After Hours Summary: CHGG +25.3%, KD +14.9%, HIMS +14.4%, PAY +10.3% up double-digits on earnings; AYX -21.9%, IFF -19.1%, MRVI -12.8%, MRC -10.4%, RNG -10.3% (appointed new CEO) down big on earningsAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: CHGG +25.3%, KD +14.9%, HIMS +14.4%, PAY +10.3%, MED +7.9%, MNKD +5.7%, PRIM +5%, MTW +4.9%, PLUS +4.7%, JELD +4.3%, PARA +4.1%, ACVA +3.6%, PRAA +3.5%, FGEN +3.3%, LCID +3%, WMK +3%, PLTR +2.8%, CRSP +1.6%, CSWC +1.5%, SBRA +1.4%, JRVR +1.3%, WHD +1%, FSK +0.4%, ARWR +0.2%, SRC +0.1%, TDC +0.1%
Companies trading higher in after hours in reaction to news: NCMI +12.2% (completes financial restructuring), TLRY +3.6% (to acquire brands from BUD), XAIR +2.5% (presents data on treatment of Autism Spectrum Disorder), DDD +1.9% (enters commercial agreement with Theradaptive), SEAT +1.4% (to acquire WD Holdings), KKR +1% (confirm agreement with PARA to acquire Simon & Schuster), ESTE +0.4% (stock offering), VRT +0.3% (stock offering), HPE +0.3% (CFO to step down to take role at RNG)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: AYX -21.9%, IFF -19.1%, MRVI -12.8%, MRC -10.4%, RNG -10.3% (appointed new CEO), TDW -8.6%, BYND -8.4%, DCGO -6.7%, HLIO -6.1%, SWAV -5.4%, FIVN -5.4% (to acquire Aceyus), PWSC -4.9%, ADEA -4.5%, COMP -2.9%, ACM -2.8%, CE -2.6%, AEL -2.5%, WTRG -2.3%, CBT -1.8%, ZLAB -1.5%, CTRA -1.4%, KMPR -1.3%, CXW -1%, SWKS -0.8%, INGN -0.8%, NSA -0.4%, PRI -0.3%, BRBR -0.1%
Companies trading lower in after hours in reaction to news: HTGC -5.6% (stock offering), SAFE -4% (stock offering), BECN -2.6% (stock offering), DV -2.5% (stock offering), KMPR -1.3% (exiting preferred home and auto business), LMT -0.8% (validates designs for U.S. Missile Defense Agency), MXL -0.8% (comments on SIMO letter), TPB -0.1% (files $500 mln mixed shelf)
Fusion: start-up shares are easier to create than limitless energy
Incipient industry will need decades, and many billions, before it becomes a commercial proposition
Ignition is the central process of nuclear fusion. The Lawrence Livermore laboratory in California has again achieved the milestone of a reaction delivering more energy than put into it. The next chain reaction will be in investment
Nuclear fusion is achieved by slamming together two hydrogen isotopes to make one atom of helium. That releases energy that is billed as clean, safe, and potentially limitless.
With a single reaction projected to deliver between 30 and 100 times the energy used to start it, a fusion plant might generate electricity at a cost as low as $25 per megawatt hour, according to a paper for the Royal Society by Nicholas Hawker, of UK-based start-up First Light Fusion. UK wind power costs £50/MWh.
We are nowhere near that. The US facility that delivered net energy gain cost $3.5bn to build. It produced only enough electricity to press a laundry load of shirts.
The breakthrough will nevertheless enthuse private start-ups and their backers. First Light Fusion, for example, is building a facility costing about £150mn. It only needs to perfect its energy delivery system — based on a cheaper stamp-sized projectile — to achieve ignition.
Amid the buzz, investors are rushing to position themselves. In the past year, the industry has attracted $1.4bn of additional private funding, bringing the total to more than $6bn, according to the Fusion Industry Association.
Start-ups are fielding calls from venture capital providers, pension funds, nuclear engineering companies and, of course, oil and gas groups. For the latter, a “fusion strategy” will now be de rigueur.
