Qualcomm - Technology to Topology

Saturday, May 31, 2008

Qualcomm recently took a stake in ip.access, a British femtocell maker. The undisclosed investment was made through Qualcomm’s European investment fund. This is a sign that Qualcomm is transitioning from its core competency – to design and develop high capacity wireless baseband technology – to eke out capacity gains through topology.

Before commenting on this latest Qualcomm move, it is important to understand femtocells. Femtocells are indoor base-stations designed to be connected to a broadband internet connection. These devices allow the same mobile device to be used for accessing voice or data through broadband. Femtocells also offer improved in-building coverage, reduced burden on the cellular network and seamless mobility to the user. While dual-mode handsets are seen as the fixed-line operators’ entry-point into wireless, femtocells are regarded as the mobile operators’ answer to it.

So, what is Qualcomm doing in this space? Talking about the investment, Frederic Rombaut, head of Qualcomm Ventures Europe said, "3G femtocells will have a very important role in future mobile network architecture…ip.access has an innovative approach to the 3G femtocell market that will enable our customers to enhance the delivery of 3G services to mobile users."

Disruptive Analysis’ Dean Bubley points out that Qualcomm has remained non-committal about femtocells so far shrugging off that it is “nothing to do with us really.” Evidently, this femtocell investment signifies a change in Qualcomm’s mindset. The company believes, and not without reason, that topology and network planning is the key to extracting more capacity. After all, there is a limit to the number of antennas that can be accommodated in handhelds.

When IS-95 was introduced in the 90’s, it offered a disruptive 10x capacity gain over the existing AMPS. The gains extracted from later standards have exponentially dropped. Most recently, the 3GPP Long-term evolution (LTE) offers incremental improvements over HSPA+. It is clear that we are getting closer to the fundamental limits possible through practical wireless systems. Indoor and edge-of-cell coverage will limit the user experience in tomorrow’s convergence device. This is where topology and microcells help.

It looks like Qualcomm, with its strategic investment in ip.access, is looking to create more capacity gains to carriers through well-designed, scalable low-cost, microcell-based networks. The company’s grounds-up approach to wireless systems design has spelt success right from its early days. I anticipate that the San Diego-based wireless giant will now look to apply theoretical notions to design optimal capacity topologies using picocells and femtocells.

In summary, the ip.access move is proof that Qualcomm is looking beyond its core competencies in wireless baseband. It is proof also that the company relentlessly continues to understand and assist service providers – the strategy that has been its biggest success factor. Finally, the company’s thinking that microcell-based networks will be the key to further capacity enhancement certainly bodes well for femtocells.

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Posted by Vijay Nagarajan at 9:00 AM 2 comments Links to this post  

An Open Letter to my readers

Thursday, May 29, 2008

For a little over a year now, I have been sharing information, opinions and analysis on the wireless industry. It has been a passionate initiative that has brought together my interest in wireless, my analytical skills and my writing abilities to propagate what I am committed to - Impact through information.

I perennially think of topics that will benefit my readers. As I look to expand the scope of my blog and its coverage, I would like help from you, my readers.

My first request to you - Ask me questions. One of the first rules to get the right information is to ask the right questions. Active debate on this blog or mail exchanges, in turn, help me present new information in a lucid and logical analysis. I have a 'contact me' that will help you ask me questions in private. Of course, you can also ask them as blog comments. In either case, keep those questions coming!

My second request to you - send me a note if you find anything that you think would be relevant to the contents in this blog. You are also welcome to point me to any disruptive technology that you think deserves my attention.

My third request to you - point out my errors if you see any. I am of the view that receptiveness to constructive criticism is the best way to improve. So feel free to point fingers at me if you find anything wrong in this site. After all, it is the content in this site that has generated the credibility. I do not want to compromise on its quality, least of all by being closed to suggestions.

Finally, if you wish to contribute as a guest on my blog, you can contact me here. I welcome diverse opinions and analysis on the wireless/technology industry which do not necessarily have to resonate with mine.

Keep reading. Keep contributing. Together, we can get a better understanding of this complex industry and its value chain.

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Posted by Vijay Nagarajan at 10:00 PM 5 comments Links to this post  

Samsung multi-sources 3G now

Samsung announced recently that it was sourcing 3G chipsets from Infineon as well. This is yet another indication of the larger trend amongst handset makers to source from multiple chipset-vendors. While this is a jolt to Qualcomm's 3G market share expansion plans, it is great news for Infineon and its 3G ally, InterDigital.

The move away from Qualcomm is significant on at least three counts. Firstly, it suggests that as much as performance is important for data networks, the competition has succeeded in narrowing Qualcomm's lead there. Secondly, the lower cost of Infineon's solution speaks well of the company's IP position. Thirdly, it expands InterDigital's 3G product footprint.

It is bad news for Qualcomm. One of the key reasons for Samsung's move is that it found a viable performance alternative for a cheaper price. That underscores the issue for Qualcomm. Until now, the company was charging a premium for its superior performance and its support network. However, as a recent Signals Research Group report points out, there are at least three other solutions with comparable performance in the market today, Infineon being one of them. These alternatives become attractive if the handset vendors discount Qualcomm's reliability and support.

It is good news for Infineon. The company is expected to be central to the 3G iPhone. With design wins at Samsung, the German semiconductor company will grow its 3G market share at the expense of Qualcomm. With the lower overhead coming from its comfortable IP position, Infineon can afford to undercut Qualcomm's pricing to gain further traction.

It is better news for InterDigital. The company supplies the 3G software stack for Infineon's solutions and stands to make money off every 3G Infineon chipset sold. So, while the King of Prussia-based company is involved in a prolonged legal battle with Samsung on IP issues, this will open up another channel of revenue from the Korean handset maker.

InterDigital's SlimChip, though one of the best, has not got substantial direct traction in the market. On the other hand, the company, through its alliance with Infineon and its product IP core licensing initiatives, is looking to expand its footprint at a fast rate. Apart from the Samsung design win, I am particularly curious how 3G will play out between STM and Nokia. (Stay tuned for an analysis of how InterDigital may benefit from the STM-Nokia relationship in the wake of recent industry events.)

In summary, Samsung has reiterated the move towards multi-sourcing. Like some of the other wireless segments, pricing and time-to-market will likely drive mobile baseband as well. That is if Qualcomm's competitors can stand up to its deep pockets and deliver consistently.

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Infineon - more consolidation?

Wednesday, May 28, 2008

Infineon's CEO Wolfgang Ziebart recently departed the company. This has given new energy to consolidation speculations. I think it is not without reason.

Ziebart, it is said, was a proponent of small acquisitions and organic growth. His exit seems to have come after internal management disagreements. With Ziebart gone, the doors are now open for larger mergers directed towards consolidation along the lines of the recent STM-NXP JV. One of the possibilities being floated around is a merger with NXP. Another possibility is a wireless JV with Freescale. Also, these possibilities are not mutually exclusively either.

Infineon, much like STM, has been in financial pains. The company (exclusing Ziebart) seems to be bitten by the European consolidation bug. The way I see it, Europe is consolidating its technology value chain and some changes in Infineon's strategy and management philosophy are inevitable.

