Last week we reported on the fate of handset makers and how Nokia and Sony Ericsson were on the rise and Samsung had lost market share, and that although Motorola’s market share has risen, its profits are in the doldrums.
Where the handset makers go, the chip companies can’t be too far behind. And so it has proved as we look at the results of those chip makers, with Texas Instruments reporting slight gains in its fourth quarter, with revenue up 4% year-on-year and profit up 2%. Strangely however TI has said that it will cut 500 jobs as it prepares for a period of weak chip demand in the pressurized mobile phone industry, hardly echoing the optimism of Nokia.
TI appears to have done okay, but is concerned that it simply carries too many people in a world where the margin is being strangled out of handset makers by the desire to reach out and dominate third world markets like India, at far lower margins.
The TI position may have been ameliorated somewhat with news that it has picked up a prime partnership with Motorola, which recently came free of its firm chips contracts with its old chip arm Freescale.
Already Motorola has shown that it likes Qualcomm’s baseband processors and radios, and now it wants all the advantages that Nokia enjoys using the TI applications processing architecture and all that the OMAP 2 and OMAP 3 roadmaps offer, with new device categories likely to come out in early 2008 based on these TI designs. The Motorola deal will also give TI experience of the first set of Western WiMAX handsets, in about the same time frame.
The two already have a relationship but now it will be much expanded and TI will also get a crack at supplying components for the Motorola WiMAX architectures that underpin its major Sprint contract and much of its network operations going forwards. Motorola will even pool intellectual property with TI, in much the same manner that TI shares its thoughts with Nokia on many new design areas.
Those Texas figures for the fourth quarter revenue included revenues of $3.46bn, and annual revenue was nearly $14.3bn, a double-digit jump from $12.3bn a year earlier. Net income for the quarter was $668m, up from $655m a year earlier, while annual net income reached $4.3bn, nearly double the prior year’s $2.3bn.
The need to drive down handset costs is making phonemakers increasingly reliant on standardized chipsets rather than cutting edge custom silicon, and this is shifting the landscape of wireless chipmakers, especially in Europe. Nokia’s reduced need for custom processors is thought to have prompted Texas Instruments’ recent decision to end its own development of 45 nanometer manufacturing process and rely on foundries instead. This also shows that independent foundries have largely caught up with the device makers themselves in process terms, and all chip vendors must adapt to the changed scenario.
Nokia aims to extend a greater part of its basic phone business to ODM manufacture, and may open up its designs to standard products for both the digital baseband and the RF. This could benefit Infineon, especially as the Finnish giant looks to broaden its sources of components to drive down costs. UK-based digital mixed-signal specialist Wolfson also stands to gain from a move to open platforms by the major handset makers, whether through their own manufacture or ODM-outsourced models.
According to a research note from Didier Scemama, an analyst with ABN-Amro Bank, Infineon, Cambridge Silicon Radio and Wolfson Microelectronics are well prepared for the change, but STMicro and ARM Holdings may be the losers. STMicro is particularly vulnerable, since it is short of intellectual property or system software, especially in wireless, with which to counterbalance the falling margins on chips. It may have to make significant investments in R&D or acquisitions to modernize its business model, ABN-Amro believes, especially with the break-up of its Crolles R&D Alliance with NXP and Freescale after 2007, which will force STMicro to finance the next phase of its process development research on its own.
Qualcomm surprised investors by reporting a 5% increase in net income for the fourth quarter. Income reached $648m from $620m a year earlier, and revenue rose 16% to $2.02bn. The profit was driven by chip sales in high end phones. Analysts were encouraged by Qualcomm’s estimate of ASPs at $210 in 2007, higher than an earlier estimate of $205. However, Qualcomm president Steven Altman admitted it was unlikely that it would reach agreement with Nokia in their bitter renegotiation talks over patent licensing, in time for the April deadline. He said the Qualcomm plans significantly to increase its estimate for legal expenses in the fiscal year to battle what he called an “orchestrated” attack on the way Qualcomm does business. He expects legal costs to exceed $200m in the 12 months ending in September, up from about $100m in the prior fiscal year.
STMicro is blaming weaker than expected demand for its wireless chips for disappointing Q4 revenues of $2.48bn, down 1.2% percent from the third quarter, although full year revenue was up 11% to $9.85bn. The company says that instead of focusing on chips for low cost handsets it will spend more energy on making 3G chipsets.