But commercial fusion lies decades away. The incipient industry will need to move from notionally powering a steam iron to supplying entire industries in reality.
Start-ups will need billions of dollars to build first-generation power plants. If all goes well, these will make smallish amounts of expensive electricity.
There is no doubt that Lawrence Livermore has achieved a scientific feat with potentially huge benefits. Predictable human nature guarantees two negative consequences. First, there will be a proliferation of fusion-themed new start-ups, many of them with little expertise or intellectual property. Second, some politicians and oil groups will assume the fusion breakthrough relieves them of the need to invest in proven renewables.
iPhone 15 Pro’s 3 nm A17 chip will blow away competition thanks to TSMC sweetheart deal
Apple’s iPhone 15 Pro is expected to be the first and only smartphone powered by a 3 nanometer processor for a while. A new report by The Information explains how a previously undisclosed sweetheart deal between Apple and TSMC is helping bring the state-of-the-art A17 chip to market.
According to the report, Apple and the chip fab company have a special agreement that puts TSMC on the line for the cost of defects when producing the A17. TSMC is also exclusively manufacturing 3 nm chips for Apple during the first year or so of its new fab process.
This arrangement reportedly saves Apple billions of dollars on costs associated with working out the kinks of a new fab process. Meanwhile, TSMC earns enough from Apple as its largest customer that it makes financial sense to eat the cost of producing defective chips. In turn, TSMC is able to improve its 3 nm chip manufacturing process before opening orders to companies beyond Apple.
The Information adds that TSMC’s 3 nanometer chip fab process has seen yield rates between 70% and 80%. That means that as many as 1 in 5 chips manufactured with new process are defective, but Apple isn’t on the line for paying for the unusable goods.
In short, Apple’s status of being TSMC’s largest customer is helping the iPhone maker stay ahead of the competition while saving billions of dollars.
As for how far ahead of the competition Apple will be, the report calls out Intel as the only other customer with 3 nanometer chip business on the table next year for now.
Apple is expected to unveil the iPhone 15 and iPhone 15 Pro around September 13. Only the iPhone 15 Pro will feature the new A17 chip.
How Apple Will Save Billions of Dollars on Chips for New iPhone
When Apple’s next iPhone goes on sale in September, its upgraded core processor will be more powerful than that of any rival smartphone.
That’s possible because of Taiwan Semiconductor Manufacturing Co., which makes all of Apple’s custom chips. TSMC is using a new process to make smaller, faster and more power-efficient chips, which it refers to as 3 nanometer, for Apple roughly a year before it makes them for anyone else. But that’s not the only thing TSMC is doing for Apple: A sweetheart deal between the companies means TSMC effectively eats the cost of the defects that inevitably crop up in a new manufacturing process.
THE TAKEAWAY
• Undisclosed deal explains why Apple is first in line for new chip tech
• Other TSMC customers do not get the same terms as Apple
• Apple is TSMC’s biggest customer by a wide margin
The arrangement will save Apple billions of dollars on iPhone, iPad and Mac chips, according to three people with direct knowledge of their deal.
The previously undisclosed commercial terms help explain how Apple can consistently be first in line to use TSMC’s advanced technology despite a high rate of defects. The savings are especially important for Apple, whose device sales have been sinking compared with where they were a year ago. And for TSMC, the orders from Apple are big enough to justify the added costs incurred from giving Apple a financial break.
“Apple and TSMC is the best strategic relationship in all of tech,” said Brett Simpson, a partner at technology research firm Arete Research. “Nothing comes close to their win-win strategy.”
The partnership is vulnerable to outside forces, namely China’s threat to invade Taiwan, where TSMC’s facilities are located. That prospect has drawn concern from other major customers, including Nvidia and AMD. Apple’s plan to be a customer of TSMC’s future fabrication plant in Arizona wouldn’t make up for losing access to Taiwan—and the Arizona plant has faced major delays.