I would opt for a mixed strategy. The small acquisition and calculated growth path that Ziebart believed is a good way to grow market share in new segments. This is also the strategy that another semiconductor giant, Texas Instruments is opting for. A Freescale JV to gain scale and compete effectively in wireless can complement this strategy.

But undoubtedly, the political and legal environment in Europe makes the NXP merger a real possibility as well. I repeat, European semiconductor manufacturers and the value chain are consolidating, and Infineon will be an active part of the big picture. So, don't be surprised if you see more mergers later this year.

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Texas Instruments - Valuation Opinions

For a while now, I have been detailing Texas Instruments’ [TXN] failure to capitalize optimally on the impending wireless boom. In my valuation series, I pointed out that in addition to all its analog initiatives, if TXN had managed wireless better, my valuation would have increased from $32 to finish closer to the $40 mark. Nothing has changed since. But I am tempted to comment on a couple of recent analyst reports.

Citigroup’s Glen Yeung raised his rating of TXN to BUY from HOLD. Increasing the price target on the stock from $31 to $39, he replaced Intel (INTC) with TXN in Citi’s “Top Picks Live.” His report seems to be primarily based on TXN’s delay in wireless market share loss at Nokia. This in turn relies on recent comments from Broadcom indicating a delay in its EDGE ramp-up with the Finnish handset vendor. Glen seems to think that this “increased optimism in TXN’s handset revenue opportunity” will sustain TXN longer than consensus estimates.

With due respect, I think this is a very short-sighted opinion. This does not rightly reflect TXN’s longer term position in the wireless space, its overall strategy, its growth drivers and hence the intrinsic value. Share losses getting pushed out by a quarter or two merely increases its net present value but does not warrant this dramatic shift in the target price. Besides, as I have often mentioned, Nokia’s multi-vendor sourcing and TXN’s lack of a viable baseband roadmap are clear indicators that TXN has not dealt its wireless cards as well as it could have.

I find the valuation report from Thomas Weisel Partners’ Tore Svanberg and Brian Williamson much more credible. The report takes a longer term view of TXN. Their sum-of-parts analysis and their argument that analog will be TXN’s growth driver resonates better with me than the Citi report. Though the company is the analog semiconductor leader, it only has about 13% share leaving a big portion of the $35-40 billion TAM for it to exploit. As TWP notes, the analog growth should be strategized and executed through acquisitions.

While I agree on the analog aspects of the TWP analysis, I am not as sure if decreasing wireless contribution is good or was intended. (More detailed coverage here and here.) Assuming fixed resources, it is possible that TXN has consciously let go of its wireless business in exchange for the much higher margin analog business. The high performance analog segment generates operating margins that are greater than twice the average semiconductor industry margins. But does this warrant throwing away its leadership position in wireless? Couldn’t the company have pursued both businesses actively?

In summary, analog, and not wireless, will be TXN’s growth driver. While I am disappointed with TI as an industry observer, I also think that the company has compensated for this loss to a certain extent through its aggressive pursuit of the analog business. For now however, with the bird in hand slowly escaping, I think TXN’s stock price continues to hover around its intrinsic value.

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Posted by Vijay Nagarajan at 1:00 AM 0 comments Links to this post  

ST Microelectronics - Valuation

Tuesday, May 27, 2008

[Originally for Sramana Mitra's site]

I value ST Microelectronics at just under $15 per share. This is about 30% more than its current value. Its strengths include its broad portfolio, its position in the strengthening European block and its resultant wireless business outlook. The operating constraints caused by STM’s geopolitical ties are growth deterrents. Its commitment to the IDM model can make it tough to compete effectively against the crop of nimble fabless companies.

While STM has been in the news recently for its wireless moves, its product portfolio extends from consumer goods to industrial automation solutions. Its IMS business will remain a steady revenue source. Its MEMS products are an important part of the highly successful Nintendo Wii. The company continues to supply advanced analog components and energy management solutions for various industrial applications. The IMS also offers growth drivers that STM is yet to address aggressively. The analog market has a TAM of around $37 billion that STM can look at once it has its wireless business logistics worked out.

Its wireless business, it appears to me, is increasingly becoming Europe and Nokia-centric. The company’s success and growth in wireless relies to a large extent on how it can bootstrap itself to Nokia’s success. While it has a good rapport with the Finnish-handset company, it cannot afford complacency. With Broadcom pushing as well to grab TI’s share as well through an aggressive product and pricing strategy, STM’s task is cut out. It has to anticipate and meet Nokia’s needs, being ready in the process to take further margin cuts.

The IDM model and Europe's labor laws will keep STM from reaping the full benefits of its wireless outlook. Its gross margins are below industry average at a low 35%. While the company is taking great efforts to become less capital-intensive, I am not sure how much more manufacturing efficiency the company can eke out. The divesting and merger activities to gain scale will provide some reprieve though.

In conclusion, I think STM is well-positioned in the wireless market to displace TI from its second position. But since this will not come at increased efficiency and margins, it does not increase the company’s value dramatically. While I am both curious and enthusiastic about STM’s wireless future, I will shy away from investing in the company just given the baggage it appears to come with.

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ST Microelectronics - Wireless Business

Monday, May 26, 2008

[Originally for Sramana Mitra's site]

The JV with NXP has given STM the scale to succeed in the mobile wireless space. Putting its weight behind the convergence movement, the company plans to leverage its full suite of wireless solutions to enable the advanced mobile devices coming out of the Nokia stables among others. Let us now try and understand the company’s wireless products, strategy, and outlook.

The backbone of STM’s convergence moves is its mobile multimedia applications processor. As part of its strategic alliance with AMD, the company has developed the latest Nomadik processor integrating functions the multimedia coprocessor and the application processor. These processors can be used in smart phones, mobile Internet devices, mobile computers, portable multimedia and navigation devices, and in-car entertainment systems. STM complements its applications processors with energy management and transceiver solutions. With these initiatives, the company hopes to grow its low single-digit market share in the application processors segment.

Prior to the NXP JV, STM’s mobile connectivity portfolio included a 11b/g WiFi solution and multiple Bluetooth solutions including a Bluetooth/FM SiP. STM has succeeded in increasing its Bluetooth market share to about 5%, thanks to its alliance with Nokia. However, STM’s GPS until last month was focused on Personal Navigation Devices (PND) and automobile markets.

Based on STM’s portfolio (excluding NXP), it is easy to see that until recently, it neither had the complete set of convergence ingredients nor the recipe and scale to compete with a veteran like Qualcomm or the relatively new yet formidably entrant, namely Broadcom. But there are two events that can turn the game in STM’s favor –

Nokia’s multi-sourcing strategy: Nokia’s move last year to source 3G from STM among other vendors was more than a mere next-step in the symbiotic relationship between the two European giants. This signified the end of TI’s joyride, a dent in its wireless stronghold. STM, along with Broadcom, is looking to capitalize on this situation by claiming slices of Nokia’s 40% handset market share.

STM received further assurance from Nokia as the latter transferred about 200 of its chipset design engineers last year. As Nokia looks to exit the chipset space, this move has given STM 3G baseband design capabilities and IP as well. With TI not having a 3G baseband roadmap, STM now has a unique opportunity to catapult itself into the second position among wireless semiconductor companies.

