1. IXYS Corporation (NASDAQ: IXYS) – the case for A SHORT

2. Investment Thesis Industry Analysis Company Overview Drivers Valuation
Table of contents
Investment Thesis
Industry Analysis
Company Overview
Drivers
Valuation
Conclusion

3. Investment thesis
IXYS’ inability to capture future market growth, costly acquisition strategy, and increased price competition from competitive consolidation create a pessimistic investment that has been overvalued in the market.
Recommendation: Sell FY 2017 Beg Price: $ Price Target: $10.65 (10.6% upside)
RISKS
The market believes that IXYS is able to maintain growth consistent with the market, but this is not true due to its inferior product mix and slowing demand
A growth strategy focusing on acquisitions over R&D creates inefficient integration and has risk of product failure
Strong price competition in majority of product groups, catalyzed by consolidation of competitors
Daim
CATALYSTS
Strong overall incoming demand due to Internet of Things (IoT) wave
Strong, long-term relationships with suppliers
Low leverage risk, despite aggressive acquisition strategy

4. OVERALL SEMICONDUCTORS PORTER’S FIVE FORCES ANALYSIS
Industry analysis
OVERALL SEMICONDUCTORS
Mature industry with typically slow growth relative to the US economy and can be characterized by rapid innovation in a highly diversified and globalized setting
U.S. supplies 50%+ of semiconductor demand (increasing production in parts of Asia)
Market for semiconductors recently growing with increased electronics consumption (IoT), greater industrial applications, and growing demand in Asia
Highly R&D intensive products with firms investing on average 30% of their sales in product innovation
PORTER’S FIVE FORCES ANALYSIS
New Entrants
Substitutes
Supplier Bargaining
Buyer Bargaining
Industry Rivalry
LOW
VERY LOW
MEDIUM-HIGH
HIGH
VERY HIGH
High startup costs and the industry is extremely capital intensive because new semiconductor companies must build a production plant
Product is used in many different applications (expertise/reliability) and its functions are not replicable
Depends on type, but machine suppliers and foundries have high power bc of specificity, while raw material suppliers have low because of similar products
Demand for electronics is increasing, concentrated in subindustries, and the thread of backward integration
Compete solely based on performance, so companies must constantly innovate to maintain market share and stay afloat
Caroline

5. KEY OPERATIONAL DRIVERS
Industry analysis
KEY OPERATIONAL DRIVERS
Cyclic Nature
Strong profits  invest in new manufacturing capacities  ramp up causes oversupply  in aggregate, drop in prices  shut off capital spending  shortage  higher prices
Result is cyclic years of A) strong acquisitions & B) drops in prices
Internet-of-Things Demand
Network of physical objects that feature internet connectivity, and the communication that occurs between (a result of increasing needs for efficiency and connected devices)
33.1% CAGR to 2021 (Source: RNR Market Research)
Caroline
(Source: McKinsey & Co.)
(Source: The Hacker News)

6. Company overview Specialized semiconductor company
Designing, developing, manufacturing & marketing niche semiconductors
Founded in 1983 by Dr. Nathan Zommer
Diversified industries (industrial, transportation, computer, medical, etc.
BUSINESS STRATEGY
Aggressive acquisition strategy instead of R&D investment (2001, 2009, 2013, 2015)
Outsources over 1/3 of production to Samsung Electronics & other producers
Shifting of overall product mix away from Power Semiconductor division towards Integrated Circuits (IoT chips)
Caroline

7. ANNOTATED PERFORMANCE YTD
Company overview
KEY FINANCIALS
CORE MANAGEMENT
Market Cap ($USD)
410.9M
Enterprise Value ($USD)
297.6M
Revenue (TTM)
319M
EBIDTA (TTM)
40M
Price/Earnings (TTM)
22.4
Stock Price ($USD)
11.91
Dr. Nathan Zommer (Chairman, CEO, CTO)
Founder, strong grasp on R&D in industry, pioneer in niche semiconductors, previous experience at GE + Intersil, holder of 75 patents, & thought leader in niche semiconductor industry
Mr. Uzi Sasson (CEO, President)
Experience in financial and operational management, strong understanding of tax/accounting processes in the semiconductor industry, & balances strong technical founder with operational skills
ANNOTATED PERFORMANCE YTD
Introduces new “Wespack” rectifier diode
Increased margins, earnings growth
Caroline
Second straight Q with Rev increase
New 2.4 GHz receiver for IoT applications
Announces new 3.2kV Thyristor
(Source: Google Finance)

8. INFERIOR PRODUCT MIX & SLOWING DEMAND
COMPANY DEVELOPMENTS & DRIVERS
INFERIOR PRODUCT MIX & SLOWING DEMAND
Market currently expects IXYS to capture proportional level of future growth in semiconductor demand (IoT wave)
We argue that IXYS will capture a much smaller percentage of this upcoming wave, and will actually decrease in the long-term
For buyers, consolidation of product vendors is key because it lowers costs
IXYS offers a much smaller product mix
As demand grows/diversifies in the future, buyers will switch to vendors that can bundle to lower costs
IXYS’ recent book-to-bill ratios indicate that demand is slowing for IXYS vs. the industry
Ajay

9. COMPANY DEVELOPMENTS & DRIVERS
ACQUISITION VS. R&D STRATEGY
IXYS pursues A&D strategy (2001, 2009, 2013, 2015) to keep up with changes in the industry, and relies less on R&D
Higher variance and risk associated with integrating the technology
Gives less flexibility and options to react to market changes quickly, as cash flows are locked up in A&D
Examples: manufacturing capacity, marketing/sales
R&D to Sales
PRICE COMPETITION DUE TO COMPETITIVE CONSOLIDATION
IXYS has tried to shift its product mix away from PS and towards ICs to better match the large growth in demand (Internet-of-Things) there
However, they have seen strong price competition as bigger IC competitors have consolidated
Larger consolidated companies are able to better cut costs and charge lower prices
Smaller companies typically follow suit to retain customers
Ajay

10. Valuation (Discounted cash flow)
COST OF CAPITAL
Fama-French 3 Factor Model to estimate cost of capital
Unlevered beta is with respect to the Russell proxy for the market and forecasted using comparables’ betas and Bloomberg adjustment
MRP is aggregate forecasts of U.S. CFOs sampled by Duke CFO journal
MRP adjusted for 30-year time horizon of project and replaces the survey’s 10-year TB with 30-year TB
3% deviation between CAPM and 3-Factor
Sohum

11. DCF OUTPUT & SENSITIVITY ANALYSIS
Valuation (Discounted cash flow)
DCF OUTPUT & SENSITIVITY ANALYSIS
Bear
Base
Bull
$9.95
$10.65
$11.95
IoT infrastructure stunned
Faster than expected growth of Asian fabs
-16.5%
Unable to capture market growth
Acquisition strategy plagued by failures
-10.6%
Stronger than forecasted market growth
More efficient acquisitions for adding scale and product offers
+.3%
Sohum

12. Questions?