The symbiotic relationship between Apple and TSMC, which The Information has chronicled in detail, began when Apple first used TSMC to produce chips for the iPhone 6 in 2014. TSMC’s special arrangement with Apple regarding defects began around that time, said one of the people with knowledge of the deal.
Sterling Reputation
TSMC charges customers such as Apple for making large batches of processor dies—the rectangular pattern that contains chip circuitry—on silicon wafers. Each wafer contains hundreds of dies, some of which are good and some of which are defective. The percentage of good to bad dies is known as the yield. Because TSMC has a reputation for manufacturing wafers with yields as high as 99%, it’s a preferred choice for customers including Apple, Nvidia, Intel and AMD.
But every time TSMC introduces a major upgrade, called an advanced process node, to its chipmaking, the defect rates of the dies stay relatively high until it can iron out the kinks. For 3 nm, the most cutting-edge node launching this year, the yield on wafers has recently been in the range of 70% to 80%, according to analysts, as well as one person with direct knowledge of the process.
That number would be a tough pill to swallow for TSMC’s customers, which typically pay for the wafer and all of the dies on it—including the bad ones. But in a break from standard practice, the Taiwanese manufacturer has only been charging Apple for dies that work—“known good dies,” in industry parlance—these people said.
However, Apple places such large orders from TSMC that the manufacturer can justify eating the cost of defects, said people familiar with the longtime arrangement. The iPhone maker’s willingness to be TSMC’s first customer for a new manufacturing process also helps the Taiwan company pay for research and development of advanced nodes and the construction of factories dedicated to them. Apple’s massive orders—it will reportedly ship 85 million iPhone 15 models this year—also means TSMC can more quickly learn how to scale up a new node for mass production.
And once TSMC fixes production issues and improves the yield on 3 nm nodes, other customers will be more willing to make their chips with the process. TSMC can charge those customers higher prices and earn higher margins, which includes asking them to pay for defective dies as well as good ones.
Spokespeople for Apple and TSMC declined to comment.
The arrangement has helped Apple maintain its lead in device computing power for years. It also protects the company’s product margins and may help explain why it hasn’t increased the iPhone’s retail price since 2017, despite the rising cost of chips and recent inflation. (Apple said last week its revenue in the quarter ending July 1 fell 1%, the third consecutive quarterly drop, as sales of iPhones, iPads and Mac shrank.)
Rising Costs
TSMC’s business boomed during the pandemic, when demand for consumer electronics skyrocketed as more people worked from home. Since then, a glut of chips and a slowdown in the global economy has weighed on TSMC’s earnings, and the company has said it expects a 10% drop in revenue this year.
Apple is by far TSMC’s largest customer, accounting for 23% of the Taiwanese chipmaker’s almost $72 billion in revenue in 2022. (In its regulatory filings, TSMC doesn’t identify its largest customer by name, but analysts and current and former TSMC employees confirmed it is Apple.) No other TSMC customer represents anything near that level of sales.
TSMC’s reliance on Apple hasn’t stopped it from raising prices. For example, Apple paid TSMC roughly $90 for the main chip in the iPhone 14 Pro, compared with $75 for the previous-generation chip in the iPhone 13, according to analysts at Counterpoint Research.
The cost increases might explain why Apple decided last year not to upgrade the core processor in the iPhone 14 and iPhone 14 Plus, reserving those upgrades for the higher-end Pro models. Analysts expect Apple to continue this trend as it looks to better differentiate its iPhones and push customers toward more expensive models. Some analysts have said they expect the price of this year’s iPhone 15 Pro models to rise $100 compared to earlier pro models, which would be the first price increase in six years.
Development Challenges
TSMC’s 3 nm node further shrinks the size of a chip’s transistors to pack more of them on a single chip without increasing its area. The 3 nm name, a marketing term, has no relation to the actual width of the transistors.
