Zoran suddenly became interesting. Actually it’s been quite interesting for a long time, and we tried to drum up some excitement when it acquired Microtune last year, but its small scale has always legislated against it. It seemed destined to pick up low level SoC contracts for smaller equipment suppliers, and was always the chip company that thought it could. Now that it’s been bought by Cambridge Silicon Radio, the UK Bluetooth and GPS giant, it has the potential to rapidly become the little chip company that can.
This is not a merger that we predicted, but that’s mostly because of the broad nature of both companies and their trans-Atlantic cultural differences, but now that the deal is ‘out there,’ is seems a natural. We think it reflects two globalizing trends, it targets the high growth area of ‘connected’ devices, taking it up against suppliers like Broadcom and Texas Instruments, and at the same time acknowledges that this world is polarizing into larger and larger suppliers or clusters of suppliers, and this requires ‘bigger’ chip suppliers.
What it perhaps indicates is that every fabless chip company, whether they are in WiFi, Bluetooth, GPS, video acceleration, graphics cores, audio and video codecs, set top SoCs, ‘no new wire’ TV connectivity like MoCA, or in 60 GHz Wireless or a variety of other disciplines ‘ they all need scale to reach out to the rapidly growing sectors of connected devices, be they Tablets, smartphones, TVs or handheld game consoles.
When these two come together they will broach the $1 billion barrier and are on course for $1.2 billion or more. CSR’s results were a little on the flat side last quarter maintaining a strong gross margin at 48.7% but falling in the quarter on cash generation and profit. For the year CSR finished with revenues of $800.6 million, an operating profit of $79 million and cash generation of $78 million.
In the final quarter it suffered amortization costs for goodwill as well as share option charges, and integration and restructuring charges on buying companies, and of course that big, but pleasantly final settlement it had with Broadcom over GPS technology which took $60 million off the bottom line. The company was so impressed with progress is paid a dividend for the first time.
CSR has made its previous $136 million stock purchase of Sirf Technology Holdings work for it, after buying it for a steal in the recession in February 2009, a move which added GPS to its portfolio. The company is already present in many handsets of the back of that deal, and said when its results came out that the Sirf technology, plus its own CSR8000 low power Bluetooth, for headsets, had both enjoyed significant design wins. It also said that its progress in WiFi was also gratifying which had, on its own pulled in 30 design wins throughout 2010. At Mobile World Congress, CSR was showing off extremely low power Bluetooth, taking signals from a nearby phone to an NEC built watch, for signaling call and message arrival. It also staked a claim for Android low energy Bluetooth for tablets. So far Android has not make a real feature of Bluetooth, but it’s likely that it will.
Qualcomm last month agreed to lay out $3 billion to buy Atheros, not only to bolster its own WiFi effort, but also to improve its own low power handset WiFi, and begin to look at SoCs which combined WiFi with other technologies. It will also take them into non-cellular markets such as set tops for the first time. Major market moves like this are what drive consolidation and force companies like CSR to play catch up as best they can.
Which is why CSR already has its own 40 nanometer CSR9800 Bluetooth/Wi-Fi combination chip and a 40 nm SiRFstarV next generation location platform in its immediate roadmap. But Zoran takes it into more or less the same markets that Atheros takes Qualcomm into, not perhaps with the same scale or market leadership, but it makes more eco-systems available to it. The danger of moves like this is that sometimes they are not strong enough moves to be profitable within their own right, and the continued R&D drain makes the activities marginal. Already CSR spent $190 million on R&D last year, while Zoran spent a disproportionately high $114 million.
In a way Zoran has been going backwards financially. Its full year revenues were $357.3 million, down from $380.1 million a year earlier and it made a loss of $47.6 million this year, $33 million last.
Recent moves by CSR include licensing the ARM Cortex -A5 MPCore and the Cortex-A9 MPCore multicore processors. That doesn’t mean that CSR plans to come into the rampaging multi-core mobile applications processor market, it would need even more scale to be doing that, but it will harness the license for location-aware SoC platforms, basically on the car and in dedicated GPS devices (PNDs) and inside the handset, where it says it is targeting the BRIC countries (Brazil, Russia, India, China) .
This merger should bring CSR more into the markets that Faultline deals with, including the set tops markets that Zoran has been attacking and particularly where it has been successful with cable modem tuners which it acquired from the Microtune range bought last September.
Other acquisitions that they have both already leaned on include in August 2009 CSR buying Belfast based APT Licensing after three years of collaboration, bringing APT’s audio compression technology to CSR audio platforms. This is what was behind bringing CSR into Audio even though APT was tiny.
In mid-2008 Zoran bought French company Let It Wave SA, which allowed it to put video frame rate conversion and image enhancement on its chips. This is a key part of devices have to size video for output to multiple screen sizes, something that has certainly given Zoran a leg up on to cellular devices.
The Microtune deal cost it the most last September around $166 million but since Microtune had $82 million in cash the company only really cost it $84 million. Microtune makes tuners for cable modems, digital TVs, as well as automotive entertainment. It was assumed that Zoran could build out of the tuner side into the processor side and stake a claim in the processing elements of Blu-ray players and set tops, but this now may not happen. The SEC filings on the merger features the image processing side of Zoran with its camera processor chips, and talks about digital cameras, printers and home entertainment ‘ its volume markets, but not its new markets. And for CSR it talks about handsets, gaming, headsets and automotive. This might be construed as meaning that the ‘new’ areas of Zoran are areas they are not quite sure about, and whether to continue with them is yet to be decided. However we’re fairly sure that’s not the case for Microtune. We know that the replacement of ‘can’ tuners with silicon tuners will continue for the next five years as a lucrative TV component business, and think Microtune is well positioned for this and in fact the takeover statement does mention this as a target market, and talks about combining the advanced demodulator technologies of both companies.
Other recent moves by Zoran have been getting its SupraHD processor into Toshiba TV sets to run as an application processor, running Netflix, VUDU, Pandora, Facebook and Twitter apps. It has also joined MoCA and says that it has shipped more than 30 million units to the pay-TV set-top box markets and so we assume it will integrate MoCA connectivity into its chips.