Saturday, June 28, 2008
[Originally for Sramana Mitra's site]
We recently evaluated Infineon’s industrial and automotive business and its wireline communications business. Let us now take a quick look at its wireless communications business that has been in the news for the past year due to the company’s presence in the iPhone.
Apart from the cellular ICs, Infineon has a low, non-negligible market share in the Bluetooth market. In collaboration with Global Locate (now Broadcom), Infineon also developed the Hammerhead II A-GPS solution for the cellular market. It also has a presence in the digital cordless and RF power markets.
While Infineon specializes in low-power chipsets and is looking to increase its wireless footprint across
Infineon’s strategy seems to be to provide low-cost cellular platforms whose gaps can be filled by other vendors. The 2G iPhone platform is a good example. While its cellular ICs were from Infineon, the application processor was from Samsung, WLAN from Marvell and Bluetooth from CSR. This model will work fine as long as handset vendors are interested in picking the best-in-class components based on cost and performance. If, on the other hand, the trend drifts towards highly integrated single vendor solutions, the handicaps in Infineon’s mobile portfolio will result in the company losing its market share, potentially including iPhone designs 2009 and beyond. Infineon will not be in a position to compete with the likes of Qualcomm, Broadcom and STM, all of whom have a complete portfolio to build single-stop cellular platforms.
Given these loopholes in its mobile and wireless portfolio, mergers and acquisitions become viable paths for Infineon to stay competitive. In the sequel, we will discuss potential acquisition areas and targets before looking at its valuation.
Friday, June 27, 2008
[Originally for Sramana Mitra's site]
We have, so far in this series, reviewed Infineon’s financials, Qimonda and the industrial and automotive businesses. As we continue to dissect Infineon in our valuation analysis, we will now take a look at its wireline business.
Infineon’s play in wireline communications is based on the convergence of data, voice and video in a single network and the resulting demand for high quality electronics. The company offers broadband solutions for central office and customer premises equipment (CPE). The company’s product lines include xDSL, 2G/3G wireless infrastructure and Ethernet solutions.
According to Gartner, Infineon held the fourth position for application-specific wireline ICs in 2006, with 5.6% market share. The company was also fourth in the wireline access network IC segment with about 15% market share. The German chipmaker further strengthened its position by acquiring TI’s CPE business in the fourth quarter of 2007. Infineon hopes to leverage TI’s customer base and carrier deployments to become the ADSL market leader.
While Infineon is a leading player in wireline communications, competition and the market make it difficult for it to achieve disruptive growth here. As an example, for the company to sustain long term in the customer premises equipment market, it needs to watch out for disruptive technologies and applications that can be integrated into such equipment. Femtocells, or indoor base stations, are good examples. Another relevant but more ‘down the road’ example is the integration of a smart-energy gateway used to monitor and control customer site energy consumption.
In the next part of the series, we will look at Infineon’s wireless play, which complements its wireline communications business. As we will see, wireless is the growth driver Infineon is relying on.
Sunday, June 22, 2008
Sometime in 2006, I was in my favorite Starbucks location next to the TensorComm office in
Now, my boss started chuckling and asked me if I had read George Carlin's new rules for 2006. I had not. I got back to my desk and checked it out and could not help bursting in laughter at what I saw. One of his rules read -
"..The more complicated the Starbucks order, the bigger the a** hole. If you walk into a Starbucks and order a "decaf grande half-soy, half-low fat, iced vanilla, double-shot, gingerbread cappuccino, extra dry, light ice, with one Sweet-n'-Low and one NutraSweet," ooh, you're a huge a** hole..."
"I am not that big an a** hole, but I still am one, " I thought to myself. Since then, I have often reflected on some of my idiosyncrasies and have consciously tried to improve myself. Of course, I should thank my boss for it. But George Carlin and his subtle message have certainly had a lasting effect on my life.
Yesterday, the comedian known for boldly pointing out such human follies and absurdities passed away due to a heart failure. I pray that his soul rests in peace.
[Originally for Sramana Mitra's site]
We recently evaluated Infineon’s financials and the negative impact Qimonda has had on it. While it is facing difficulties offloading its Qimonda stake, the German chipmaker has done well in its two business segments. Let us take a quick look at the Industrial and Automotive business in this part.
