When will customers start buying all those AI chips?

It’s the best and worst time to be in semiconductors right now. Silicon Valley investors are once again owning up to their namesakes and taking a deep interest in next-generation silicon, with leading lights like Graphcore in the United Kingdom hitting unicorn status while weirdly named and stealthy startups like Groq in the Bay Area grow up.

Growth in chips capable of processing artificial intelligence workflows is expected to swell phenomenally over the coming years. As Asa Fitch at the Wall Street Journal noted yesterday, “Demand for chips specialized for AI is growing at such a pace the industry can barely keep up. Sales of such chips are expected to double this year to around $8 billion and reach more than $34 billion by 2023, according to Gartner projections.”

Yet, all those rosy projections don’t suddenly make the financial results of companies like Nvidia any easier to swallow. The company reported its quarterly earnings last week, and the results were weak — pretty much across the board.

The Exit: an AI startup’s McPivot

Five years ago, Dynamic Yield was courting an investment from The New York Times as it looked to shift how publishers paywalled their content. Last month, Chicago-based fast food king McDonald’s bought the Israeli company for $300 million, a source told TechCrunch, with the purpose of rethinking how people order drive-thru chicken nuggets.

The pivot from courting the grey lady to the golden arches isn’t as drastic as it sounds. In a lot of ways, it’s the result of the company learning to say “no” to certain customers. At least, that’s what Bessemer’s Adam Fisher tells us.

The Exit is a new series at TechCrunch. It’s an exit interview of sorts with a VC who was in the right place at the right time but made the right call on an investment that paid off. 

Fisher

Fisher was Dynamic Yield founder Liad Agmon’s first call when he started looking for funds from institutional investors. Bessemer bankrolled the bulk of a $1.7 million funding round which valued the startup at $5 million pre-money back in 2013. The firm ended up putting about $15 million into Dynamic Yield, which raised ~$85 million in total from backers including Marker Capital, Union Tech Ventures, Baidu and The New York Times.

Fisher and I chatted at length about the company’s challenging rise and how Israel’s tech scene is still being underestimated. Fisher has 11 years at Bessemer under his belt and 14 exits including Wix, Intucell, Ravello and Leaba.

The interview has been edited for length and clarity. 


Saying “No”

Lucas Matney: So, right off the bat, how exactly did this tool initially built for publishers end up becoming something that McDonalds wanted?

Adam Fisher: I mean, the story of Dynamic Yield is unique. Liad, the founder and CEO, he was an entrepreneur in residence in our Herzliya office back in 2011. I’d identified him earlier from his previous company, and I just said, ‘Well, that’s the kind of guy I’d love to work with.’ I didn’t like his previous company, but there was something about his charisma, his technology background, his youth, which I just felt like “Wow, he’s going to do something interesting.” And so when he sold his previous company, coincidentally to another Chicago based company called Sears, I invited him and I think he found it very flattering, so he joined us as an EIR.

Cisco to acquire silicon photonics chip maker Luxtera for $660 million

As networks get put under increasing pressure from ever-growing amounts of data, network equipment manufacturers are facing huge challenges to increase data transmissions speeds over further distances. As a premiere networking equipment company, Cisco wants to be prepared to meet that demand. Today, it opened up its checkbook and announced its intent to acquire Luxtera for $660 million.

Luxtera, which was founded in 2001 and raised over $130 million, will give Cisco a photonic solution for that data networking problem. Rob Salvagno, head of Cisco’s M&A and venture investment team sees a company that can help modernize Cisco’s networking equipment.

“That’s why today we announced our intent to acquire Luxtera, Inc., a privately-held semiconductor company that uses silicon photonics technology to build integrated optics capabilities for webscale and enterprise data centers, service provider market segments, and other customers. Luxtera’s technology, design and manufacturing innovation significantly improves performance and scale while lowering costs,” he wrote in a blog post announcing the acquisition.

Photonics uses light to move large amounts of data at higher speeds over increased distances via fiber optic cable. Cisco sees this as a way to future-proof customer networking requirements, while keeping them on Cisco equipment. “The combination of Cisco’s and Luxtera’s capabilities in 100GbE/400GbE optics, silicon and process technology will enable customers to build future-proof networks optimized for performance, reliability and cost,” Salvagno wrote.