NXP merger: Chief among the synergies between NXP and STM is their complementary convergence capabilities. Just recently, NXP had acquired GPS company GloNav. GloNav’s very strong IP, experienced engineering team, GPS SoC solutions for mobile devices and PNDs will now be a key aspect of STM’s convergence portfolio.

NXP also brings deep expertise and products in Bluetooth and WiFi as well. STM and NXP together have about 10% of the Bluetooth market today. Finally, NXP provides more baseband expertise, especially in the GSM/GPRS/EDGE space. I am however unable to judge 3G expertise given that the IP core for its HSPA-EDGE product is licensed from InterDigital.

STM now has all the raw materials needed to take on the convergence movement. It however lags in its product roadmap by at least a year. Convergence has to be accompanied by integration efforts. With new baseband capabilities, we can expect STM to make an integrated 3G baseband and applications processor. We will also see integrated connectivity products.

The company’s strong relationship with Nokia will however buy it time. It will likely drive STM's wireless product strategy. I don’t see anything wrong with that for now. With its understanding of the global mobile market and its brand-name, Nokia is a great resource for STM. The Italian company needs to work closely with the leading handset vendor to determine the market direction and focus its internal R&D in that direction. It should however desist from being complacent. It is perhaps TI’s complacency that has given STM this opportunity in the first place. It is now up to STM to learn from TI’s situation, sustain and grow its share within Nokia.

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ST Microelectronics - NXP JV

Sunday, May 25, 2008

[Originally for Sramana Mitra's site]

In the last part of this series, we looked at STM’s strategic initiatives that are aimed at making the company more nimble and profitable. A very important part of this strategy was unveiled last month when the company decided to form a Joint venture with its wireless business and that of NXP. Before moving on to STM’s wireless business and outlook, it is important to understand the dynamics behind this move.

As per the deal, STM will have control on the JV with about 80% stake. The company will pay NXP $1.55bn to close the deal in the third quarter. With revenue totaling about $3bn in 2007, the JV had about 10 percent of the global market, according to iSuppli. Besides, the synergies are expected to save up to $250mn in 2011.

While STM has steadily encroached into TI’s market share by denting its Nokia and EMP 3G accounts, NXP is a 2/2.5G supplier to tier-1 and tier-2 vendors including Samsung. Besides the scale, the JV will have a strong IP position with over 3500 patent families. This, in turn, gives it greater negotiating power in IP cross-licensing discussions further increasing its margins.

Besides establishing a strong R&D team focusing on media convergence and energy management, the JV now has a complete portfolio of connectivity solutions. These technologies – WiFi, Bluetooth, FM and GPS - will be integral to tomorrow’s convergence devices. These connectivity solutions complement the company’s baseband, application processor and RF products, allowing the company to offer them as part of a state-of-the-art single stop mobile platform. For more details on the STM-NXP JV and its effects on the wireless industry, I will direct the interested reader to my articles here and here.

The wireless industry, especially the 3G chip vendor space, will consolidate and the stronger players will pick themselves out of the crowd. The JV is STM’s statement of arrival. Over the last couple of years it has made tremendous strides culminating in design wins from Nokia and Sony Ericsson. The JV will perhaps not make an immediate impact in its product line. It, however, expands its customer base and also positions STM to exploit the convergence market over the next few years.

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ST Microelectronics - Strategy

Saturday, May 24, 2008

[Originally for Sramana Mitra's site]

As highlighted in our discussion of ST Microelectronics financials, the company has not been very profitable in the last few years. More importantly, it has been growing lesser than the semiconductor industry and losing market share. It is therefore appropriate to peek into the steps that the company has taken to address this situation.

There are five major themes in STM’s strategy.

Scale is important: Last year, the company joined hands with Intel to create Numonyx, an independent Flash memories semiconductor company. Last month, STM announced a disruptive deal to merge its wireless assets with those of NXP to create a solid number three player in that space. In both cases, the idea was to use scale and consolidation to succeed. These efforts also directly impact STM’s product portfolio moving forward.

Convergence is coming: STM has rightly identified the coming convergencethe confluence of the computer and communications. As a technology provider, the company is positioned to supply key components for the convergence platform. With the NXP JV, STM has a complete portfolio of core cellular and peripheral connectivity solutions that along with its application processor can completely power today’s smartphones and tomorrow’s convergence devices.

Streamline R&D: STM has focused its R&D efforts on key growth areas that it has identified. What I find more attractive is the focus on the right things within these areas. For example, its focus on wireless baseband and multimedia demonstrates a good understanding of the market dynamics. With data coming to the forefront, more companies have developed stellar receiver solutions. For STM to benefit from its wireless aggression, it needs to have good baseband and application processor solutions to start with.

Move to a less capital intensive model: STM is also consciously attempting to reduce its CapEx. Its move to divest the FMG is a good example. It continues to work with partners to reduce its process technology advancement costs. The company is targeting a CapEx to Sales ratio of less than 10% for 2008.

Build position as Europe’s flag-bearer: Geo-political alliances can help grow STM’s semiconductor market share. For example, Nokia already contributes to over 20% of STM’s revenues. Moving forward, with TI’s wireless share up for grabs, STM will want to leverage its European badge with Nokia to grow its revenues substantially. The two companies have been getting closer by the day, much to the discomfiture, and perhaps to the resignation, of TI.

Much like Ms. Mitra, I am a strong believer in the convergence device movement. So quite naturally, STM’s wireless direction, and R&D efforts excite me. The company’s consolidation efforts are also very positive. Its relationship with Nokia plays to its strength. STM should however be careful not to repeat TI’s mistake of being complacent about its existing big clients.

STM’s annual report is very honest, upfront and detailed. What was worrying was the lack of an apparent vision except the obvious goal to sustain as a semiconductor giant. Unlike the other wireless chipset vendors, the political underpinnings of the company seem to make it more difficult to make grandiose plans and execute on them.

There is no denial of STM’s value and growing strength in the European technology value chain. But there are inherent inefficiencies in the IDM model. So, I am skeptical about its capital and cost reduction moves. I am inclined to think that the company's decision to retain manufacturing control may downplay and even negate some of these strategic initiatives. It may inhibit the creation of growing value to STM’s investors.

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ST Microelectronics - Financials

Friday, May 23, 2008

[Originally for Sramana Mitra's site]

In the introduction to this series, I reviewed the company’s history and businesses. Let us now review the company’s financials from a more holistic perspective.

For the year 2007, STM reported net revenues of $10 billion at a gross margin of 35.36% and an operating loss of 5.45%. The revenues increased a modest 1.5% over the $9.854 billion that the company earned in 2006 at an operating profit of 6.87%. During the same period, the semiconductor industry sales grew about 3%. It is also worth noting that the industry’s gross margin average is at 50.5% while the operating margin average is at 18.6%.

Nokia is STM’s largest customer accounting for 21.1% of the company’s revenues for 2007. STM’s top-10 OEMs accounted for 49% of its revenues. On the basis of location of order shipment, Europe accounted for around 1/3rd of the revenues while Greater China accounted for 27.5%.

For Q108, STM declared revenues of $2.18 billion (excluding the divested FMG). This is an increase of 11.6% y-o-y. ASG revenues increased 14.2% y-o-y driven by wireless, consumer and automotive products. IMS grew at 7.1% y-o-y helped by the MEMS, microcontrollers and advanced analog businesses. Q208 revenues are expected to increase between 5 and 11% q-o-q and 10-16% y-o-y at a gross margin of about 37%.