TSMC historically has introduced a new node every two years, allowing Apple to tout a major iPhone performance upgrade every other year. But the 3 nm node took an unusually long three years to develop as TSMC pushed up against the physical limits of how many transistors it could jam into a single chip. As a result, Apple released its flagship iPhone 14 Pro last year with only a minor upgrade to its chip, but it plans to use the 3 nm tech for the upcoming iPhone 15 Pro, according to people familiar with the device.
At the moment, Intel is the only other TSMC customer committed to using 3 nm in the near future, though TSMC won’t mass-produce those chips until 2024 at the earliest, according to analysts and a person with direct knowledge of the matter. Intel’s yields from some early production of TSMC’s 3 nm wafers have been around 70%, meaning roughly three out of every 10 dies don’t work. Unlike Apple, Intel has to pay for them anyway, according to the person.
A spokesperson for Intel declined to comment.
French startup Exotrail expands U.S. footprint with two new subsidiaries
French in-space transportation company Exotrail is launching two U.S.-based subsidiaries, one focused specifically on serving U.S. government and defense customers, the company said Monday.
Tyler Browder, co-founder and former head of satellite software developer Kubos, was installed to lead the new Exotrail U.S., Inc. He joined Exotrail as a senior officer in February, just after the company announced it had closed a $58 million Series B. At the time, Exotrail expressed its intent to expand its footprint in the United States.
Exotrail also hired Brian Holt as the director of U.S. government business development and partnerships. Holt had previous worked for the Department of Defense’s Space Security and Defense Program and at SpaceWERX, a technology-focused organization within the U.S. Space Force. By establishing a subsidiary that solely sells to the U.S. government, separate even from the other American subsidiary, Exotrail is better positioning itself to meet the particular demands and national security requirements of defense contracts.
In a statement, the French startup said its new American subsidiary “will commit significant resources” to building out engineering and manufacturing capabilities in the States. Exotrail U.S. is currently searching for a location for a satellite factory and a separate integration facility.
“We already have more than five customers in North America, with commercial partners ranging from traditional prime to new space operators like Astro Digital, Starfish Space, and NASA on the civil space side,” Browder said in a statement. “Accelerating our growth in both institutional and commercial markets is instrumental to Exotrail’s future.”
Exotrail is one of a handful of companies looking to provide in-space transportation services to satellite operators, though it has taken a more vertically-integrated approach than some of its competitors. Its product offerings include mission analysis software, propulsion systems, and in-space mobility services. The company has more than twenty customers across North America, Europe and Asia.
Crypto Rules Delay Puts Billions in Tax Revenue at Risk
Democratic senators are pressing Biden administration to speed up release of regulations tied to 2021 law
Implementation of a law to catch crypto tax cheats is delayed inside the Treasury Department, putting billions of dollars in federal revenue at risk and frustrating members of the president’s own party.
The department missed its first deadline to implement a 2021 law in time for the current tax year. Now, following further delays, it might be close to too late for tax year 2024.
Closing a gap that can make it easier for cryptocurrency investors to dodge taxes was projected to raise $28 billion over a decade, but declining cryptocurrency prices might have altered that figure. The tax rules are part of the administration’s strategy of making crypto investors play by the same rules as others.
Now, Sen. Elizabeth Warren (D., Mass.) and three other senators are pushing the Biden administration to move quickly.
Tax evaders could exploit loopholes, senators say
“These new rules were urgently needed when President Biden signed them into law in 2021. Over the past two years, that urgency has only intensified,” Warren, Bob Casey (D. Pa.), Richard Blumenthal (D., Conn.) and Bernie Sanders (I., Vt.) wrote to Treasury officials this week. “Given the chance, tax evaders and the crypto intermediaries willing to aid them will continue to game the system, exploit loopholes, and siphon off billions of dollars a year from the U.S. government. You must not give them that chance.”
Last December, the Treasury Department and Internal Revenue Service said that brokers wouldn’t have to report any information until the administration issues final rules addressing questions such as the definition of a broker. More than seven months later, Treasury hasn’t taken the first formal step of issuing a proposal, which would kick off a monthslong—or yearslong—process before those final rules are done.