While Cisco has been acquiring its share of high-profile software properties in recent years including AppDyanmics for $3.7 billion in 2017 and Jasper Technologies for $1.4 billion in 2016, it also acquired Israeli chip designer Leaba Semiconductor for $320 million in 2016 for its advanced chip making capability.

Today’s announcement would seem to build on that earlier purchase as Cisco tries to modernize its hardware offerings to meet increasingly stringent demands inside large-scale data centers.

The acquisition is subject to the typical regulatory scrutiny, but Cisco expects it to close in its fiscal year 2019 Q3. It reported its Q1 2019 earnings in November.

Nvidia’s limited China connections

Another round of followups on Nvidia, and then some short news analysis.

TechCrunch is experimenting with new content forms. This is a rough draft of something new – provide your feedback directly to the author (Danny at [email protected]) if you like or hate something here.

Nvidia / TSMC questions

Following up on my analyses this week on Nvidia (Part 1, Part 2) , a reader asked in regards to Nvidia’s risk with China tariffs:

but the TSMC impact w.r.t. tariffs doesn’t make sense to me. TSMC is largely not impacted by tariffs and so the supply chain with NVIDIA is also not impacted w.r.t. to TSMC as a supplier. There are many alternate wafer suppliers in Taiwan.

This is a challenging question to definitively answer, since obviously Nvidia doesn’t publicly disclose its supply chain, or more granularly, which factories those supply chain partners utilize for its production. It does, however, list a number of companies in its 10-K form as manufacturing, testing, and packaging partners, including:

To understand how this all fits together, there are essentially three phases for bringing a semiconductor to market:

  1. Design – this is Nvidia’s core specialty
  2. Manufacturing – actually making the chip from silicon and other materials at the precision required for it to be reliable
  3. Testing, packaging and distribution – once chips are made, they need to be tested to prove that manufacturing worked, then packaged properly to protect them and shipped worldwide to wherever they are going to be assembled/integrated

For the highest precision manufacturing required for chips like Nvidia’s, Taiwan, South Korea and the U.S. are the world leaders, with China trying to catch up through programs like Made in China 2025 (which, after caustic pushback from countries around the world, it looks like Beijing is potentially scrapping this week). China is still considered to be one-to-two generations behind in chip manufacturing, though it increasingly owns the low-end of the market.

Where the semiconductor supply chain traditionally gets more entwined with China is around testing and packaging, which are generally considered lower value (albeit critical) tasks that have been increasingly outsourced to the mainland over the years. Taiwan remains the dominant player here as well, with roughly 50% of the global market, but China has been rapidly expanding.

U.S. tariffs on Chinese goods do not apply to Taiwan, and so for the most part, Nvidia’s supply chain should be adept at avoiding most of the brunt of the trade conflict. And while assembly is heavily based in China, electronics assemblers are rapidly adapting their supply chains to mitigate the damage of tariffs by moving factories to Vietnam, India, and elsewhere.

Where it gets tricky is the Chinese market itself, which imports a huge number of semiconductor chips, and represents roughly 20% of Nvidia’s revenues. Even here, many analysts believe that the Chinese will have no choice but to buy Nvidia’s chips, since they are market-leading and substitutes are not easily available.

So the conclusion is that Nvidia likely has maneuvering room in the short-term to weather exogenous trade tariff shocks and mitigate their damage. Medium to long-term though, the company will have to strategically position itself very carefully, since China is quickly becoming a dominant player in exactly the verticals it wants to own (automotive, ML workflows, etc.). In other words, Nvidia needs the Chinese market for growth at the exact moment that door is slamming shut. How it navigates this challenge in the years ahead will determine much of its growth profile in the years ahead.