The main products of this segment include power semiconductors, sensors and microcontrollers, silicon discretes, chip card and security ICs. Infineon’s ICs are used in power trains, body and convenience features such as air conditioning in your car, its safety features such as ABS, airbags and stability control, and its infotainment aspects. Industrial applications include power management and supplies, power generation and distribution, and industrial control. Customers include Avnet, Bosch and Siemens.
Market research firm Semicast reported that Infineon is the leader in the industrial segment ahead of STM and Renesas. Semicast estimates that Infineon has about 7.5% of the $20 billion industrial market. Further, this market is expected to grow to $33 billion in 2013 presenting Infineon with a good growth driver. Strategy Analytics ranks Infineon as the second largest supplier of ICs for automotive applications worldwide with about 9% market share. Additionally, Infineon is number one in the power semiconductors market with 6% share in 2006 according to an IMS research report.
Driven by the strong demand for energy efficient solutions, the industrial and automotive business will stay healthy. The company expects healthy growth rate in the industrial segment primarily based on its leadership position in power applications. It also hopes for roughly stable sales within its automotive business based on its ability to provide complete high quality semiconductor solutions integrating power, analog, mixed signal IC and sensor technology.
Like Semicast’s Colin Barnden notes, the challenge will be to hold on to the leadership position in the face of increased competition. The uncertain economy will make the stable industrial and automotive segment very attractive for semiconductor companies. The segment thus presents a good opportunity for Infineon subject to competitive risks. For the moment, I am willing to give Infineon the benefit of doubt that it will at least continue to maintain its market share here if not grow it modestly.
Wednesday, June 18, 2008
[Originally for Sramana Mitra's site]
In the last part of this series, we looked at Infineon’s recent financials and pointed out that Qimonda is a key reason why the company is struggling to create more shareholders’ value. Let us now take a deeper look into Qimonda’s challenges and Infineon’s strategic initiatives to address the situation.
The picture below, taken from Infineon’s fiscal 2007 annual report, illustrates the root cause of Qimonda’s misery.
The DRAM prices dropped a whopping 29% in fiscal 2007 led by seasonal demand weakness, inventory build-up prior to the Windows Vista launch and capacity conversion from NAND to DRAM by the competition. The 44% increase in shipments and the continuing market diversification strategy were not enough to stave off these challenges leading to a net sales decrease of 207 million Euros in 2007.
Despite these issues, the DRAM business requires Qimonda to invest heavily in its research and manufacturing capabilities. In 2007, Qimonda announced plans to build new manufacturing facilities in Singapore and Malaysia. It also announced an agreement with SanDisk to jointly develop and manufacture Multi-chip Packages. Additionally, the company hopes to leverage its product and market diversification strategy to increase DRAM average selling prices (ASPs), profitability and return on capital.
Last week, Qimonda and Elpida, both top-5 DRAM suppliers, signed final contracts for a strategic technology partnership on joint development of DRAMs. Primarily a move to gain scale, this agreement encompasses a broad cross licensing of Intellectual Property that gives both companies higher design freedom while aligning their development interests. Elpida’s CEO is also quoted as saying that he was open to a share swap with Infineon.
Infineon wants to get out of the memory business. It announced recently that it wants to reduce its current 78% stake in Qimonda to below 50% by the 2009 Annual General Meeting. While not many will pay cash for this stake, share swaps with companies like Elpida may help constrict the supply and stem the free-fall in DRAM prices. With private equity unlikely to pick up Qimonda due to its unattractive cash flow, such share swaps may be the unfortunate reality that Infineon has to face today.
In summary, Infineon is unlikely to relieve itself of the memory business overnight. The huge write-off in the last quarter demonstrates that the company has realized this hard fact. It will have to swallow more losses despite its valuable R&D and manufacturing capabilities. From a valuation perspective, Qimonda will continue to have a considerable negative impact on Infineon’s share price.
[Originally for Sramana Mitra's site]
In the first part of this series, I presented an overview of the company’s various business segments. With that as the background, let us look into the company’s recent financials.
For the fiscal year ending September 30, 2007, Infineon reported net revenues of 7682 million Euros at a gross margin of 20.7% and operating loss of about 3.5%. This is a decrease of 3% from the 2006 revenues of 7929 million Euros. The gross margin for 2006 was 26.2% while the corresponding operating loss was about 3.4%. Much like its European competitor STM, Infineon is also struggling well behind the industry average gross margin of 50.5% and operating margin of 18.6%.
