Qualcomm and Motorola extended their 3G chip pact last week, providing a welcome boost for two companies under siege, though the contrast in their quarterly results showed how much more resilient the chipmaker is proving under pressure. The new deal will be a huge relief for Qualcomm, which saw its highly significant year-old agreement with Motorola for 3G handset chips come under threat last fall, as it appeared the phonemaker was moving towards Texas Instruments instead.
The new agreement is an expansion of a deal forged in late 2006, which was a significant breakthrough for Qualcomm in its quest to dominate W-CDMA chips as well as its own CDMA2000 3G platforms. Motorola was in the process of becoming less tied into its own former semiconductor unit Freescale, and was steering clear of TI, which was still tied inextricably to Nokia at the time. Since then, although Nokia remains TI’s largest customer, the Finnish giant has been diversifying its chip suppliers, bringing in STMicro as an alternative W-CDMA baseband vendor and development partner.
This, in turn, has sent TI on a more aggressive path to find other customers, and made it easier for Nokia rivals to deal with it ‘ and in September it signed a pact with Motorola, which appeared to put the Qualcomm arrangement in jeopardy. Motorola sources indicated strongly that there were no technological reasons for the U-turn ‘ indeed, it was clear that Motorola engineers remained strongly in favor of the Qualcomm platform ‘ but that the change was down to ‘business’ factors – widely assumed to center on pricing and/or royalty rates, especially given the newly strengthened negotiating position that Motorola had gained with TI, following Nokia’s loosening of its ties with its former alter ego.
It is not clear what concessions Qualcomm may have made to regain some of the Motorola 3G business from its main rival, but the alliance is back on track. This will be important to the chipmaker in many ways. The loss of Motorola had thrown doubt on its claims that it can justify relatively high pricing with cutting edge and functional products, making investors nervous when they were already spooked by the legal battles with Broadcom and Nokia, and arousing fears that Qualcomm was not well equipped to supply handset makers that were having to cope with tighter margins. Financially, the original Motorola deal was estimated to be worth about $700m in revenues to Qualcomm, which Wall Street reckons translates to 10 cents per share in earnings.
Now it seems Motorola has been lured back by Qualcomm’s advanced integration and system-on-chip technology, which will be valuable for reducing costs in volume devices.
Meanwhile, despite legal setbacks and other pressures, and the still unresolved issue of royalties from Nokia, Qualcomm turned in another quarter where it beat high analyst expectations, driving its stock up 10% on the news. The chipmaker posted revenues of $2.44 billion in its first quarter, up 21% on last year, and the licensing division made $650 million, up 8% year-on-year despite the lack of royalties from handset market leader Nokia.
These figures pleased Wall Street, though net income was slightly below expectations, rising 18% year-on-year to $767 million. Qualcomm now has $11.3 billion in cash, slightly reduced on a year ago as the company pays out a dividend and continues to buy back shares, including $668 million paid to retire 17.7 million shares in the past few weeks. Despite pressure from Broadcom injunctions and Nokia battles, Qualcomm raised previous guidance for fiscal 2008, projecting revenue in a range of $9.6 billion to $10 billion, up from a prediction of $9.5 billion to $9.9 billion. For the current quarter, it forecast that revenue would reach $2.4 billion – $2.5 billion, which would be up 8% on a year ago, and represent shipments of 80 million to 85 million chipsets, a 33% increase.
‘Our continued focus on execution allows us to deliver excellent financial results despite the impact of defending our business model,’ said CEO Paul Jacobs in a statement.
President Steve Altman said Qualcomm continued to have ‘periodic discussions’ with Nokia on a new cross-licensing deal, after the previous one expired last April, but that there had been ‘no significant progress’, despite the appointment of an arbitration panel. Qualcomm is awaiting word on whether it will be allowed to combine the arbitration process with a court case getting underway in Delaware, Altman said. Meanwhile, the company is not recording any anticipated licensing revenue from Nokia.
Qualcomm’s antagonist Broadcom also enjoyed a strong quarter, announcing fourth quarter revenue of $1 billion , up 8% on the year earlier, with net income doubled to $90 million.
But for the 2007 year, revenue reached $3.8 billion , up 3% year-on-year, while net income dropped to $213.3 million, down from $379 million in 2006. Despite this, the stock rose 6% on the announcement and the chipmaker issued a bullish outlook for 2008, particularly focusing on expected revenue growth in Bluetooth, Wi-Fi and digital television, as well as its important addition of Nokia as a customer for EDGE baseband chips. The Q4 earnings slightly exceeded analysts’ expectations but the company said it was focused on reducing R&D and other costs, a concern cited by analysts.
The company is also accelerating its move to 65nm process technology as it steps up its focus on the cellphone market, in which it remains a minor player (less than 2% share) but where it is likely to increase its impact, because of the Nokia deal and its skill in highly integrated, multi-radio platforms. In an interview with EETimes, CEO Scott McGregor, the architect of the cellphone strategy, said: “Basically, my strategy is an extension of what Broadcom has always done well – focus on rapidly growing markets, build a broad IP portfolio on a common [process technology] platform and execute them well.’
Broadcom recently unveiled the industry’s first 65nm chips, with a single-chip Gigabit Ethernet controller, and single-chip EDGE and 3G handset products. However, it is likely that the main rewards of this advance, and of the Nokia EDGE deal, will be reaped in 2009. And of course, the question remains of how far the Nokia agreement will generate large revenues, and how far it is just a political manoeuvre to put pressure on TI and to strengthen Broadcom against Nokia arch-enemy Qualcomm. Craig Berger, in a research note issued by Friedman Billings Ramsey, echoed the doubts of many, saying: ‘We begin to wonder how material this design win is at Nokia.”
As cellphones incorporate more technologies, Broadcom’s potential is strengthened. It is now the leading supplier of Bluetooth chips into cellphones, according to Will Strauss of research firm Forward Concepts, and has about 10% of the handset Wi-Fi market, though well behind TI’s 30%. It also has very advanced technology for advanced multimedia devices, whether these are phones or other formats.
Texas Instruments was also in upbeat mood, reporting fourth quarter revenue up 3% to $3.56 billion , its first year-on-year gain for four quarters. Operating profit was up 23% to $996 million and the chip giant gave strong projections for the current quarter. The company forecast revenue for the current quarter to be between $3.27 billion and $3.55 billion, despite the threat of a US economic slowdown and the loss of its virtual monopoly of baseband chip business at Nokia.
Full year revenue reached $13.8 billion , down 3% over the prior year. Operating profit for 2007 reached $3.5 billion , a 4% increase over 2006.