Rapid fire analysis

Short summaries and analysis of important news stories

Saudi Arabia’s Crown Prince Mohammed bin Salman. FETHI BELAID/AFP/Getty Images

US intelligence community says quantum computing and AI pose an ’emerging threat’ to national security – Our very own Zack Whittaker talks about future challenges to U.S. national security. These technologies are “dual-use,” which means that they can be used for good purposes (autonomous driving, faster processing) and also for nefarious purposes (breaking encryption, autonomous warfare). Expect huge debates and challenges in the next decade about how to keep these technologies on the safe side.

Saudi Arabia Pumps Up Stock Market After Bad News, Including Khashoggi Murder – A WSJ trio of reporters investigates the Saudi government’s aggressive attempts to shore up the value of its stock exchange. Exchange manipulation is hardly novel, either in traditional markets or in blockchain markets. China has been aggressively doing this in its stock exchanges for years. But it is a reminder that in emerging and new exchanges, much of the price signaling is artificial.

A law firm in the trenches against media unions – Andrew McCormick writes in the Columbia Journalism Review how law firm Jones Day has taken a leading role in fighting against the unionization of newsrooms. The challenge of course is that the media business remains mired in cutbacks and weak earnings, and so trying to better divide a rapidly shrinking pie doesn’t make a lot of sense to me. The future — in my view — is entrepreneurial journalists backed up by platforms like Substack where they set their own voice, tone, publishing calendar, and benefits. Having a close relationship with readers is the only way forward for job security.

At least 15 central banks are serious about getting into digital currency – Mike Orcutt at MIT Technology Review notes that there are a bunch of central banks, including China and Canada. What’s interesting is that the trends backing this up including financial inclusion and “diminishing cash usage.” Even though blockchain is in a nuclear winter following the collapse of crypto prices this year, it is exactly these sorts of projects that could be the way forward for the industry.

What’s next

More semiconductors probably. And Arman and I are side glancing at Yelp these days. Any thoughts? Email me at [email protected].

This newsletter is written with the assistance of Arman Tabatabai from New York

Sony posts $2.1B profit as PlayStation sales keep on growing

Sony’s PlayStation business continues to come on leaps and bounds after a 27 percent increase in gaming revenue helped the company record a $2.1 billion profit in Q2.

The PlayStation division is Sony’s top performer and once again that was the case, carding $4.9 billion in sales during the quarter with an operating profit of $800 million for the division, that’s up around 65 percent year-on-year. That caused Sony’s operating profit to jump by 59 percent as revenue rose six percent to $19.6 billion.

Outside of gaming, Sony saw big gains in sales within financial services, its second-biggest revenue generator which jumped 27 percent, and semiconductors, up 11 percent, although losses for its troubled mobile unit widened to reach $265 million for the quarter while mobile revenue declined by 32 percent year-on-year.

The Sony is so bullish about the rest of the year that it has raised its full-year operating profit forecast to 870 billion JPY, that’s $7.7 billion and an increase of about 30 percent to the original target.

That’s partly down to the strong performance of its PlayStation but also the impact of its $2.3 billion buyout of EMI Music Publishing, as pointed out by Bloomberg. Sony previously held a 39.8 percent share in the venture but the deal — which just got the regulatory green light in Europe — will see the value’s of original stake increase while adding additional revenue from the business. Tellingly, those EMI gains represent 55 percent of the additional revenue Sony is forecasting to hit this financial year.

Virus shuts down factories of major iPhone component manufacturer TSMC

Apple touts the cybersecurity of its iPhone, but less can be said for the exclusive manufacturer who makes the processor for the iPhone.

Semiconductor foundry TSMC, or Taiwan Semiconductor Manufacturing Company, was hit by a virus late Friday night, which forced it to shut down several factories according to Debbie Wu at Bloomberg. The virus and the shutdown were confirmed by TSMC representatives.

It is not clear at this time which factories were hit, or whether those factories were producing the iPhone’s main processor. Apple is expected to unveil new iPhones this fall, and supply chain disruptions in the critical month of August could have significant adverse consequences for the rapid availability of the new phone before the key Christmas holiday.

TSMC has grown to become the largest independent semiconductor foundry in the world, with profits last year of $11.6 billion. The company has benefitted from partnerships with smartphone companies like Apple, which produces the designs for its own A-series chips and then contracts out their manufacturing to foundries.

