The king of China’s semiconductor IP, whether VeriSilicon shares can turn losses into profits

In the chip industry, Dai’s three brothers and sisters-Dai Weimin, Dai Weijin, and Dai Weili are well-known and legendary figures in the industry. The three brothers and sisters graduated from the University of California, Berkeley, and later became successful entrepreneurs in the chip industry. They founded well-known chip companies such as Meiman Electronic Technology and Silicon Valley Vision.

Today, Meiman Electronic Technology has been acquired by Aojie Technology, and Silicon Valley Vision has been acquired by American Kent Corporation. The trajectories of the three Dai brothers and sisters have coincided with another chip company-VeriSilicon. Dai Weimin and Dai Wei were appointed as senior executives, and after Aojie Technology acquired Meiman Technology created by Dai Weili, they also became customers of VeriSilicon.

VeriSilicon’s shareholder background lineup is strong: IDG, Intel, and Xiaomi funds are all listed, and Gong Hongjia, the second largest shareholder of Hikvision (002415) and Fullhan Micro (300613), also holds shares; not only that, the National Integrated Circuit Industry Fund (Big Fund) currently holds 7.98% of the shares and is the third largest shareholder of the company. With so many well-known shareholders, VeriSilicon’s special industry status is evident.

However, in terms of performance, its performance is not as “glamorous” as its background: Since 2016, the situation of consecutive losses has not been reversed. VeriSilicon’s positioning is very clear, and it is determined to be a “service provider” for chip design companies. What is so special about this “service” that is valued by so many well-known investors? Does VeriSilicon’s consecutive years of losses mean that its development prospects need to be discounted?

“Chip light design” is indispensable

Under the wave of globalization, the division of labor in the chip industry chain has become more and more clear, and the concept of “chip light design” has emerged.

In the 1980s and 1990s, Japan’s bubble economy burst, and its semiconductor industry began to decline. At the same time, Taiwan’s semiconductors have risen. Manufacturers headed by TSMC and UMC have undertaken the wafer manufacturing process, marking the further refinement of the global chip industry chain. Since then, chip design, packaging, and manufacturing are no longer completed by one chip factory, but can be subcontracted to different professional manufacturers.

The division of labor directly gave birth to an unprecedented special demand, that is, the technical connection and matching demand between the chip design plant and the fab responsible for manufacturing. It is this demand that has become the background for the birth of chip design service companies.

Chip design service companies are like “middlemen”. They help standardize chip definitions, plan chip architecture, verify chip logic, and successfully create a smoother communication channel between chip design and manufacturing plants. This is the predecessor of “Chip Light Design”.

At the time of the third major transfer of global semiconductors, that is, the rise of China’s semiconductor industry, the importance of “chip light design” is even more self-evident:

As our terminal products become more complex and diverse, the difficulty of chip design is rapidly increasing, leading to a sharp increase in research and development costs. It is increasingly difficult for chip design companies to successfully develop a chip. Thus, the “light design” model was born. It allows design houses to “load light” and focus more on core processes such as chip definition, architecture, software or algorithms, while front-end work such as circuit design and verification, and back-end work for communicating with fabs are all outsourced to design service companies .

Therefore, in a nutshell, the essence of chip design services is “outsourcing.” This kind of “outsourcing” is usually divided into two parts:

One is the traditional “man-in-the-middle” business, that is, through a series of tasks such as defining chip specifications and verifying chip logic, the customer’s requirements for chips are transformed into a layout that can be used for chip manufacturing, so that the fab can update the “instructions” according to the layout. Make chips well.

The other is “IP authorization”, that is, chip design service providers authorize IP to customers and provide supporting software. The so-called IP is a verified and reusable module on the chip. It has specific functions such as graphics processing, voice processing, and video encoding and decoding. It is loaded on the chip and can be “plug and play”. This process is similar to building blocks, and the chip IP is like building blocks. Assemble the pre-built parts to quickly build a complete model.

Obviously, to be able to achieve “IP authorization”, chip service companies must have core technology, and this technology must be verified by reality, and can be quickly put into use and used repeatedly. This requires extremely high technical strength of manufacturers. Just like the hot “IP” in the film and television industry, it will be difficult to form without perennial accumulation and careful cultivation. Once formed, IP is like a “toll bridge”, bringing a steady stream of intellectual property income to the enterprise.

From the perspective of the development of China’s semiconductor industry, a large number of local start-up chip design companies have emerged, providing a rapid development soil for the chip design service industry. In 2015, there were 736 chip design companies in my country, and in just three years, this number has increased to 1,698. Most of these companies have less than 100 people. They have limited design resources. If they want to survive in the ever-changing market, they can only concentrate on the development of algorithms and modules they are good at, and outsource the areas they are not good at to service providers.

In fact, not only start-up companies have an urgent need for outsourcing chip design, but other manufacturers do the same. For mature chip companies, they have many product lines and it is difficult to invest enough resources in each link of each product. Therefore, they will find service providers to help R&D part of the link. For system integrators and Internet manufacturers based on the development of their own chips, such as Huawei and Xiaomi, they have little accumulation in chip design and lack of experience, and they also need help from service providers.

