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Applied Micro Circuits Corporation Announces Use of TSMC 7-Nanometer Tech

By Ashraf Eassa – Jul 11, 2016 at 7:00PM

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This small data-center chipmaker plans to adopt TSMC's 7-nanometer manufacturing technology.

Image source: Applied Micro. 

Applied Micro Circuits (NASDAQ: AMCC), a company that made it onto the radars of tech investors as one of the first vendors of ARM (ARMH) server chips, put out a press release today announcing that it will adopt Taiwan Semiconductor Manufacturing Co.'s (TSM 0.15%) 7-nanometer chip technology for future products.

Additionally, the company also provided an update on its upcoming third-generation X-Gene family of products. Let's take a closer look at these announcements and what they might mean to investors.

Nothing surprising about 7-nanometer adoption

TSMC is currently in mass production on its 16-nanometer manufacturing technology, the technology that Applied Micro's third-generation X-Gene is built on. The chip manufacturer is expected to transition to its next-generation manufacturing technology -- 10-nanometer -- early in 2017.

The 10-nanometer node, however, is expected to be short-lived for TSMC. The node will likely be adopted for 2017 smartphones by the likes of MediaTek, HiSilicon, and Apple (AAPL -0.80%), but it is generally believed that many fabless companies will skip 10-nanometer and go to TSMC's 7-nanometer technology.

It's no surprise, then, that Applied Micro will skip the 10-nanometer technology node altogether and land its fourth-generation X-Gene processor family on TSMC's 7-nanometer process.

Update on third-generation X-Gene

In the press release, Applied Micro said that its third-generation X-Gene processor family is expected to "sample to customers by early 2017." Generally speaking, one can count on at least a yearlong gap between when a processor family samples and when it starts shipping to customers in significant volume. In other words, I believe that X-Gene 3 won't start contributing materially to the company's revenue until 2018.

Indeed, in light of this timeline, it's not hard to see why Applied isn't bothering to move to 10-nanometer. TSMC says that its 7-nanometer technology will go into mass production in the first half of 2018, so by the time that the fourth-generation X-Gene chips are ready to go into production, so too will TSMC's 7-nanometer process.

What this means for the company

Applied Micro has long compared its products to those of server-processor market leader Intel (INTC -0.82%). Although X-Gene 1 and X-Gene 2 do not appear to have been particularly successful in the marketplace, Applied aims to take server-processor share from the chip giant with the X-Gene processor family.

Although the success or failure of a product in the marketplace depends on more than the manufacturing technology that it's built on, manufacturing technology is certainly a factor that drives performance and power efficiency.

Intel released server processors aimed at servers based on its 14-nanometer technology in March of 2016, and is expected to transition to a second generation of chips using its 14-nanometer technology in the first half of 2017.

If Intel keeps to an annual server-product release cadence, then we should expect to see the first parts based on its 10-nanometer technology available in volume during the first half of 2018. In that case, Intel would still have a substantial manufacturing edge over Applied, which could make it difficult for the latter to gain share with X-Gene 3.

Ashraf Eassa owns shares of Intel. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Apple Stock Quote
$146.63 (-0.80%) $-1.18
Taiwan Semiconductor Manufacturing Stock Quote
Taiwan Semiconductor Manufacturing
$81.62 (0.15%) $0.12
Intel Stock Quote
$29.17 (-0.82%) $0.24
ARM Holdings plc Stock Quote
ARM Holdings plc

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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