It is clear that STM has been struggling, not only to increase its sales but also to obtain industry average margins. The company’s prolonged struggle to achieve above-average sales has necessitated a review of the company’s strategy. STM has already set the wheel in motion. Among other strategic initiatives, it has divested its FMG while aggressively acquiring scale in its wireless business.

The low gross margin, however, questions the prudence of STM’s commitment to continue as an integrated device manufacturing company. With the fabless model gaining ground, STM will find it increasingly difficult to compete favorably if it continues to exercise control over its advanced proprietary manufacturing technologies. The company spent over a billion dollars in related Capital Expenditure for 2007. Besides, to make ends meet, it is constantly looking for alliances to share costs. A good example is the current agreement with IBM to develop 32-nm and 22-nm CMOS process technology. While it perhaps makes political sense to retain control over much of the value chain, the IDM model can turn out to be a deterrent to STM’s profitability.

In summary, while STM’s broad range of products guarantees a steady revenue-stream, its margins are not impressive. The company is looking to keep its operating costs below 28%. As the competition becomes tougher, this needs to be complemented by higher gross margins for the company to have a sustained growth model.

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ST Microelectronics - Overview

Wednesday, May 21, 2008

[Originally for Sramana Mitra's site]

ST Microelectronics (STM) has been making steady progress in the wireless world. Last month, it decided to merge its wireless assets with NXP to form a JV that is now the third-largest wireless semiconductor company in the world. As we continue our vendor matrix study, we will dissect STM this month for its market position, strategy and financials. Incidentally, STM is the first non-US vendor that we are covering in-depth here.

STM was formed in 1987 merging the semiconductor business of SGS Microelettronica and the non-military business of Thomson Semiconducteurs. The company completed its IPO in 1994 getting listed on Euronext Paris and NYSE simultaneously. It subsequently listed its shares on the Borsa Italiana in 1998.

STM has been Europe’s semiconductor flag-bearer for quite some time now offering a broad range of products. According to an iSuppli report, STM is ranked fifth among the semiconductor companies in the world. The company also topped the industrial products category, while finishing second for analog products and third for wireless and automotive products.

STM’s Application Specific Products Group (ASG) comprises of semiconductor products for mobile, multimedia, communications, computing, home entertainment & displays, and automotive sectors. ASG is the single biggest contributor to STM’s revenues at $5.439 billion in 2007. With its wireless moves, STM aims to leverage its strengths to make ASG a key growth driver.

The Industrial and Multisegment Sector (IMS) consists of the company’s analog, Micro-Electronic-Mechanical-Systems (MEMS), microcontroller, memory and smartcard businesses. In 2007, IMS contributed 31.4% of STM’s revenues at $3.138 billion.

Until recently, STM also had a Flash Memory Group (FMG) that it strategically divested to spin-off Numonyx. This JV with Intel was intended to give the FMG business the scale to operate successfully while making STM’s core product-line more nimble.

So, much like the other semiconductor leaders, STM has breadth in its product portfolio. With this brief overview of the company history and businesses, we will now continue to dissect its financials and strategy to gain insights into its future.

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Convergence components - Connectivity solutions

Tuesday, May 20, 2008

In my previous article on convergence, I discussed the mobile baseband radio. While the WAN capability is most important, it also needs to be complemented by the so-called connectivity solutions. WiFi, bluetooth, GPS, FM and mobile TV have increasing penetration in the higher-end phones and will be a part of the convergence devices of tomorrow.

WiFi can facilitate seamless mobility for your voice call while also offloading internet browsing from the cellular network when you are near a wireless hotspot. WiFi can be used in conjunction with cellular systems today to enable fixed-mobile telephony convergence (FMC). There are dual mode handsets that can offload the burden on cellular networks, address in-building coverage issues and also switch your call seamlessly between the Wide-Area Network (WAN) and the Local Area Network (LAN).

Bluetooth as a short-range wireless technology has carved itself a niche, especially in the headset market. Legislations mandating in-car hands-free driving is one of the trends that will drive bluetooth penetration into mobile devices. The bluetooth standard has been improved to handle more sophisticated use cases such as stereo audio and high-speed data transfer. While some use cases overlap with those of WiFi, the audio profiles of bluetooth will find a unique place in the convergence movement.

GPS will help enabling location-based services (LBS). Like the GPS companies would like to say, tomorrow will not just be about when but also about where. GPS will be part of most if not all mobile devices in five years. Qualcomm has been bundling GPS with its chipsets for a while now with the hope that LBS will become more important that the mandatory E911 services. You can also look at GPS in your convergence device as the merger of the PND with the mobile phone. Garmin is attempting just that with its Nuvifone.

Mobile TV, for me, is perhaps the least exciting of the major convergence devices components. The reason is display. Display technology today is a far cry from enabling a good TV experience in your hand-held. Realizing this impediment, companies like Qualcomm are investing in display technology. High quality displays such as Qualcomm's Mirasol along with features such as retractable thin screens and a wide network coverage can help change the picture (pun intended).

FM will also become a staple. Besides these technologies, we can also think of Zigbee, RFID, UWB as other candidate radios that can convergence in your mobile device. These may come as part of a second wave that will seek to converge home networking as well.

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Convergence components - mobile baseband

Monday, May 19, 2008

Convergence for me is more relevant from a technology provider perspective. As I alluded to in my previous convergence article, innovative ideas and use cases have always existed. But it is only now that form-factor reduction and power consumption research have caught up with the human mind which generates creative mobility ideas. These technological advances coupled with increased attention to usability have made mobile convergence possible. One of the key effects of these improvements is the inclusion of more radios into the hand-held. So, it will be illustrative to look at the wireless components of convergence along with use cases.

The heart of the convergence device will be the mobile radio. We have the rapidly proliferating 3G standards that combine voice with reasonable speed data services. On one side, we have the Wideband CDMA (WCDMA), and its evolution namely High Speed Data Packet Access (HSDPA), HSPA, HSPA+. On the other hand, we also have the Data Optimized CDMA evolution standard (CDMA1x EV-DO).

Looking ahead, the industry talks of 4G wireless as well. Today, we have two main 4G standards, namely 3GPP Long-term evolution (LTE) and Worldwide Interoperability for Microwave Access (WiMAX.) LTE is the 3GPP evolution path beyond the HSDPA standards. WiMAX, promoted as THE wireless broadband solution, received a reprieve in the US recently as Sprint finally decided the tie the knot with Clearwire. While mobile WiMAX will have to share the pie with LTE, fixed WiMAX can offer backhaul wireless broadband services as the panacea for the emerging markets.

The transition from 3G to 4G has to be preceded by the maturity and monetization of the existing and future 3G infrastructure. It appears that the 3G networks are slowly ramping up as data becomes a more prominent differentiator in the developing markets. These networks will mature in the next couple of years and thrive for five years or so before slowly being replaced by Orthogonal Frequency Division Multiple Access (OFDMA) based 4G technologies that promise much higher data rates and hence more service possibilities.

