As Intel and Qualcomm reported their quarterly results, there was a sense of the calm before the storm. Both turned in unspectactular sets of figures, Qualcomm overshadowed by its supply shortages, Intel by the softening PC market. However, the significant discussions revolved around the future, when these two giants really will go head-to-head. Qualcomm has to contend with a smartphone sector which has huge unit growth potential but is becoming commoditized; Intel needs a more convincing play in the ‘post-PC’ world than a handful of handset wins. So both are focusing heavily on newer form factors which they believe they can dominate, as represented by the ultrabook at Intel, and the tablet at Qualcomm.
For its fiscal third quarter (ended June 24), Qualcomm continued to be weighed down by shortages of its newest mobile chips, but said the last months of this year would see a rebound, and pointed to strong growth in emerging markets and in its Atheros unit.
The company’s main foundry, TSMC, has had trouble achieving the necessary volumes for Qualcomm’s new 28nm smartphone chips, and though the firm is working with other manufacturers now, this problem will not be fully addressed until the last calendar quarter of this year. Also dragging on the US company’s quarter was the global economy. Qualcomm saw softened demand in Europe and north America, though unlike some players, still sees China as robust. However, it trimmed its forecasts for global shipments of 3G and 4G devices in calendar 2012 to between 875m and 935m.
In fiscal Q3, Qualcomm reported net income up 24% year-on-year to $1.21bn on revenue up 28% to $4.63bn ‘ although that lagged Wall Street hopes of over $4.67bn. And the chip provider cut the higher end of its revenue target for fiscal 2012, which ends in September, to between $18.7bn and $19.1bn, from a previous guidance of $18.7bn to $19.7bn. It was clear that the markets would have to wait until the last three months of this year ‘ Qualcomm’s first fiscal quarter ‘ for a real uptick. It disappointed analysts with its forecasts for the current fiscal Q4, saying it expected to make 62-68 cents per share on revenues of $4.45bn to $4.85bn. Analysts had looked for 76 cents a share on sales of $4.89bn, said Bloomberg. But CEO Paul Jacobs insisted: ‘It’s a near-term issue that we’re going through,’ adding that the last three months would be ‘strong’.
Jacobs was looking foward to a strong December quarter, which may be boosted by a new iPhone with Qualcomm modems. President Steve Mollenkopf highlighted the Atheros business and particularly the upcoming revenue boost from launching chips for the new Wi-Fi 802.11ac standard. He said modem leadership, especially in LTE, continued to be a differentiator in many device form factors, saying: “While many companies are still commercializing their first LTE products, we have already announced our third generation LTE chipsets and will continue investing in our modem road map to maintain our leadership.’
One of the strongest elements of the quarter was the trend for featurephone users, especially in emerging markets, to upgrade to affordable smartphones, increasing licensing and chip revenues. Smartphone prices may be falling, but the shift of the total handset market away from basic devices is boosting overall profitability for a firm which supplies the whole gamut of devices. Qualcomm said it was raising the average handset price ‘ the figure it uses to calculate licensing revenue ‘ to a range of $216 to $222, up from $207-$217 as previously estimated. However, it is well aware that, with Chinese competition and the move to sub-$50 smartphones, that trend will be easily reversed.
Much of the next year will be spent ensuring that Qualcomm gets a good position in higher margin items like tablets ‘ where it will, in particular, leverage its intimate relationship with Microsoft to ride the Windows 8 wave ‘ and the media equipment which it can now target courtesy of Atheros.
Intel, of course, is also looking forward to Windows 8 as a new revenue stream and one which may, for a while at least, command a premium ‘ and where it has its own close bond with Microsoft. However, while it will continue to boost its credibility in Atom processors for smartphones and slates, it has more confidence in its ability to shape and lead a form factor which bears more resemblance to its traditional PC ‘ the ultrabook, as it calls superslim, web-attached notebooks. As these, and even full notebooks, gain touchscreens and HTML5 environments, Intel will be looking to establish the ultrabook as the dominant post-PC gadget and relegate the tablet to the category of a toy.
