PLD Market Marching Ahead

In my most recent post on the programmable logic device (PLD) sector, I discussed speculation that Intel would acquire Xilinx (NASDAQ:XLNX). Programmability in chip design has become a key factor that is driving a large portion of the semiconductor business at the moment. James Detar of Investor’s Business Daily reports that after a decade of slow growth, programmable chip makers are on the march. Let’s take a closer look.

There are several factors driving this growth. PLDs are key parts of network gear as well as smartphones. Using PLD chips, companies can easily reprogram or change the program that runs them. They allow easy upgrades to keep up with changes in business model or technical standards. PLD is a better strategy than application-specific integrated circuits (ASICs) and application standard specific products (ASSPs). Raymond James analyst Hans Mosesmann says that about $15 billion–$20 billion of the chip market formerly in the camp of ASICs is set to be captured by PLD players.

Another key factor is the increasing pricing pressure on electronic devices and the need to design a product for less money and more functionality. Take the smartphone sector, for example. Every month, a new model of handset is launched that tries to include as many features as possible at throwaway prices. And if you take into account the number of vendors in the game, the number of smartphones launched in a year can be mind-boggling, and the pressure on the component ecosystem is intense. For more about why PLDs are gaining ground in handsets, read this article.

Xilinx and Altera lead the overall PLD market, with Lattice Semiconductor in a distant third but a key player in the mobile segment as it makes less expensive PLDs for smartphones. However, according to Jag Bolaria at Linley Group, the scene is now changing with Xilinx and Altera also lowering their prices. In April, Xilinx unveiled a new PLD chip to include an ARM core to boost the performance of Xilinx chips in communication devices such as smart phones.

Ticonderoga Securities analyst Apurva Patel believes the PLD market will grow two to three times the semiconductor industry growth rate in 2010. He expects PLD sales to increase as much as 37% this year, to a record $4.5 billion from $3.28 billion last year. In 2000, 70% of PLDs went into routers, switches, and other communications products, but now they’re expanding into autos and other products while telecom market accounts for just 50%.

Xilinx is the leader in the PLD market with annual revenue of $1.83 billion in fiscal 2010, slightly above $1.8 billion in 2009. Net income for fiscal 2010 was $357.5 million or $1.29 per share versus $361.7 million or $1.31 per share last year. Fourth quarter revenue was up 34% y-o-y and 3% q-o-q to $529 million, and net income was $148.5 million or $0.54 per share.

Xilinx paid $44 million in cash dividends and spent $125 million on share repurchases, ending the quarter with $1.4 billion in cash. Early this month, the company said it plans to offer $520 million worth of convertible senior notes which would be due in June 2017. IT intends to use most of the proceeds for share repurchases.

For the first quarter, Xilinx expects revenue to increase 5%–9% q-o-q to $555 million–$577 million. The stock  is currently trading around $24.85 with market cap of about $6.8 billion. It hit a 52-week high of $28 on April 21.

Altera (NASDAQ:ALTR) is close behind Xilnx with annual revenue of $1.2 billion in 2009. Its first quarter revenue was $402.3 million, an increase of 52% y-o-y and 10% q-o-q. Net income was $153.2 million or $0.50 per share, compared with $44.0 million or $0.15 per share last year and $103.0 million or $0.34 per share last quarter. Altera ended the quarter with $1.7 billion in cash.

For the second quarter, Altera expects revenue to grow 10%–12% to $442.5 million–$450.6 million. Also in April, Altera announced its next-generation line of PLDs called Stratix V to boost speeds of routers and switches. The stock is currently trading around $24.30 with market cap of about $7.33 billion. It hit a 52-week high of $27.48 on April 21 after its earnings report.