Keep in mind that from a convergence device perspective, mobile broadband is the key technological driver. So, the cellular baseband modem that is complemented by the Wide Area Network (WAN) coverage from the wireless service providers becomes central to such a device.

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Icera another option for TI

Sunday, May 18, 2008

In my Texas Instruments (TXN) valuation series, I pointed out that the company did not have a strong 3G product strategy. I subsequently also discussed in detail the synergies that existed between InterDigital and TI. I had also noted that if not InterDigital, TI could consider Icera also as a viable option to buttress its 3G roadmap. Let us take a quick look at this possibility.

Bristol-based Icera Semiconductors has one of the better performing HSDPA products in the market today. The company’s soft modems have been gaining traction in the data-cards market. The company recently announced a merger with Sirific Wireless. Sirific’s RF front-end and digital RF expertise is expected to complement Icera’s Livanto soft modems. Icera also announced a mobile phone design win recently. Combined with Sirific, Icera has raised over $200mn till date. The company is also looking to raise another round on the strength of its recently announced design wins and the broader market traction it has been receiving of late. More on Icera can be found here.

Texas Instruments, as I have been lamenting once too often in this blog, does not have its own 3G-baseband roadmap. The ‘foundry’ model worked for the company so far. But with Nokia and Ericsson sourcing from multiple vendors, its situation has become precarious. Besides, Nokia also moved its chipset engineering team to STM which after its recent merger with NXP has become a larger force to reckon with. These industry-events together with Broadcom's (BRCM) aggressive ‘3G on a chip’ campaign spell bad news for TI.

TI has to act soon. Pacts with InterDigital (IDCC) and/or Icera to bundle their baseband solutions with its application processors or even to offer a combined OMAPVox solution are possible. Or, if TI desires, it can attempt to acquire one of these companies. IDCC, with its strong IP is unlikely to be a cheap acquisition target. Besides, there is a chance that IDCC’s patents may only incrementally benefit TI in patent cross-licensing discussions given the latter's already strong IP position.

A good alternative then is to acquire a focused product-centric company such as Icera. With the scale of investments, Icera may be a cheaper option to pursue than IDCC. The company’s expertise in soft modems may complement TI’s own DSP expertise to create niche products for the future. With its support network, TI can leverage this unique technology to stay ahead of its competitors in product launch as well as performance.

Of course, the other question to ask is if either TI or Icera will consider its path. For TI, the RF expertise in Icera may not add much value. So, the UK-based company may have sounded more attractive to TI before the Sirific merger (though an additional $100mn is not much for the semiconductor giant.) Icera, on the other hand, is also positioning for an IPO in the 2010 timeframe and Sirific is seen as a strategic addition in this direction.

While Icera seems to have big plans, TI may also just resign to its dwindling 3G baseband business. With the convergence devices movement slowly heating up, the company also finds itself competing with more players on the applications processor front. So, if it does not buy or partner with someone now, it will have to think ahead, start on 4G and hope that it can recapture any lost market share at that time.

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Convergence definition

Saturday, May 17, 2008

Convergence is defined by different needs and different approaches. There is no one road to device convergence. Yet, that is the next big thing that all wireless players are knowingly or unknowingly working towards. Let me start this convergence series by what I mean by convergence devices.

Convergence can be looked at in two different ways -
  • It is the culmination of voice and data in a single mobile device
  • It is the confluence of various wireless technologies in a mobile device
The first view of convergence is more that a service provider or consumer. If data can be accessed through a mobile device, a multitude of service and application possibilities open up. Some examples include location-based services, mobile television etc. Essentially, your mobile device is moving away from being just a phone to meet more of your mobile needs in this information age.

The second view, which incidentally is closer to my heart today, is a technology provider perspective. All these services and applications are made possible by the different wireless technologies or radios in today's mobile device. The smart-phones today not just have cellular functionalities but are often equipped with bluetooth, WLAN and GPS for starters. The penetration of these so-called connectivity solutions will only increase in the future. Without the technological advances made to include multiple radios in a single hand-held, the applications are only a pipe-dream. Throw in a fast, low-power processor into the mix and this device doubles up as a computer too.

No matter which viewpoint you wish to side, the concept of convergence originates where the laptop meets the mobile phone. It is one device that can provide you mobility, internet, television, location-based services, music, camera and a host of other functions besides being your phone. If these ideas seem abstract, imagine a hybrid of the Apple iPhone and the Apple Macbook Air. That should give you a better picture.

With this as the background, in the next part of this series, I will discuss the radio technology components of convergence.

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Convergence series

Friday, May 16, 2008

Convergence of the mobile phone and the computer is closer to reality now than ever before. Over the next few weeks, I plan to do a series on the concept of convergence, looking at its definition, technology components, use cases, trends and challenges.

I would love for this series to generate an active debate that will help us all to collectively understand what it takes to drive convergence towards mass acceptance. So stay tuned.

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iPhone Air hybrid in the works?

Thursday, May 15, 2008

Apple-related rumors always add spice to your day. As we all anticipate the 3G iPhone’s release any day now, we are seeing a steadily increasing spate of news, rumors and ‘leaks’. ZDnet.de reported this iPhone story recently –

“As part of an Intel event for the 40th birthday of the semiconductor company at Munich’s BMW World, Germany managing director Hannes Schwaderer confirmed today what has long been a rumor on the Internet: namely, that there is an iPhone with Intel’s new Atom chip. The device is slightly larger than the current version, Schwaderer said. That is not, however, because of the Intel chip, but because of the larger display used in the new iPhone.”

Apple 2.0 blog published an anatomy of this rumor, in which it points out that Intel specifically disclaimed the ZDnet report. Intel’s PR stresses that the Intel Germany CEO mentioned the iPhone of the future as an example of mobile internet devices (MIDs).

My take: It was mostly the case of an over-enthusiastic journalist picking up phrases out of context to present a sensationalistic news generator. But irrespective of the truth behind this story, Intel and Apple may well come together for a hybrid of the iPhone and the Air. It will be the sort of convergence device that will be a single stop shop for all your mobile communications and computing needs.

After all the frenzy and speculation around Apple’s acquisition of PA Semi, we now hear that Intel after all has a place in the Cupertino-based company’s immediate convergence plans. When Intel and Apple made a big deal about the packaging effort that went into miniaturizing Intel’s Core Duo 2 processor for Air, it sounded as if something ‘more mobile’ was brewing.

Intel’s Atom processor would be the obvious choice to take this relationship further and into the convergence space. Intel has been promoting the Atom processor along with the so-called Mobile Internet Devices (MIDs). The Apple device may be its best MID yet.

We all hope to see the 3G iPhone soon. Also watch out for this convergence device that will follow. It is now a question of when and not if this device will come out.

By the way, what should Apple call this device? iCon? Or is it iCom?

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What is 3G iPhone anyway?

Wednesday, May 14, 2008

A friend posed this iPhone question recently –

Could the iPhone run on CDMA with the Infineon chip that will be in the 3G GSM phone? Or would different hardware and/or software be required?”

I thought I will publish a tutorial to benefit all my readers. This is my view of the wirelss standard we will see implemented in the 3G iPhone.

