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Making a Wide Moat in Chips

A focus on high-performance analog semiconductors and being first to market bring pricing power to Maxim integrated, says CFO Bruce Kiddoo.

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Brian Colello: Hi, I'm Brian Colello, semiconductor analyst at Morningstar. With us today is Bruce Kiddoo, CFO of Maxim Integrated Products.

Maxim is one of the few wide-moat firms that we cover on the semiconductor team. They're particularly strong in high-performance analog chips, a business that serves a variety of industrial and communications customers, that's able to generate high-margin business. Bruce, thanks for joining us.

Bruce Kiddoo: Thank you.

Colello: Help us understand a little bit the high-performance analog space for our listeners. We have a lot of proprietary designs that involve some--there are long product lives in these cycles, but you are able to maintain good prices and good margins. Talk to us about how Maxim is able to do that.

Kiddoo: All right. The high-performance analog business has really been the core business for Maxim for over 25 years. It's all about performance. It's all about innovation. At Maxim, we've always, we felt, had the best engineers, and we've always been focused on analog. So we continuously generate the best products which our customers want, with the very highest performance.

We have proprietary manufacturing processes which, again, allow us to generate unique products that no one else can. And therefore we're paid for that.

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In the industrial side, you do have very long product life cycles. We have products that are still shipping that we introduced 20 years ago. So from that point of view, this is a business that provides very long-term, predictable cash flows for us.

In addition, it's a market that continues to grow. Whether you're talking about IP security cameras, whether you're talking about the Smart Grid, whether you're talking about automotive. These are industrial, high-margin businesses where there is continued growth in this business.

Colello: Sure, and it sounds like this is a business where there are going to be new incremental opportunities going forward into the future, five, 10 years out, where you are able to maintain that high pricing, being the first to market.

Kiddoo: Absolutely. People are always going to pay for high performance. And to the extent that that allows them to differentiate their products, they're willing to pay us for that IP that we deliver to them.

Colello: OK. And at the same time as well, about half of your business is what I'll call high-volume chips, so consumer-related markets, handsets, PCs, things like that. Talk to us a little bit about that business and the difference with the high-performance analog business.

Kiddoo: Right. I think in that business, a little bit you have to make sure we understand it's still high performance. These are still very innovative products. The difference is the end markets that they go into have a much quicker cycle time.

So whereas in the high performance, the industrial and communication businesses, those are businesses where you may have five- or 10-year product life cycles. On consumer and computing, you may have 12- to 24-month product life cycles, and therefore you need to be able to react faster. Your development cycles have to be faster, and really you have to have a lot more agility.

I think the other key area that Maxim has really differentiated itself from our peers is the ability to integrate all of these high-performance cores into a single chip. And what that gives you, of course, is lower-cost, lower-power, lower-price, and therefore it's a strategy, which on the digital side, has been ongoing for a number of years. It's actually unique to the analog side and it's a strategy which we believe us, at Maxim, have a time-to-market advantage. From competitors that can copy us, we're ahead of them from a time to market. And there's many competitors who just don't have the IP, the broad IP, and haven't organized themselves to be able to develop these integrated solutions.

Colello: OK. And going along with that, talking about the PC market as well, I know you're particularly a player in power management for battery lives and perhaps back lighting solutions, things like that. Tell us what you're seeing in the PC market right now, specifically. We're hearing a lot of talk about possible upgrade cycles and some buzz around Windows 7. Tell us about how that business is shaping up, going forward.

Kiddoo: Right. So this is a business where, as you said, our emphasis is really on battery management, power management for display, and selective areas, power management on the motherboard. This is a business that came back very strongly. We had very strong growth the last two quarters, in the June and the September quarter.

It's normally seasonally slow in the December quarter, and so that's what we're seeing, as well. We're not seeing significant inventory out there in the channel right now, so from our point of view, it's a business that has recovered. It recovered strongly, and it's now just going through a normal seasonal cycle.

Colello: OK. That's great. Well, Bruce, thank you for joining us today. I'm Brian Colello with Morningstar, and thanks for watching.

Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.