This will be the key device battle of 2013, and the big guns are taking sides already, though these tend to fall broadly in line with the traditional PC/cellphone industry divide. Intel’s CEO Paul Otellini was bullish about the survival of the PC industry ‘ in a new guise, but still in Intel’s image. Speaking on the company’s Q2 earnings call, he denied some analyst reports that ultrabooks had sold poorly in the quarter and said Intel had achieved its volume goals for the new form factor. The real uptick came at the end of the quarter when second generation utlrabooks with Ivy Bridge processors started to ship, he said, and these will drive a strong second half, especially as prices begin to fall ‘ between $600 and $700 will be the norm by the holiday season, he thinks. About 140 Ivy Bridge ultrabooks are in the pipeline, said Otellini, and more than 40 of those will be touch-enabled, while 10 or more will have convertible, swivelling screens.
Shipments of Intel-based ultrabooks, plus Apple’s equivalent, the MacBook Air, will grow from 10.7m units this year to about 17m in 2013, according to researchers at Gartner, and the category is also likely to include thin laptops based on AMD silicon (which cannot use the Intel-trademarked ‘ultrabook’ label). “We are looking at about 5% of total mobile notebook shipments in 2012,’ said Gartner analyst Mikako Kitagawa, though Apple’s devices could account for as much as 40% of the total, other watchers say.
The importance of new form factors such as ultrabooks ‘ which will be sold either as additions to conventional PCs or stimulate users to upgrade ‘ is clear from Intel’s results. Pressures on PCs and on consumer spending drove the firm to cut its target for 2012 sales growth. It now expects this year’s revenues to be between $55.6bn and $58.7bn, which would be up by 3%-5% on 2011 ‘ but previously, Intel had expected growth in ‘high single digits’. Intel still expects growth in all geographies in 2012 and continues to forecast a stronger second half of the year than the first half.
Despite the lacklustre outlook, second quarter results were broadly in line with company and Wall Street expectations. Sales were $13.5bn, up 5% from the first quarter of 2012 and almost 4% year-on-year. Net income was down 4% on last year, at $2.8bn, but up 5% on Q112. Revenue in the PC Client and Intel Architecture Groups rose by 3% on Q1 but the Data Center division was the star, up 14%.
“Overall, our business in the first half was consistent with our expectations,” said Otellini. “What we had expected that we would see by now was that the US and Europe consumer businesses would have recovered from the softness we have been seeing for several quarters.’ This is now not likely to happen until 2013, leading to lower than expected PC sales and putting additional pressure on newer product lines to redress the balance.
Otellini added: ‘As we enter the third quarter, our growth will be slower than we anticipated due to a more challenging macroeconomic environment. With a rich mix of ultrabook and Intel-based tablet and phone introductions in the second half, combined with the long term investments we’re making in our product and manufacturing areas, we are well positioned for this year and beyond.’
ST-Ericsson’s losses grow:
With Ericsson reporting weak results in its second quarter, it will come under more pressure to back away from its ST-Ericsson joint venture, as it did its handset JV with Sony. STE is going through a long and painful turnaround programme as it transitions to new products, at the same time as losing share to Qualcomm and other rivals. In Q2, it lost $318m, a wider deficit than the year-ago figure of $221m, and revenues fell by more than 10% year-on-year to $344m (though they were up 19% sequentially).
CEO Didier Lamouche remained defiantly upbeat, saying: “We are advancing towards our objective to reduce our breakeven point and to reach sustainable profitability. During the quarter, all profit and loss metrics showed a sequential improvement: from revenue growth to gross margin expansion and from expense reduction to the decrease of our operating loss.’ He said operating results and cashflow needed to improve further to make STE resilient to the rapidly changing and competitive market in which it operates. The firm expects net sales to be flat sequentially in the current third quarter.
The growth in revenues between Q1 and Q2 was attributed to several encouraging handset wins, after a lengthy period when the decline in legacy products has not been adequately offset by uptake of the new Thor and NovaThor modem and SoC ranges. STE’s main area of strength recently has been in China, and NovaThor will be used by China Unicom, YuLong and the Shanda Bambook in the country. Other wins include two Panasonic handsets for Japan, which use STE modems, plus slots in the Samsung Galaxy Beam and Ace 2, and the Sony Xperia Go.
Investors are dissatisfied with the pace of improvement and many favour a sell-off or break-up, particularly to a Chinese chip firm.