There are two pervasive wireless standards that support 3G -

  • The third generation partnership project (3GPP) has defined 3G as the CDMA-based evolution of GSM. So, GSM networks (e.g. AT&T in the US and most of Europe) have migrated or are migrating to WCDMA for higher voice capacity and also nominal data-rates. 3GPP has also added high throughput data capabilities in its later releases of the standard (e.g. HSDPA, HSPA, HSPA+.)
  • The Qualcomm-promoted CDMA2000 1x standard is part of the 3GPP2. Qualcomm calls its CDMA2000 1x as 3G. High throughput data capabilities have been added in the various revisions of EV-DO. Hence EV-DO is considered a natural evolution path for most CDMA2000 1x based networks (e.g. Sprint, Verizon)

Now, if we assume that the iPhone 3G has the Infineon SGOLD3H chip and its HEDGE platform, then we will have -

  • 3GPP Release 5 compliant dual-mode protocol stack
  • HSDPA with up to 7.2 Mbps for downlink
  • WCDMA 384 Kbps for uplink and downlink
  • Backward compatibility with GSM/GPRS/EDGE

For more details, I will direct you to the Infineon product brochure here. This version of iPhone 3G will have support for the above standards and nothing more. Essentially, it will not have HSUPA, or HSPA+.

Further, if the Infineon assumption holds, we will not have one iPhone that supports both 3GPP and 3GPP2-based standards. In other words, if the 3G iPhone is HSDPA capable, it will not be CDMA1x or EV-DO capable. Of course, it does not preclude Apple from releasing two versions of the iPhone – one for HSDPA and the other for CDMA1x/EV-DO. This will necessitate that Apple develop a completely new chipset/platform partnering with Qualcomm.

The common 3G iPhone notion is WCDMA or HSDPA-capability. Though not impossible, Apple will mostly desist from a CDMA1x version now. There are at least two reasons for this

  • WCDMA/HSDPA will be the dominant 3G standard moving forward. This will allow Apple to address most markets
  • In the US, a major market for CDMA1x, AT&T provides enough opportunities for Apple to increase its market share. In turn, the iPhone gives AT&T the chance to steal subscribers from the other service providers

In summary, a software upgrade/hack will not make AT&T’s 3G iPhone CDMA1x/EV-DO capable so you can use on Sprint or Verizon. Finally, irrespective of the actual standard in the 3G iPhone, the truth is it will have a CDMA air interface.

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Modu - convergence game-changer?

Thursday, May 8, 2008

Mobile convergence is a recurrent theme in this blog. As I continue my journey to understand the mobile value chain, disruptive trends are often brought to my attention. Recently, I was introduced to the Modu – the world’s smallest and first modular phone.

Let me start by saying Modu impresses me. You can read more about the concept from the company’s website here. As I think through it, more and more ideas pop out. I will pen a few hoping that this can initiate a discussion.

Firstly, while I think convergence is the future, customization has the potential to drive it in the emerging markets. If the feature-set is not available at a reasonable cost, allowing the user to choose a subset for the cost he is willing to shell out makes a compelling business case. While modularity is not my favorite approach to customization, it is an interesting one at that.

Secondly, the idea is simple, yet creative. Once you have the basic phone sold (with or without carrier support), the so-called jackets are consumer electronic gadgets that you can pick off the shelves of your favorite store. The product also helps CE manufacturers who risk being marginalized because they neither have the scale nor time to incorporate mobile phone capabilities in their devices. It is easy to conceptualize a modu transformer slot.

The idea is not without its drawbacks. The concept of changing jackets to suit your needs may be unattractive to a good portion of the consumers. While I like choice, my personal preference will be to go for my feature-set in a single device. For example, let us say that on a particular day I have the music player jacket. What if I have to make an unannounced trip that necessitates the GPS jacket that I don’t have handy? Perhaps, I am very utility-driven. But I am sure I am not alone here.

Not surprisingly, Modu’s PR machinery is focusing on the ‘coolness’ factor. The primary target audience is the young iPod-loving generation. In the emerging markets where cost is a factor, the pricing strategy can help this concept click.

That being said, there are two things to be kept in mind here. Firstly, the emerging markets will have a bifurcated user-base with the utilitarian user on one side and the younger gadget-loving crowd on the other. Secondly, in a country like India, the consumer is heavily brand and status-driven. It is important for Modu to ensure appropriate branding to compete with the Nokia handsets that dominate the market. At the same time, the aggressive pricing strategy should not cast aspersions on Modu’s quality or value.

Also, convergence will be driven by the user experience. So, the question in my mind is whether the jackets will match the UI, applications and the ease-of-use that have been the differentiators for some of the most successful mobile CE products. The pricing also makes me wonder about Modu’s abilities on this front.

In summary, Modu is a very interesting concept that adds a dimension to convergence, ironically through a divergent set of jackets. So far, the Israeli startup has impressed me with its ideas and moves. It remains to be seen whether the company’s marketing department understands its competitors’ moves and the pulse of the markets it is targeting. It is important that the company executes on its product launch well by striking a balance between cost and performance, the very conundrum that drives the growth rate of the wireless market at all levels world-wide.

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InterDigital exceeds expectations, expresses iPhone hopes

InterDigital announced its First Quarter 2008 results yesterday. The King of Prussia-based company beat analyst expectations this quarter, addressed the Nokia and Samsung litigations and also hinted about its 3G iPhone presence.

The total revenues for the First Quarter 2008 were $56mn down from $67.8mn in First Quarter 2007. Last year’s number however includes $18mn royalty audit findings and 2G royalties from Sony Ericsson. This year’s revenues include $55.5mn in recurring revenues, $53.3mn of which comes from patent licensing royalties. The net income was $7.3 million, or $0.15 per diluted share. This is almost double of the analyst consensus of $0.08 per diluted share.

InterDigital’s operational expenses for the quarter were at $45.1. The company has a healthy cash position of about $240mn and continues its share re-purchase program. LG, Sharp and NEC together account for 54% of the recurring revenues while RIMM, HTC, Sierra wireless and Option also have solid licensing deals with the company. While it did not give the revenue outlook for the next quarter yet, InterDigital forecasted that the non-litigation operating expenses (associated with SlimChip R&D and marketing) would grow sequentially between 4-8%.

On the product front, the company executives are positive about the technology IP licensing agreement with the ‘growing Asian semiconductor company’ that it hopes will increase its footprint in the Asian markets. The company’s HSDPA technology to NXP is moving into production and would now expand its presence given NXP’s merger with STM. Even while it continues IOT and performance testing with its current product, InterDigital asserted that its next product scheduled for 2009 was also well into development. This cost-down, better performing product targets not only the data-card and embedded market but also the smart-phone and the high-end feature-phone market.

On the licensing front, InterDigital continues to battle Nokia and Samsung. It has moved to sever the two cases with the ITC. It reiterated that it has made ‘substantial progress’ with the Nokia licensing negotiations. The executives suggested that the Finnish-handset maker’s current offer was unacceptable even if it were ‘a bird in the hand.’ Optimistic about a positive resolution, they stressed that InterDigital now has the scale to assert its IP using its financial position to create more value. With a growing list of over 25 3G licensees and with 3G itself burgeoning, the company is looking to leverage its IP optimally.