However, like other semiconductor industries, on the track of chip design services, it is currently showing an early start overseas and mature development, while mainland China started late and is struggling to catch up:

Most Chinese companies are positioned in the role of “middleman”, wandering between chip design and manufacturers to meet customer customization needs. There are very few vendors in China with IP authorization capabilities. Overseas companies led by ARM, Synopsys, and Kent Electronics monopolize about 60% of the market.

In 2018, British and American companies accounted for the vast majority of the top 10 semiconductor IP vendors in the world. Only one mainland company was shortlisted, and that was VeriSilicon.

Compared with traditional chip service companies, VeriSilicon’s unique IP authorization capabilities demonstrate its core competitiveness. Its IP covers graphics, video, digital signal, neural network processing, etc., and has been widely used in the Internet of Things, automotive, industrial and other fields. Among them, VeriSilicon’s graphics and digital signal processor IP market share are among the top three in the world. With advanced neural network processor IP, VeriSilicon ranked 21st in the world among AI chip companies in 2018 and 3rd in mainland China.

At the same time, its “fab neutrality” position also constitutes another core competitiveness. Unlike many chip service companies that only bind to one fab, VeriSilicon has always maintained a “neutral” position and established cooperative relationships with multiple fabs. This approach of not favoring one over the other is only to provide customers with more diversified choices. Combining the process characteristics and production capacity of different fabs, the company can tailor more “personalized” services for customers.

The unique IP authorization is building VeriSilicon’s increasingly stronger technological moat, and the neutral position of the foundry has added to VeriSili’s customized service capabilities. Under two factors, it is not surprising that VeriSilicon is favored by many well-known customers. In its customer network, there are not only outstanding domestic semiconductor companies such as Huawei, Ziguang Zhanrui, and ZTE, but also global semiconductor giants such as Intel, Bosch, and STMicroelectronics, as well as global Internet companies such as Facebook, Google, and Amazon.

Huge R&D is gradually showing scale effect

The chip service has a bright future, but it is not easy to do it. From VeriSilicon’s performance over the years, we can see how difficult it is to operate.

From 2016 to 2019, VeriSilicon’s revenue rose from 1.08 billion to 1.34 billion, showing an upward trend. But year by year, its performance still fluctuates. Among them, the company’s revenue fell by 2.08% in 2018. From the perspective of profit, despite the significant reduction in losses, as of 2019, the net profit is still a loss of 41.17 million.

Tracing the profit back to the gross profit margin, we found that the customized service, which accounts for about 70% of VeriSilicon’s revenue, has a gross profit margin of less than 20%. Although the gross profit margin of the IP licensing business is above 90%, the proportion is still not high.

Tracing back to the root causes of performance fluctuations, it is not difficult to speculate that VeriSilicon’s customized services are still on the eve of the release of scale effects. In order to gain access to advantageous customer groups, VeriSilicon will undertake many difficult and time-consuming projects, and make appropriate profits to accumulate customer resources. Compared with Taiwanese manufacturers that started early, such as Worldchip and Creative Electronics, VeriSilicon’s labor costs are higher, indicating that it is still in the process of cultivating project experience.

At the same time, the neutral position of the foundry makes it closer to customers, but it is unable to achieve economies of scale within a single supplier through strategic investment, centralized procurement, etc., thereby saving procurement costs.

Therefore, in the area of ​​customized services, if we want to achieve stable growth in revenue and profit, we can only cultivate a wide customer network and wait for the real scale effect to be released. And this process does not happen overnight, VeriSilicon still needs to accumulate precipitation step by step.

On the other hand, in the IP licensing business, VeriSilicon’s gross profit margin is as high as 90%, but the scale is small, accounting for less than 1/3 of the company’s total revenue. Therefore, although VeriSilicon’s IP business ranks sixth in the world, VeriSilicon’s market share is only 1.8% compared with the world’s number one ARM, which has a strong market share of 44.7%.

Behind every “explosive” chip IP is the accumulation of years of research and development. From VeriSilicon’s R&D expenses, we can see how difficult its IP cultivation process is. Every year, the company invests more than 300 million yuan in research and development, accounting for more than 30% of its total revenue. Such a huge amount of R&D investment, both in absolute value and in the relative value of the proportion of revenue, ranks among the best in the entire A-share market.

In the future, VeriSilicon disclosed that it will invest 370 million yuan in IP research and development, and use investment or mergers and acquisitions at the right time to continue to expand its IP resource base and to be in line with top IP vendors.

Three major transfers of the global semiconductor industry have highlighted the trend of division of labor in the chip industry chain. In the “outsourcing” wave of chip design, VeriSilicon has been at the forefront with its international leading technology and unique service model, and has been favored by top customers such as Intel, Google, and Huawei. However, scale-up of customized services is not easy, and technical IP training is not overnight. In time, VeriSilicon is expected to accumulate and become the world’s top chip design service provider.