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Xilinx and Altera are the two main participants of the Semiconductor sub-industry, part of the
Information Technology industry. The duopoly puts out the 80 percent of the market that allow
the companies to work with high margins.

Their main products are PLDs (Programmable Logic Devises), integrated circuits, applied in
manufacturing. PLDs¶ special feature is that they have unspecified function at the time of
manufacture. They get programmed to perform a specific function only after the manufacturing
process. An important variant of PLDs is Field Programmable Gate Arrays (FPGA) containing
logic blocks and a hierarchy of interconnects that can be set to change the configuration or
design a new configuration once the chip is already manufactured. These integrated circuits are
applied in many fields of the industry; aerospace, automotive, electronics, computing, medical
and communications markets. Recently wireless communication markets have had the fastest
growing demand for PLDs.

A decade earlier Xilinx was the pioneer at cutting edge technology, it invented FPGA device as
well. Altera emerged from smaller semiconductor producing companies and last year it almost
reached Xilinx in market share. The once pioneer competitor had stopped continuous
developments and let space for Altera the technologically newer fast growing opponent.

Recently Xilinx has invested considerable amount of money into R&D and starts to reach
technologically Altera, but the market share the other gained changed the market positions. The
duopoly is set and because there are only 2 main players they gain thick margins on their
production.

Examining the financial performance of the 2 companies allow us to have closer picture about
the duopolistic semiconductor industry. In the frame of the analysis the main financial ratios are
presented, that cover the whole operation of the companies. Management success is measured by
ROE, ROA and Asset turnover, profitability is examined by margin analysis, liquidity by quick

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ratio, solvency by debt to equity ratio, finally, the trend of growth is presented by the annual
growth rates.

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Return on assets is an indicator of how profitable a company is relative to its total assets. ROA
gives an idea about the management¶s efficiency at using its assets to generate earnings. The
higher is the ratio the better. Examining the ROA of the companies during 2006-2010 period the
major difference between their ratios is that Xilinx has more stable performance, it is increasing
continuously while Altera has jumps and falls in its ROA ratio. Even it is currently above its
competitor, based on its trend it can perform worse in the future. Compared to the industry
performance they perform substantially better, that means that the other small participants must
have problems with reaching profit on their assets despite of their small size.

   

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Return on equity is the amount of net income returned as a percentage of shareholders

equity. It measures a corporation's profitability by revealing how much profit the company
generates with its shareholders¶ money. ROE shows the same pattern in case of the leading
companies as ROA. Altera has highly volatile profitability while Xilinx is more balanced but on
average have lower results. Especially in the last three years it has lagged behind Altera. The

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industy is well below the two leaders, Xilinx has 7.5% advantage compared to the industry
average, Altera has currently 22%.


 
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Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue.
Higher value represents a better result. The ratio reflects pricing strategy as well. Low profit
margin companies tend the have higher asset turnover, high profit margin ones have lower
turnover. This interpretation of the ratio is well visible in the semiconductor industry. Both
Xilinx and Altera have nice turnover ratios, but the industry average is even higher, because the
small market participants can¶t reach as high profit margin as the industry leaders.

   

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'uick ratio is an indicator of a company's short-term liquidity, it measures whether the company
is able to meet short-term obligations in time with liquid assets. Higher value represents better
position but above a certain level it reflects that the company has too many liquid assets that
decrease its profitability. Xilinx with its 7 quick ratio value has not better liquidity then Altera.
Both companies are stable none of them are endangered by potential bankruptcy. The below 2
industry average shows that the rest of the market has liquidity problems, many small companies
are likely to suffer from the fear of disability of meeting their short-term obligations.

 
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The ratio shows the financial leverage of a company, it indicates how much debt the company is
using to finance its assets compared to its equity. The higher the ratio is the more difficult is to
stay solvent for the company. Long term debt has more consequences; once, involves interest
payment that has effect on the liquidity of the firm, second at maturity the bonds or loans
(depending on the form of debt) should be repaid or replaced that require good prospective from
the company. If the results of the firm worsen or its future is not that bright its debt might not be
prolonged or replaced by creditors. Then the company is in trouble.

Regarding to debt to equity ratio Xilinx and Altera are just in opposite trends. Altera has
decreased its ratio that means it paid back most of its debts while Xilinx increased its
indebtedness, most likely it needed excess financing to its R&D activity to catch up in
technology to Altera. The 40% debt to equity of Xilinx is still not unhealthy but further increase

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in not desirable. The industry average is well above them at 54% level that shows the small
participants are with their back to the wall.

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Gross margin reflects the company¶s profitability just at the level of total revenues minus direct
costs and it leaves out the effect of indirect costs that are more company specific. Therefore the
gross margin is more industry specific measure at least for companies in similar size. This is the
case for Xilinx and Altera, their PLD production provided this firm size and of course highly
efficient operation results 65-70% gross margin that is a promising starting point. For the whole
industry the much more moderate margin level can be the result of small and inefficient
competitors beside this two market leaders.

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Ebitda margin shows the profitability of a company, the ratio is free from the effect of interest
rate, tax, depreciation and amortization, therefore it is a good measure to compare the core
profitability of different companies free form firm specific features. In Gross margin Xilinx and
Altera are quite close to each other, but on the level of Ebitda margin the difference starts to be
more visible. Altera¶s ratio is more volatile but in the last 3 years it mainly over-performed
Xilinx. The difference can be the result of higher efficiency of Altera¶s production, or lower cost
on workforce, marketing or R&D. Looking deeper into the P&L of the company¶s it can be
stated that in the recent years Xilinx started to spend substantial amount of money on R&D, most
likely to make up its leeway, therefore the lower Ebitda margin can be partly the result of this
effort. Compared to Altera¶s 46% Ebitda margin the industry average is much lower, that means
all the small companies work close to breakeven, and they might not stay long-term in the
industry.

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Finally to see the growth dynamism of the firms it is worth to examine the annual Ebitda growth
that shows the companies¶ ability to expand before tax, interest rate, depreciation and
amortization effects. Altera has again volatile results, but its trend line is steep upward sloping.
In the last three years it expanded substantially even if that increase was not the most stable.
Actually Altera must have less diversified customer base in different segments than Xilinx that
can cause the volatile results at most of its ratios. If the industry a semiconductor producer serves

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with PLDs is cyclical than its demand will be also cyclical. But in the case of customers from
cyclical industries it is good to have different type of customers and since PLDs usability is
really wide range Xilinx must have more diversified client portfolio, therefore more stable
results.

In case of the industry the growth dynamism is visible but it is clearly the effect of the two big
fish, the small counterparts¶ results set back the total industry ratio.

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Based on the financial ratios it can be stated that both Xilinx and Altera are profitable and
financially healthy companies. They rule the market and the rest of the semiconductor industry is
just struggling in the shelter of these firms. The small competitors might not be long-term on the
market or they operate close to breakeven.

The future of Altera and Xilinx is not as bright as their present, because the increase of PC usage
where PLDs are primary used is declining behind mobile devices and tablets. Currently neither
Xilinx nor Altera is able to produce applicable chips for these new tools, their only choice is to
start focus on R&D activity and develop those new little parts that make them inevitable for the
new mainstream technologies as well.


 , All financial data is from Capital I', all charts are created based on its numbers. For
semiconductor industry aggregated data were available from 2007.

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