I also looked to pick up clues on the impending 3G iPhone during the call. CEO William Merritt was bullish in his prepared remarks mentioning “based on public report, [Infineon’s] good positioning for the iPhone 3G business.” This, as Bill points out, is attractive for InterDigital due to its per unit 3G software licensing deal with Infineon. The company was also hopeful that Infineon would win the 3G iPhone socket since it will be “a nice contributor to revenue.” My take –the CEO will not mention the iPhone in his prepared remark unless he is confident about Infineon. It appeared to me he was playing safe and yet wanted to give the InterDigital investors a clue of what was in the offing. I see this as yet another ratification of my 3G iPhone-Infineon-InterDigital thesis which you can read here.

The company’s product marketing strategy also struck the right chord with me. It mentioned that it was in talks with application processor companies. The plan is to bundle its SlimChip solution with powerful application processors for the smart-phone market. This is something that I have been advocating that InterDigital has to do. As I have mentioned here, there is a great synergy with TI. It will serve the best interests of both these companies to partner for 3G. This TI+InterDigital bundle (or even a custom-OMAPVox solution) can find itself in Nokia smart-phones.

All in all, it was a good quarter. There were no red flags. On the contrary, I see the company positioning itself to realize maximal value out of its 3G IP and product offerings.

[Long InterDigital at the time of writing. All thoughts expressed here are those of the author's and do not necessarily reflect those of either Atheros Communications or TensorComm Inc.]

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More than one iPhone?

Tuesday, May 6, 2008

On reading my iPhone and WiMAX article, a friend sent me the link to another 9to5Mac story wanting to know if I had assumed only one model of the iPhone in my analysis. My answer: Yes, I am assuming that only one new model will come out. We are all confident about the 3G iPhone. That is a given. But, I do not discount the possibility of Apple launching more iPhone models.

Apart from the 3G iPhone that I have been covering in great detail on my site, the possibility of a smaller, lower-cost version is reasonable. Like the 9to5Mac article rightly updates us, it is a question of when and not whether a second model is on its way. From Apple’s perspective it makes good business sense to offer an entry-point into the emerging markets. It does not have to be a feature-rich iPhone. It is also unlikely to be 3G-capable. If I were to guess, I would expect it to be an easy-to-use, utilitarian iPhone which also doubles up as an iPod.

Apple will likely leverage its development effort on the current Infineon platform to launch this version rather than starting from scratch with another vendor. The Apple brand and the iPhone enigma will help sell these phones in newer markets thus expanding its penetration. At this point, I don’t have ideas on its feature-set, pricing and of course, its launch date.

We can also expect that Apple will upgrade its current line of iPhones. We are probably looking at models with more memory and stereo Bluetooth among other enhancements.

In summary, I have merely extended Apple’s iPod product strategy here. The product features I have mentioned are more an incomplete wish-list if anything. As for the actual product line-up and their features, we will have to wait for the moment of truth when they are launched.

Disclaimer: All thoughts expressed here are those of the author's and do not necessarily reflect those of either Atheros Communications or TensorComm Inc.

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3G iPhone and Qualcomm

Sunday, May 4, 2008

[Originally for Sramana Mitra's site]

The 3G iPhone rumors are getting more frequent by the day. We all know it will hit the market. It is just a question of when. I have, in the past, looked at the likely component vendors for the impending iPhone including Infineon and InterDigital. As requested by one of our readers, we take a look at a company which will gain from the 3G iPhone, even without a single component inside it - Qualcomm.

With a substantial portion of the 3G intellectual property (IP), Qualcomm stands to make royalty money from every CDMA-based phone sold around the world. Three out of four phones in the 2010-2011 timeframe are expected to be CDMA-based. Quite obviously, this includes the impending 3G iPhone.

If a 3G iPhone is available in the next couple of months, I estimate about 2.5 million units will be sold. This number is expected to climb to about 17.5 million units in 2010. With a conservative selling price of $350 and a royalty percentage of 5%, Qualcomm stands to make close to $44 million this year and as high as $300 million in 2010 just on iPhone sales.

Both Apple and Infineon (whose chipset, I am betting, is central to the 3G) will certainly be aware of this situation. Infineon purchased Agere’s mobility products business from LSI last year. This acquisition, as Will Strauss of Forward Concepts points out, brings with it a huge body of patents (including 3G) from Agere’s Bell labs legacy. Besides, Infineon has a strong ally in InterDigital, the IP powerhouse which supplies the 3G stack for Infineon chipsets. Apple also signed licensing agreements with InterDigital last year for 2G and 3G iPhones.

While it appears that the iPhone camp has a good IP position, it does not obviate the need for a Qualcomm license. The combined patent portfolio of Infineon and InterDigital will help bring down the net money flowing into Qualcomm’s coffers. However, it is unlikely that this number will become public knowledge. We will also not know what percentage distribution of this fee as paid by Apple or Infineon.

This brings us to an interesting question that our reader asks – “Is there an upcoming legal battle coming? Interesting since recently qcom and apple switched top lawyers.” It is true that Apple lost its general counsel Donald Rosenberg to Qualcomm last September. But I will desist from drawing connections to a potential legal battle. A legal bickering between the two technology heavyweights just because it is a lose-lose situation. Qualcomm, while vigorously defending its IP, would prefer to be in the good books of Apple hoping for a future design win into the iPhone or other convergence devices. With Nokia’s 40% market share seemingly out of its reach in the short-term, Qualcomm will attempt to grow its market share with new vendors, Apple being a prime candidate. I am sure that Apple, a stickler for performance and technology leadership, will also understand that Qualcomm can be an important partner in the longer term. So, the most likely scenario is a low profile licensing agreement between the two.

In summary, Qualcomm stands to gain from the 3G iPhone irrespective of whose chipset is being used. I highly doubt a legal showdown, least of all based on the general counsel’s move. As for the exact licensing terms, we will never know. This secrecy not only adds to the enigma of Apple’s product strategy and margins but is also crucial to the success of Qualcomm’s business model.

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Qualcomm - Valuation revisited

[Originally for Sramana Mitra's site]

It has been around six months since I wrote my Qualcomm valuation series. I had at that time valued the company at $44.60. Following the company’s fiscal second quarter 2008 earnings conference call I reviewed its mobile opportunities, strategy and also its product strategy for convergence and mobile computing in my blog. With these as the background, let me revisit Qualcomm’s valuation.

Firstly, there has not been any major event since that will have a negative impact on my $44.60 valuation. On the contrary, the strength of this number comes from the company’s ability to address most if not all segments in the mobile chipset market. It has since made positive strides in new market areas with a comprehensive product portfolio. Besides, the CDMA-pioneer is also betting big on software applications, services and mobile commerce.

Gobi, Qualcomm’s embedded dual-standard chipset for laptops has helped the company gain traction with laptop vendors. Till date five major OEMs are embedding the mobility solution in their laptops. The notebook/laptop market is expected to grow at 10-15% CAGR over the next five years. Though the volumes are not as big as those of mobile phones, Qualcomm stands to gain even with modest penetration. For a more detailed account of Qualcomm’s Gobi moves, I will direct the interested reader to my articles here and here.

