Worlwide Data Traffic To Increase 40% Year-to-Year: What Are Implications For SemiCon Sector?
March 8, 2010 - The Wall Street Transcript has just published Semiconductors, Semiconductor Equipment & EDA Software Report offering a timely review of the Semiconductors sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
View Details of This Special Report
Recent Wall Street Transcript Special Reports.
Anil Doradla joined William Blair & Company in 2008 as an Analyst covering communication semiconductors, wireless communications and electronic components. He previously had 15 years of experience in the wireless industry, including positions in consulting, R&D, strategy, product design and international operations. Mr. Doradla worked with SBC Labs, now AT&T Labs, participating in several key initiatives that shaped both SBC Wireline and Cingular. He received a master's degree in electrical engineering from Virginia Tech, where he was part of the mobile and portable radio research group. He also holds an MBA from the McCombs School of Business at the University of Texas at Austin.
TWST: What is the current status with the communication semiconductors?
Mr. Doradla: Just as the Internet has revolutionized the way we communicate, the proliferation of the Internet across wireless and wireline systems is revolutionizing the comm. semi industry, too. Although both these worlds have their own specific dynamics, at a higher level, a couple of trends are shaping and will continue shaping the industry by separating the winners from the losers.The first trend relates to integrating multiple chips into a single chip. Solutions that were offered across two, three or more chips are now being offered on a single chip. These chips are commonly referred to as "system on a chip," or SoC.
Over the past couple of years, companies adopting these trends have seen significant payoffs. Successful companies, such as Starent Networks, now part of Cisco (CSCO), Cavium Networks, FFIV (FFIV), NetLogic Microsystems and Riverbed (RVBD), have one thing in common: All their products are application aware. These companies have successfully taken market share from their plain-old-vanilla system counterparts and have created businesses that are rich in ASPs and margins. To illustrate the point of application awareness, let us take an Internet router supplied by companies such as Cisco and Juniper (JNPR). The main function of a router is to route the Internet traffic to the appropriate destination. In the past, these routers would not be aware of what types of traffic were being routed and, as a result, would treat a VoIP session using Skype, video download from YouTube and plain Internet browsing in an identical fashion.
Furthermore, router companies would reach out to the Intels and AMDs (advanced micro devices) of the world, and employ generic semiconductor chips to route the traffic. While this approach worked well in the past, given the explosive growth in the Internet - both in terms of volume and richness in applications - it is not efficient. The industry finally realized that employing techniques that could peer into Internet packets and understanding the nature of the traffic - whether it was a voice, video or browsing - resulted in routers that were able to prioritize traffic, and provide greater security and quality of service. While Starent Networks, now part of Cisco, was a pioneer in application-aware routers for the wireless industry, Cavium Networks and NetLogic Microsystems are pioneers in developing programmable microprocessor routers for enterprise and data center markets.
TWST: You mentioned Qualcomm, Broadcom and some other large players in this space. Do smaller companies have an opportunity to succeed, or do they eventually reach a point of being acquired?
Mr. Doradla: While smaller pure-plays have an opportunity to succeed, in most cases, especially if they have unique innovations, they are acquired by larger companies. I think pure-plays can scale up, but after a point, their ability to replicate success across multiple domains poses a challenge. Overall, we believe smaller players will continue to be sources of technological innovation, while bigger companies evolve towards being more of system integrators.
TWST: What is it that sets these companies apart?
Mr. Doradla: All these companies have incorporated principles of SoC and application awareness in their products - two key elements that I highlighted a short while ago. Other than Qualcomm, each of these companies are sub-2 billion-market-cap companies that have created their own niche and specialization. In the case of Cavium and NetLogic, they are riding the wave of greater data adoption over the Internet, enterprises and wireless networks. According to Cisco, over the next several years, worldwide data traffic will grow 40% year-over-year. This means that there will be great demand for microprocessors that are designed to process the traffic in routers and switches.
Cavium and NetLogic, in our opinion, are the leading pure-plays in this space and will continue benefiting from this trend. Both these companies have significant exposure to Cisco, the leader in the data networking world. Additionally, these companies have been witnessing increased demand from wireless infrastructure companies, such as Alcatel-Lucent (ALU), Huawei, and Nokia-Siemens (NOK) for 3G and 4G products.
The remainder of this 29 page Semiconductors, Semiconductor Equipment & EDA Software Report can be immediately viewed by purchasing online.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Special Issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
For Information on subscribing to The Wall Street Transcript, please call 800/246-7673