The automotive and industrial business segment contributed 39% of the revenue while the communications segment accounted for about 14%. Qimonda, the struggling subsidiary producing memory chips, contributed close to 50% of Infineon’s 2007 revenues. Almost one third of Infineon’s products are consumed within Europe while Asia-Pacific accounts for another third.
Much of Infineon’s woes are tied to the struggling Qimonda. The commoditization of memory chips has caused their prices to fall considerably. While the cost of owning and operating memory fabs is high, the RoI is just not there due to unfavorable market conditions. Severely impaired in its ability to generate shareholder value, Infineon recently declared its interest in Qimonda as ‘assets held for sale.’ To give more clarity on its core business, the company will now report revenues only from its continuing operations. The potential gains or losses due to the change in the fair value of Qimonda will be reported as discontinued operations. In accordance with this practice, the company wrote off 1.3 billion Euros last quarter.
In the recent quarter that ended March 31, 2008, the company reported net revenues of 1049 million Euros from its core segments. This is an increase of 7% from the corresponding quarter in 2007. The gross margin for the quarter was 35% while the operating margin was about 4.5%.The Qimonda write-off in the balance sheet demonstrates the quandary that Infineon is in. It wants to dilute its stake in Qimonda and get out of the memory business. But apparently, the loss-making subsidiary does not have many takers. Infineon’s handling of Qimonda in the next few years will be an important component of any valuation analysis. It will hence be illustrative to take a look at this relationship in the sequel.
Tuesday, June 17, 2008
[Originally for Sramana Mitra's site]
We have, over the past year, presented detailed valuation theses for various mobile chipset vendors namely Qualcomm, Texas Instruments, Broadcom, InterDigital, Marvell and STMicroelectronics. This matrix will not be complete without Infineon – the German Chipmaker.
Infineon shot to the spotlight in the wireless world as it was discovered to be at the heart of the sensational first generation iPhone. I also think that Infineon will continue to hold this socket in the 3G iPhone to be released on July 11th. I am betting that Infineon’s XMM6080 platform and its PMB8878 chip (formerly known as S-GOLD3H and now marketed as X-GOLD608) will be in Apple’s darling product that was announced amidst much fanfare and expectations recently.
While the iPhone has been Infineon’s public face around the world for the last year or so, its business interests are much broader spanning automotives, industrial applications, and memory among others. The company was founded in the summer of 1999 as a wholly owned spinoff of Siemens AG following the latter’s huge losses in the fiscal year 1998. Infineon Technologies AG was listed as an IPO on the Frankfurt and New York Stock Exchanges in 2000. Today, iSuppli ranks Infineon 10th in the list of worldwide semiconductor suppliers.
The company is broadly divided into three business segments –
Automotive, Industrial and multimarket segment designs, develops and manufactures and markets semiconductors and complete system solutions for automotive, industrial, security applications and customer-specific applications. The continuing demand for high power products for industrial applications, increased sales of energy efficient products and an increased demand for government ID applications are attributed as growth drivers for this segment.
The Communication segment offers a range of ICs, other than semiconductors and complete system solutions for wireline and wireless communication applications. Wireless chipsets are a mainstay of this unit. Beaten up over the past two years by the insolvency of BenQ’s German subsidiary, the company is trying to recoup by building its IP and product base mainly through acquisitions. Besides Apple, Infineon phone platform customers include ZTE, Panasonic and LG.
Qimonda was legally separated from Infineon in May 1, 2006 into a stand-alone company manufacturing memory products. This segment has been Infineon’s Achilles’ heel from the day one. In fact, Infineon’s inception was forced because memory price erosion led to a $674 million pre-tax loss posted by Siemens Semiconductor in 1998. Even in 2007, a drastic 29% decrease in DRAM prices hurt Infineon’s prospects. The German chipmaker, realizing this bottleneck is starting to dilute its ownership in Qimonda.
With this brief overview of the company, we will look at the company’s financials, business segments, strategy and valuation in the sequels.
Tuesday, June 10, 2008
Forgive me for the barrage of posts, but I feel it would be better to put my thoughts down here before they either become obsolete or irrelevant (or both.) So here are a few more points to think about.
Firstly, AT&T is subsidizing the iPhone for us. This means that AT&T is paying Apple for the iPhone. Some estimates run up to an extra $200. Apple, in turn, has given up its cut from AT&T service contracts (contrary to my earlier speculation here). AT&T has increased the data plan by $10. So, the total cost of the new 8GB iPhone will still be $199+$240 = $439 for a 2-year contract. But most consumers will look at this increase as a premium that they will pay for 3G. For them, the bottomline will be that they are getting a very cheap iPhone at $199. VentureBeat has a nice post on this topic here.