“Treasury is working diligently to issue these important and complex regulations soon,” said Treasury spokeswoman Kristin Lynch.
“We’re almost at the point where the delay is overshadowing the regs themselves,” said James Creech, a San Francisco tax lawyer for accounting firm Baker Tilly. He said implementation for tax year 2024 would be an ambitious start date given the reporting systems that brokers will need to implement and test.
Definition of crypto broker contested
The tax rules were bitterly fought by the crypto industry when Congress wrote them into an infrastructure law in 2021. Some lobbyists said the law’s definition of a crypto broker was too vague.
A broad definition of broker could create a liability for crypto businesses that can’t comply, such as software developers, crypto miners and wallet providers, said Ji Kim, head of global policy at the lobbying group Crypto Council for Innovation.
A group of lawmakers, including Senate Finance Committee Chairman Ron Wyden (D., Ore.), attempted to amend the law to narrow the definition, but those efforts failed. The rules, once implemented, will give the IRS more information about crypto investors’ profits and will inform investors that the IRS knows they have made money.
It will also make tax compliance easier for crypto investors who want to meet their obligations, and clear rules could make the industry more mature and standardized, said Creech, the tax lawyer.
“If you are trading crypto and you get the same 1099-B that you get from trading in a Schwab account, that’s a win for the industry and that’s a win for the taxpayer that wants to comply,” he said.
The dispute over the delayed tax regulation is part of the crypto industry’s broader lobbying war.
Crypto firms and their venture-capital backers argue that digital tokens such as bitcoin and ether, and the blockchain technology that underpins them, are revolutionary innovations that deserve to be treated differently from the rest of finance. They have spent tens of millions of dollars donating to political campaigns and lobbying Congress to write special provisions to accommodate their businesses.
Cryptocurrency’s emergence has challenged tax authorities, who struggled at first to fit it into typical categories. The IRS says cryptocurrency is property, not currency, so that profits from sales are taxed as capital gains. On enforcement, the IRS has tried to pierce the secrecy that is part of cryptocurrency’s core appeal.
The Biden administration has proposed further changes to tax laws governing cryptocurrency, including limits on so-called wash sales where investors can sell property, realize a loss and then immediately buy it back. Those proposals, which haven’t advanced in Congress, would raise more than $31 billion.
KKR agrees deal with OHB to take German satellite group private
Capital raising for the space sector is easier in private markets, says controlling Fuchs family
Europe’s space companies will struggle to grow with public market investors who fail to understand the sector, according to the boss of one of Europe’s leading satellite manufacturers, OHB.
Speaking as OHB sealed a deal with US private equity group KKR to take the family-controlled company private, Marco Fuchs, chief executive, said his company would be better able to exploit the commercialisation of the space sector outside of public markets.
As a listed company since 2001, investors had failed for more than 20 years to value OHB appropriately, he added.
“It’s a value creation challenge that we have in front of us now,” he said. “We believe this is the right way to do it. I’m very happy that we were able to find a partner who believes in it . . . Then we can develop it very strongly.”
Global investment in the sector tumbled 58 per cent last year from a record high, as space companies have struggled to win the support of investors because of the poor performance of many start-ups who rushed to list through special purpose acquisition companies in 2021.
Fuchs said investor sentiment had made capital raising difficult in the past two years. Private markets offered better valuation for space companies, because of the “very lumpy nature” of the businesses, he added.
But KKR said it expected the space solutions market to grow and saw “great potential in Europe”. Christian Ollig, KKR partner, said that with additional investments in research and development, “OHB is ideally positioned to achieve long-term sustainable growth”.
Fuchs said after a period away from the glare of public markets, OHB would then consider a return to the stock market, perhaps in five years.
Founded in 1981, OHB is one of Europe’s most established space hardware companies, providing satellites to the EU’s Galileo navigation constellation, components to the Ariane rocket programme and the Juice probe exploring Jupiter’s icy moons. In recent years, it has begun to expand in rocket launch technology through a majority stake in German launcher start-up Rocket Factory Augsburg (RFA), and in ground stations and digital applications for space.