TSMC is a critical partner for the launch of the new iPhone. It announced earlier this year that it had begun volume production of 7mm chips, which will drive performance while limiting energy usage.

The origins of the virus are not known, although a statement by the company to Bloomberg said that it wasn’t introduced by a hacker.

Cyberattacks are nothing new to the island nation, which has increasingly faced sophisticated cyberattacks, mostly originating from China, which holds deep antipathy for Taiwan’s president Tsai Ing-wen. Taiwan’s government websites have sustained 20 million cyberattacks per month, with the bulk believed to be originating from China. Jess Macy Yu at Reuters reported earlier this summer that Chinese cyberattacks had grown more successful, even as their total volume has declined. Taiwan’s local elections will be held later this year in November, and the number and intensity of attacks is expected to increase as the date approaches.

Alongside Foxconn, TSMC is one of Taiwan’s most important and profitable companies, and is an obvious target both due to its wealth and scale, as well as its centrality in the increasingly fraught cross-straight relations between China and Taiwan. China has made becoming the world leader in semiconductors a national priority, and companies like TSMC are deeply competitive with mainland foundries.

That’s the paranoid context for many tech executives in Taiwan, and while the culprit of this particular virus is not yet publicly known, eyes and fingers are already beginning to point in one direction.

More information about the attack is expected to be available next week.

Samsung forecasts slowing profit growth for Q2, missing analyst estimates

Samsung has put out earnings guidance for its Q2 which indicate quarterly growth at its slowest for more than a year — as a lack of new ideas to sell high end smartphones drags on the company’s bottom line.

The electronics maker is reporting estimated profit of 14.8 trillion Korean won (USD$13.2BN) on revenue of 58 trillion Korean won (USD$51.9BN) for the quarter.

Samsung’s expectation just misses an average estimate of 14.9 trillion won from 18 analysts polled by Thomson Reuters, and shares in the company are down just over 2 per cent on the earnings guidance news.

The Q2 forecast compares to profit of 15.64 trillion Korean Won (USD$14BN) on revenue of 60.56 trillion Korean Won (USD$54.2BN) for its Q1 — when Samsung reported a record operating profit off the back of growth in its semiconductor business plus the early global launch of its flagship Galaxy S9 smartphone.

Despite that Q1 high, it had prepared investors for a Q2 slowdown — warning in April of challenging conditions ahead, citing weakness in the display panel segment and a decline in profitability on the mobile side, amid rising competition in the high-end smartphone segment.

At the same time, the global smartphone market is shrinking — even in China, the erstwhile growth engine for smartphones after Western markets saturated. So Samsung’s smartphone business is facing a dual squeeze from shrinking sales opportunities and rising competition from the likes of China’s Huawei and Xiaomi — two rival Android device makers that have been carving out additional marketshare.

Meanwhile, Samsung’s main rival for high end smartphone profits, Apple, beat analyst estimates of iPhones shipments in its Q2 in May, despite an earlier miss in the holiday quarter — showing the staying power of its high end smartphone brand and a positive, if slow burn, response to how it’s iterating its mobile business, with the iPhone X.

Returning to Samsung, the positive story for the company — continued record growth for its chip business — is still not filling the smartphone-shaped profit hole in its books, even as restarting momentum in the smartphone segment is looking increasingly tough in a very tough market

The Galaxy S9 is a solid smartphone but serving up more of the same equals diminishing returns in the fiercely competitive Android space. And investors look circumspect, with shares in Samsung down around 12% this year.

One wild card on the device innovation front: Samsung has been teasing its R&D work to build a foldable smartphone for multiple years. Ahead of Apple’s iPhone X flagship launch last year Samsung suggested it was targeting 2018 to finally release a product.

However this is also a risky strategy given the obvious manufacturing challenges, and — beyond that — question marks over whether a foldable smartphone is really the type of mainstream innovation that could fire up major momentum among high end handset buyers or be viewed as a niche gimmick.