The second point I wanted to make was on the 3G comparision demo. Apple showed that the iPhone was 36% faster than two competing 3G phones. I posted that this may reflect the capabilities of the modem design. As it turns out, that theory is not bullet-proof. In response to Om Malik's question on AT&T's 3G network capabilities, the company's mobility chief, Ralph de la Vega said that he is confident of being able to deal with the demand. Further, he said " We have a maximum throughput of 3.6 Mbps and soon it will be 20 Mbps. The core of the network is going to run faster as well." This piece escaped my earlier analysis. If the AT&T network currently runs at a maximum of 3.6 Mbps, then an advanced receiver in the iPhone (that supports up to 7.2 Mbps) should have minimal impact on the results. So, now I am left wondering where, if outside of the
I will post more thoughts as I think through this further. Perhaps, I will consolidate these observations into a single post in the future. Until then, I hope you find these tidbits and commentary useful.
My first premise is that Infineon's XMM6080 platform will be in the 3G iPhone. Now, if we look at the product brief of the XMM6080 here, the block diagram clearly states that the GPS capability of this platform comes from "Infineon/Global Locate A-GPS Hammerhead PMB2520/25." As we all know, Broadcom acquired Global Locate last year.
This is my simple argument that Broadcom owns the GPS slot in the 3G iPhone. Counter arguments, anyone?
Monday, June 9, 2008
The 3G iPhone is here. Well, almost here! Steve Jobs announced the latest avatar of the iPhone in his WWDC keynote today. Unfortunately for the users and technology enthusiasts, the phone is not out until July 11th. In any case, let us quickly look at the tidbits thrown at us during Steve's talk.
The 8GB 3G iPhone will indeed come with the $199 price tag. Other models are also lower cost than before. This is perhaps an industry changing move by Apple which has sought to bring smartphones to the mass market. It has, in the process, also shed the exclusivity tag that accompanies most of its products. The $199 tag is likely below the phone's manufacturing cost. So, it looks like AT&T is subsidizing it for us. Besides, I am sure that Apple will make money through the plethora of applications that are lined up for the iPhone apart from the AT&T service contract itself. Essentially, there seems to be a change in its iPhone business model. Apple, while choosing volume over margin with this move, will have to be cautious not to repeat Motorola's mistakes with the highly successful yet unprofitable Razr line of phones.
The 3G iPhone will be GPS-enabled. This clearly puts gadgets like Garmin's Nuvifone at a disadvantage. The phone also boasts good battery life. It has 5 hours of 3G talk-time, 5 to 6 hours of data browsing, 7 hours of video, 24 hours of audio. Not to mention the highly anticipated enterprise support that will have RIMM gritting its teeth.
OLD: This is the old version of the paragraph. I have updated this with more accurate information and have it below. Please read that......[The 3G data speed demo gave clues about the iPhone's modem capabilities. Steve showed that the iPhone was about 36% faster than the Treo 750 and the Nokia N95. The caveat is that these popular phones are based on slower WCDMA and are not HSDPA-enabled. For the uninitiated, WCDMA stands for Wideband Code Division Multiple Access and is the 3G migratory path for GSM carriers. HSDPA stands for High Speed Data Packet Access (HSDPA) and is a higher speed data optimized evolution of WCDMA. So, while not being a fair comparison, it demo showed that the iPhone supports HSDPA. I would personally have wanted to see how the iPhone performed against other HSDPA phones. That would have given me a better metric to evaluate the modem and also obtain clues about the baseband supplier.]
UPDATED: The 3G data speed demo gave clues about the iPhone's modem capabilities. Steve showed that the iPhone was about 36% faster than the Treo 750 and the Nokia N95. Nokia's N95 is HSDPA-capable. Palm also unlocked the Treo 750 to support HSDPA. (I am still a little hazy about the Treo specs. and would welcome additional information that you can provide me on this.) For the uninitiated, HSDPA stands for High Speed Data Packet Access (HSDPA) and is a higher speed data optimized evolution of 3G. So, Discounting any improvements provided by the OS and the browser, the demo suggests that the iPhone has a higher capability HSDPA receiver. A friend suggests that the difference in performance may be because the N95 uses a category 6 HSDPA receiver capable of download speeds upto 3.6 Mbps. The iPhone looks to be having a Category 8 receiver capable of 7.2 Mbps. This does give me clues about the baseband supplier. While multiple vendors including Qualcomm and InterDigital have Category 8 receivers, this comparison gives me more confidence that Infineon's X-GOLD-608 is central to the 3G iPhone.
