Mobile market Slowdown?

Wednesday, March 12, 2008

Texas instruments (TXN) reduced its Q1 revenue and earning outlook early this week bringing down with it, the stock prices of Nokia as well. I will reserve my comments on how this affects Texas Instrument until I publish my deep-dive analysis on the company for Sramana Mitra's site. There is, however, one question that I wish to touch upon following this news from TI - Is the 'recession' percolating into the mobile wireless industry as well?

Let us first put TI's outlook reduction in context. Ron Slaymaker said that it is "impossible" to generalize this as a trend indicating 3G slowdown. Infineon AG (IFX), who I speculate will supply the core for the impending iPhone v2 (3G) as well, confirmed its outlook for the second quarter and fiscal year 2008 on March 11th. TI's primary competitor, Qualcomm increased its quarterly cash dividend by 14% and introduced a new $2bn stock repurchase plan. The San Diego based company also confidently reaffirmed its 2Q outlook in the annual shareholders meeting citing strong flow of orders for its phone chips. So, other than yesterday's announcement from TI, there are no other indicators yet warranting a generalization.

Besides, Ron also seemed to underplay this as a short-term fluctuation, if anything. He suggested that the longer term (and in my mind, almost unquestionable) trend towards smartphones represents a significant opportunity for TI's core competencies. So, while there was a mention of other customers not living up to TI's expectations as well, there were no other red flags indicating a slowdown in 3G demand. For the moment, based on the other news from TI's competitors, it appears to be more a case of TI's 'large' customer having inventory management issues or losing market share.

Looking at the bigger picture, cellphones are ubiquitous today. Their demand will only increase in the next few years as data becomes an integral part of the mobile experience. I think more people will own cellphones as it moves from being a luxury item to a necessary utility, especially in the emerging markets. India is perhaps a good example. You can read my earlier articles on the Indian mobile market here and here. So, the wireless handset market, will only continue to grow rapidly at the projected rates. The continuing trend towards convergence can only further this growth.

There is, however, some merit to the argument that wireless is not necessarily recession-proof. Existing customers will now have higher thresholds for changing phones. Despite the 'coolness' factor associated with many of the phones in the market today, the price has to also be right. In most cases, there will be a cost-feature trade-off with cost often winning. In order to maintain sales of the higher-end phones, their prices may be slashed. In either case, the average selling price (ASP) of the handsets will go down faster than anticipated. This, in turn, can cause a general reduction in both handset and chipset revenues.

In summary, the TI outlook reduction does not necessarily reflect lower 3G demand. The resilience of the mobile market is fairly justified by its increasing footprint. An economic slowdown, however, can cause a drop in the ASP (as against unit sales). This may be enough to slightly dampen the fortunes of some companies, but will not be enough to sway them or the industry off the ground.

Full Disclosure: Long QCOM at the time of writing

Posted by Vijay Nagarajan at 1:00 PM  

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