Qualcomm also offers the Snapdragon and the Snap Star solutions that, in my opinion, are taking on Intel’s Ultra-mobile PC (UMPC) and Mobile Internet Devices (MID) initiatives. While Intel approaches these convergence initiatives as a reduction in the form-factor and power consumption, Qualcomm has proven competency in building high-performance mobile chipsets. Ms. Mitra in her Apple article on Forbes talked about the ‘yet-to-be created category’ of convergence devices that mobile phone and laptop vendors will scramble to emulate behind Apple. Snapdragon positions Qualcomm to exploit this situation very well. More on Snapdragon can be found here and here.

While it is difficult to quantify Qualcomm’s convergence moves, the upsides are very apparent. For the purpose of valuation, I will take a conservative stance. If I assume that Gobi succeeds in penetrating 20% notebooks in 2012, and the other solutions find slightly lesser success in their segments, I estimate at least a $5.50 increase in Qualcomm’s share price. So, my verdict, based on current information, is $50 per share. As more information trickles in over the next few quarters, I also think that this number will go up.

In summary, Qualcomm has continued to create more value with a very well-thought out and visionary product roadmap and planning into the future. These diversification efforts that I have highlighted in the past will expand the company’s core competency beyond mobile phone chipsets and IP. It also makes Qualcomm more resilient in the eventuality of reversals in some of the various legal disputes that it has been involved in. Finally and perhaps most importantly, the diversification also highlights Qualcomm’s ability to adapt to the changing market needs as it continues to be the flag-bearer for the US wireless industry.

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QCT website

I have recently been covering Qualcomm's mobile strategy in great detail, especially highlighting its Snapdragon and Gobi solutions. Yesterday, a friend directed me to a new Qualcomm website that has a wealth of information on these topics.

Check out QctConnect. It is the website for the QCT division and its products. You can see that the company is promoting Snapdragon and Gobi as the face of QCT. 'Chipset'-related links from Qualcomm's corporate website also leads to this new website. Not long ago, the link was not up because of legal issues following the ITC ban.

I am guessing that this new site has been designed to avoid the legal hassles. But looking at the ocmprehensive website, I am left wondering if the company will try something funny - a QCT spin-off? Probably not!

Incidentally, for those of you who are interested in Qualcomm's valuation, I have a recent post here highlighting my thoughts. For the iPhone enthusiasts, read post on how the launch of its 3G version will have a positive impact on Qualcomm.

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SiRF - Valuation

Saturday, May 3, 2008

Over the last few weeks, I have been writing about SiRF. I am amply clear that a merger or acquisition would be the best end-game for the company today. The earnings conference call did not offer any immediate solace to SiRF investors though the company executives promised a turn of fortunes by the end of this year. In this article, I will conclude this series with a valuation of the GPS leader. I have carried this valuation primarily from an acquisition stand-point. To appreciate the perspectives offered in this piece, I recommend catching up on your reading here, here and here.

My most optimistic valuation of SiRF is at $11.70 per share. In estimating the company’s value, I assumed that the company’s management can carry its restructuring exercise well enough to bring its operating expenses back on track and close to 35% of the revenue. Despite my skepticism, I have also assumed liberal market shares in the various segments.

SiRF’s woes primarily are due to its inability to counter the new wave of competition in the burgeoning cellular handset market. The TAM for the cellular handset GPS is expected to double to over $1bn in 2010 and beyond. Excluding Qualcomm’s market share, the rest of the cellular handset GPS TAM is expected to be 40-50% of the TAM for the mobile GPS market.
Secondly, the driver behind the mass adoption of GPS in mobile handsets is the reduction in ASP. Its high-performance receivers notwithstanding, SiRF runs the risk of being marginalized as more and more mobile chipset providers bundle and aggressively price GPS solutions with their products.

Thirdly, even in segments where it has a dominant presence today, SiRF will find tough competition moving forward. Broadcom (Global Locate) replaced SiRF in ONE (TomTom’s best-selling PND.) Even the portable CE and Portable computer segments for which SiRF is collaborating with Intel will also face stiff competition from Qualcomm’s Snapdragon and Snap Star solutions.

In summary, I don’t see the company getting anywhere close to its glory days again. The 52-week high of $30.61 is but a dream. I have been maintaining so far that its current range for SiRF’s share price is too low. Perhaps, not any more! If SiRF continues to incur heavy expenses and fails to retain its mobile market share, I would value it close to $6. So, the market is justified in its caution.

$11.70 would be my price for an acquisition. If the company decides to stay by itself, the realization of this value will solely depend on efficient expense management and the ability of SiRF to efficiently retain good market share levels.

[I picked up the company’s shares close to its bottom. I will monitor its movement and offload it at around $10-$11 without blinking an eye. But that is just me!]

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Qualcomm - beyond mobile phones

My last Qualcomm article talked about its mobile phone chipset strategy. Here, I want to highlight Qualcomm’s other hardware offerings that greatly expand its market possibilities, especially in the mobile computing space. These products and the software/service initiatives that the company has been taking recently allow it to shed its ‘CDMA-company’ or ‘mobile-phone chipset company' tag to help become a more global and well-recognized brand.

Gobi is an embedded solution for notebooks that packs EV-DO, HSPA and GPS capabilities together. More than the component technologies in Gobi, I like the concept of a universal solution. While it will be some time before such combination chipsets are fully utilized, there will certainly be a market for them(perhaps including other standards such as WiMAX, LTE as well.) With convergence shaping up better by the day, Gobi is a very brilliant initiative from a company that seeks to expand its footprint.

Qualcomm, with a head-start in this concept, has gained good traction with the vendors. HP recently announced their plans to ship Gobi-enabled laptops. The company has secured design wins with five major laptop OEMs and several major networks have certified the Gobi. With the first Gobi-enabled laptop shipping in the June time-frame, the company expects full revenue impact in fiscal 2009. Gobi is currently being designed into enterprise devices. As it succeeds in its effort to push Gobi into consumer-grade devices, we will start to see a much higher positive impact on the company’s revenue. You can read earlier Gobi coverage from my blog here, here and here.

Qualcomm’s other big move towards mobile computing and convergence is the Snapdragon. The Snapdragon platform is designed as the single-stop shop for handset vendors looking to converge on mobility and computing (e.g. a hybrid of the iPhone and the Air.) The low-power, high performance platform, Qualcomm says, is designed for pocket-sized portable computers with 4-5 inch screens. This platform is already designed into 15 devices and is expected to hit the markets in the latter half of this year.

Sanjay Jha suggests that the Snapdragon does not compete with Intel’s Atom processor mentioning that the latter targets larger form-factor devices. But it is evident to me that Qualcomm is looking to take on Intel by betting on the smaller form-factor. If you can get a device that can do everything and more than Intel’s Atom-enabled UMPCs and yet fit into your pocket, what would you rather buy? More on Snapdragon can be found in my blog here and here.

The third product is the Snap Star or QST solutions targeting consumer electronics. The Snap Star solutions combine GPS, wireless connectivity, multimedia and broadcast TV to consumer-oriented devices such as personal navigation and mobile entertainment devices. This, it seems to me, is targeting the GPS flavor of Intel’s Mobile Internet Devices (MID).

These industry-defining products that Qualcomm has lined up can thrust it forward beyond mobile-phones. The company is also very aggressive about complementing these solutions with mobile services. Mobility and convergence present wonderful market opportunities. Qualcomm with its comprehensive product roadmap is positioned to exploit them.

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