 

These are the competitive pressures driving automakers to accelerate new tech adoption

The transformations that companies like Tesla, Uber and Lyft bring to the auto industry are changing more than just the ways car companies think about drivetrains and ownership, and its opening doors for new ways of thinking about the entire mobility industry.

That’s the word from some of Israel’s top investors from the stage at our TechCrunch Tel Aviv event.

Every aspect of the auto industry is being reshaped by technological innovation and it’s opening the traditionally closed supply chains that car makers have relied on for at least a century creating more opportunities for startup vendors in areas like sensors, software, services, and yes, even electrification.

For Michael Granoff, the founder of Maniv Mobility, Chemi Peres, the founder of PItango, and Yahal Zilka, the co-founder of Magma Venture Partners, there are at least four areas of opportunity for startups (especially startups hailing from Israel’s innovation nation) to penetrate the trillion dollar mobility market.

Artificial intelligence, new business models, electrification, and enabling sensor technologies are all areas where Israeli entrepreneurs have launched businesses, and they’re all technologies in high demand from established automakers and the upstarts that would challenge them.

“It’s not just automotive, but what Israel can bring to that,” says Zilka. “The big thing in automotive was the introduction of semiconductors. Over the next 15 to 20 years it’s going to be artificial intelligence.”

How those technologies come to market for mobility used to depend on an established supply chain, where tier 2 technology vendors would sell to tier 1 suppliers and then be integrated into the cars by the big brand original equipment manufacturers like Ford, GM, BMW, Daimler, Toyota, and the like.

Tesla’s entrance into the market and the competitive threats that Uber, Lyft, Gett and others pose to the entire automotive business model have pushed these companies to shake things up, making investments in technology for the automotive industry far more attractive.

“Only when your business is effected by the digital wave of internet and connectivity, only then do you start moving,” says Peres.

For Israel, that means a window has opened for enabling technologies like sensors, artificial intelligence, data processing, and new business models.

These new companies with names like Autofleet, otonomo, Innoviz Technologies, Oryx Vision, and Via are already establishing themselves as competitors or suppliers helping to transform the existing order. 

For Peres and the other investors, automakers should expect to see even more radical changes ahead as technologies push further transformations to industrial infrastructure, the urban environment and consumer demand.

“The old generation was that you create a production facility… [and] you create masses of products, but it’s going to be completely disrupted,” says Peres. “You’re going to have much less cars and cars are going to be much more sophisticated in their services.”

Cars, Peres says, are moving to the elevator pitch — where vehicles on streets are used like elevators in buildings. “It will eliminate ownership, reduce operational costs, reduce energy costs, and will be able to get a great service and save the over 1 million people that are killed every year and the 50 million people that are injured,” Peres says.

Those changes will impact more than just the auto industry. Manufacturing will be disrupted by additive manufacturing technologies, and, eventually, advancements in nanotechnology that will allow for self-assembling machines.

Eventually, these changes are going to force more action from regulators as they grapple with how to address the increasing demand that will come with cost depreciation, according to Granoff. 

“There’s going to be a pricing mechanism that is going to be required to modulate the use of roadways,” he says. 

For Peres, the future may not be the use of roadways at all. “It doesn’t need to be cars on roads. It can be flying robots,” says the Pitango co-founder.

No matter what the ultimate solution is, given the Israeli entrepreneurial ecosystem, it’s a good bet that at some level there’ll be Israeli technology behind the wheel of each innovation.

 

Mythic launches a chip to enable computer vision and voice control on any device

 Hardware that responds to voice commands is already out there and probably in your hand or house right now. Whether it’s a smartphone, smart speaker or wearable, it has to connect to the cloud to deliver answers to your questions. Now, a startup called Mythic (formerly known as Isocline) is launching a chip and software that will change all that, putting voice control, computer vision… Read More

Qualcomm Signs New Patent Licensing Deals In China

qualcomm shutterstock Qualcomm announced today that it has inked new patent licensing deals in China with smartphone manufacturers Beijing Tianyu Communication Equipment and Haier Group. The San Diego-based chipmaker has made a series of similar agreements over the past two months as it recovers from an antitrust investigation by the Chinese government. Read More