Shares in OHB jumped more than 30 per cent to €42.10 after the announcement. The company reported €32.2mn in earnings in 2022, up 16 per cent since 2017. Before the announcement, its shares had been trading at about €30, adding only about 6 per cent from five years ago.
The Fuchs family is not selling any of its existing shares. KKR is paying €77mn for a 10 per cent stake in OHB through an issue of new shares, and is offering €44 a share for the 30 per cent of the company that the Fuchs family does not own. The offer represents a premium of just over a third to the closing price on Friday and values OHB at about €1bn, including debt.
The private equity group will also invest €30mn through a convertible loan to RFA, which is racing to develop a micro-launcher to tap into a booming satellite launch market. The deal values RFA at about €240mn, enough to get the company to the launch pad in the first half of next year, said its chief executive Stefan Tweraser.
The Fuchs family is expected to hold a 63.4 per cent stake after completion of the deal, with KKR holding 34.1 per cent. The remaining shares are held by a Fuchs family member outside the family trust.
Fuchs said OHB’s decision to quit the public market was in part driven by the rapidly evolving industry, with companies needing strong balance sheets given the rising risk.
“The whole business model is changing,” he said. “Government agencies used to decide what rockets would be developed and then they would use them. Now the rockets are being developed with private money and government decides which one to use.”
Satellite development was also accelerating fast, he said. Going private would give the company time to focus on running the business without the constant pressure of publishing quarterly reports, he said.
UK house prices fall for fourth consecutive month, Halifax figures show
Property market displays resilience in face of sharp rise in interest rates with modest declines
UK house prices edged down in July to an average of £285,044, marking a fourth consecutive monthly decline, but with the market showing increased activity, according to data from Halifax.
The average house price fell 0.3 per cent last month, broadly in line with a 0.2 per cent drop reported last week by rival lender Nationwide.
But the Halifax data showed an annual fall in July of 2.4 per cent, slower than the 2.6 per cent rate of decline reported in June and less than the 3.8 per cent reported by Nationwide.
The figures suggest the housing market has so far proved relatively resilient in the face of the sharpest rise in interest rates for 35 years.
Kim Kinnaird, director at Halifax Mortgages, said activity among first-time buyers in particular had held up relatively well, with people settling for smaller homes in order to offset higher borrowing costs.
Although house prices were likely to continue falling over the coming year, she said, given strong wage growth and only a modest increase in unemployment, she expected “a gradual rather than a precipitous decline”.
Martin Beck, chief economic adviser to the EY Item Club, said one reason for resilience was that higher official interest rates were feeding through only slowly to mortgage holders as fixed-rate deals expired.
The average interest rate on the existing stock of UK mortgages had risen only to 2.93 per cent as of June, even though lenders were quoting rates of around 6.85 per cent for a typical new two-year fixed mortgage.
Ben Broadbent, Bank of England deputy governor for monetary policy, noted last week that the latest rise in the BoE’s benchmark rate, to 5.25 per cent, had not triggered any further rise in expectations for interest rates two or three years ahead — by which mortgage rates are set.
The BoE also noted that, while the fall in nominal house prices had been relatively modest so far, high consumer price inflation meant they had already fallen more sharply in real terms.
However, most analysts expect price falls to continue over the year ahead.
The buy-to-let market is one source of uncertainty, with landlords facing both rising mortgage costs and tougher regulation. The BoE thinks exits by landlords have not yet had a significant effect on prices. But Kinnaird said the sector was under pressure and “it remains to be seen . . . what that could mean for the supply of properties available to buy”.
Beck cautioned that although many homeowners had healthy savings, and others were extending their mortgage terms in order to cope, “these sources of support will only go so far”.
Imogen Pattison, assistant economist at the consultancy Capital Economics, said that despite better recent news on inflation, mortgage rates were likely to remain near their current levels for the next year, leading to a “renewed slump in demand” and accelerating falls in house prices later this year.