Applied’s belief in these growth opportunities is backed by its investments, such as adding 500 new R&D engineers. CFO Bob Halliday said, “To grow, we are aggressively rebalancing our spending towards semi and display products and technical field resources, focused on disruptive high-value products. This quarter, we increased R&D to 64.3% of R&D plus SG&A, which was up from 57% a year ago.”
John Chambers, Chairman and CEO of Cisco Systems, Inc. (CSCO.O), also made comments supporting the idea that mobile screen resolution is becoming increasingly important when he forecasted that, “Two-thirds of the load on mobile devices in just a year will be video.” However, the opportunity for his company is a new era he coins the “Internet of Everything,” and he said, “The size of those markets is $19 trillion. That’s a profit potential. That doesn’t count all of the infrastructure underneath of it.”
When discussing different components of this new era, Chambers said, “If you look at the Internet of Everything, purely the consultancy piece, over the next several years, is a $1 trillion market that we can address, and so you begin to look at us looking at this as a major new revenue scenario, versus the consultancy services, but more importantly pulling through our whole product architectures.” He also added that there is “$1.5 trillion in retail alone, $2.9 trillion in terms of manufacturing. So you can imagine the conversations that we’re having with the leaders in this, and we don’t go in there selling them routers and switches.”
EXHIBIT 1. S&P 500: Q4 2013 EARNINGS SCORECARD — COMPANIES REPORTING THE WEEK OF 2/14/14
Source: Thomson Reuters I/B/E/S
One company that is benefiting from these trends for increased demand in higher computing power, improved display and interconnectivity is NVIDIA (NVDA.O), which reported a 33.3% earnings surprise, driven by high-end PC gaming. Senior Director of Investor Relations at NVIDIA, Chris Evenden, said, “Revenue came in well above our outlook, driven by high-end PC gaming. Our GeForce business benefited from the launch of many excellent graphically intensive games, including Call of Duty Ghosts, Assassin’s Creed 4 Black Flag and Batman Arkham Origins. In Asia, Blade and Soul has proved hugely popular.” He also added that, “The PC gaming market is now larger than console gaming or mobile gaming, according to DFC Intelligence. The same firm estimates revenue from graphics-intensive PC games will approach $20 billion this year.”
The ways that we think of how we interact with computers is also changing. NVIDIA hints that the “Internet of Everything” is on the horizon, and it is already starting to have an impact on the auto industry. Evenden referred to statements from Audi when he said, “Ricky Hudi, Audi’s Chief Engineer Electrics/Electronics, noted that 90% of the innovation in automobiles today involves his field of electrics and electronics. NVIDIA’s automotive initiative is focused squarely at this car revolution. As we start fiscal 2015, we have 64% of the PC discrete graphics market, 81% of work station graphics units, and Tesla in pilot projects at 44% of all HPC sites.”
EXHIBIT 2. S&P 500: 2014 YOY EARNINGS GROWTH ESTIMATES
Source: Thomson Reuters I/B/E/S
While tech company management is optimistic about the future, it may take a while for the sector as a whole to get there, as analysts see technology earnings growth underperforming that of the index for three of the next four quarters, as seen above in Exhibit 2. Over this period, it will be important to watch leading indicators, such as increases in headcount, to evaluate the progress toward this new era of technology.
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