MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this annual report. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. The Company's actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause future actual results to differ materially from the Company's recent results or those projected in the forward-looking statements include, but are not limited to, the following: the cyclical nature of the semiconductor and electronic systems industries; capital requirements and the availability of funding; competition; new product development and technological change; manufacturing risks; order cancellations or reduced bookings by key customers or distributors; intellectual property developments, international events, currency fluctuations; problems in obtaining adequate raw materials on a timely basis; and the loss of key personnel. Unfavorable changes in the above or other factors discussed under "Risk Factors" listed from time to time in the Company's SEC reports, including in the Prospectus dated October 18, 1995 (pages 9 through 16), could materially affect the Company. The Company assumes no obligation to update the forward-looking statements or such factors.
Overview
The semiconductor industry slowdown experienced in 1996, as compared to previous years, continued in 1997, and the Company experienced increased competition and pricing pressure in its core product markets. According to trade association data, worldwide sales of semiconductor products (the total available market, or "TAM") increased 4.0% in 1997 over 1996, only a modest improvement over 1996 when the TAM decreased 8.6% compared to 1995. According to trade association data, the estimated market for products produced by the Company (the serviceable available market, or "SAM") (which prior to 1995 consisted of the TAM without DRAMs, microprocessors and opto-electronic products and commencing in 1995 and for all subsequent periods presented includes microprocessors as a result of the Company's production of x86 products) increased approximately 9.9% in 1997 over 1996, compared to an increase of 3.5% in 1996 over 1995.
The Company's net revenues for 1997 decreased 2.5% compared to net revenues for 1996 due in part to declining prices resulting from production overcapacity in the industry and strong competition in certain product families, as well as to the impact of the appreciation of the U.S. dollar on net revenues registered in European and Japanese currencies and a less favorable product mix.
Despite difficult market conditions and a 2.5% net revenue decline in 1997, from 1993 to 1997 the Company's net revenues increased from $2,037.5 million to $4,019.2 million. Such revenue gains were achieved despite the Company's absence during that period from the market for DRAMs (a commodity memory product) and, until the second half of 1994, from the market for personal computer microprocessors (such as the x86 family of products). According to trade association data, the TAM increased from $77.3 billion in 1993 to $137.2 billion in 1997, while the SAM increased from $61.5 billion in 1993 to $112.9 billion in 1997. The Company's share of the TAM increased from 2.6% to 2.9% during this period, while the Company's share of the SAM increased from 3.3% to 3.6%. Revenue growth within the Company from 1993 through 1997 was particularly significant for dedicated products, EPROMs and semicustom devices.
The Company's absence from the DRAM market contributed to the Company's outperformance of the semiconductor industry in 1996, when the Company's net revenues increased by approximately 16%. The Company gained market share in 1995 and 1996 against both the TAM and the SAM, but lost market share against both the TAM and the SAM in 1997. The Company attributes its lower market share in part to its marginal presence in the x86 microprocessor market and in the market for datacom products, two market segments that experienced sustained growth in 1997, and in part to fierce competition and a market slowdown in sales of hard disk drives and set-top boxes, two market segments in which the Company has strong market positions. The Company believes that recent difficult market conditions have led certain of its competitors to redirect their marketing focus and manufacturing capacity toward products that compete with the Company's products. The Company believes increased competition in its core product markets is generating greater pricing pressure, increased competition for market share in the SAM, and a generally more challenging market environment for the Company.
The Company continues to focus on differentiated ICs and analog ICs. Differentiated ICs (which the Company defines as being its dedicated products, semicustom devices and microcontrollers) accounted for approximately 57% of the Company's net revenues in 1997, compared to approximately 59% in 1996. Such products foster close relationships with customers, resulting in early knowledge of their evolving requirements and opportunities to access their markets for other products, and are less vulnerable to competitive pressures than standard commodity products. Analog ICs (including mixed signal ICs), the majority of which are also differentiated ICs, accounted for approximately 49% of the Company's net revenues in 1997, compared to approximately 46% in 1996 while discrete devices accounted for approximately 14% of the Company's net revenues in both 1997 and 1996. In recent years, these families of products, in particular analog ICs, have experienced less volatility in sales growth rates and average selling prices than the overall semiconductor industry. However, the difficult competitive situation in the semiconductor market in 1997 has led to price pressures also in these families.