The $199 tag is great news to me. I was looking to get the iPod Touch and a GPS device anyways. I will wait for my Sprint contract to expire and quickly grab one of these from an Apple store. I am not alone. All colleagues and friends I talked to today are quite bouyant. People who don't have the 2G iPhone are waiting for July 11th. Those who paid a high premium for the previous iPhone are still willing to trade theirs for a newer, sleeker and faster big brother. The 10 million iPhone target will now be a rather conservative estimate.
In summary, the keynote confirmed rumors that a lot of imagined were outrageous. The $199 iPhone is the mother of all deals and is bound to put other smartphone makers in a spot while giving great leverage to AT&T.
Sunday, June 8, 2008
The 3G iPhone is expected to launch soon at the WWDC. One of the primary component winners likely is Infineon. The company’s cellular chipset is expected to drive the iPhone. As we wait for the teardown, I was asked by a good friend how we would know if IDCC is in the iPhone. He specifically wanted me to address the issue with respect to the latest IFX 3G product announcements. Here is my take on it.
Firstly, IDCC will get licensing fees from Apple as per agreements signed last year. The agreement covers 2G and 3G iPhones to be sold in the near future. So, irrespective of whose 3G components are in the iPhone, IDCC gets money from Apple.
Secondly, there will be money coming if Infineon’s 3G baseband is in the iPhone. In light of the recent product announcements by Infineon, I need to be careful when I make that statement. So, let me step back and reflect on the impending 3G iPhone. I wrote in the past that I expect to see the MP-EH platform with the S-GOLD3H baseband chip in the 3G iPhone. The company has rechristened its products since. The HSDPA capable MP-EH platform is now the XMM 6080 while its 3G baseband chip - PMB8878 - previously known as the S-GOLD-3H (H indicating HSDPA capability) is now the X-GOLD 608. Read more on this subject here and here.
Further, the 3G software stack that will be used in the MP-EH/S-GOLD3H combination was jointly developed by InterDigital and Infineon’s subsidiary Comneon. So, IDCC will get per-unit royalty from Infineon for use of the stack. While the software collaboration is public, I am inclined to speculate based on recent modem performance data that IFX 3G chips use some baseband receiver design IP from IDCC. This can be an additional source of per-unit royalty for IDCC.
Recently, Infineon announced an array of X-GOLD61x HSDPA/HSUPA products that drastically reduce on power and space apart from catering to multiple phone market segments. Furthermore, the company also announced specifically that the stack for the X-GOLD61x solutions is internally developed. While this announcement gives more design control to Infineon, it implies that IDCC will not receive per-unit royalties for the software stack on the 61x series. On the other hand, I am still bullish (read speculation) about the use of IDCC’s physical layer receiver IP in all of Infineon’s 3G offerings. Also, while I think these new products are part of Infineon's push to hold on to Apple for future designs in the face of increasing competition, I would be greatly surprised if I see any of these 61x chips in the first 3G iPhone.
In summary, look to see if the iPhone teardown reveals Infineon’s PMB8878/X-GOLD 608/S-GOLD-3H baseband. So, the best case scenario for IDCC is for the iPhone to have a heart of Gold! Even otherwise, the King of Prussia-based company will gain from Apple’s licensing fees.
[Long IDCC at the time of writing]
Thursday, June 5, 2008
We are less than a week off from the Apple Worldwide Developer's Conference 2008 (WWDC) in which the 3G iPhone is expected to make its debut. I have, over the past year, covered the 3G iPhone in great detail. As we head to the WWDC, I thought it will be nice to compile my iPhone predictions about some component suppliers. Take them for what they are - just predictions!
3G Baseband: Infineon will be at the heart of the iPhone. The Infineon 3G chip will have a software stack that is jointly developed with InterDigital. The King of Prussia-based InterDigital is also likely to have a good portion of the baseband IP if my guess is right. I am basing this last speculation on the performance of the IFX chipsets in recently conducted tests.Essentially, InterDigital will earn a per-chip royalty for the software stack and possibly for the baseband IP. For more details on the 3G baseband supplier analysis, I will direct you to my article here.
Application Processor: Samsung will perhaps continue to own this part. Marvell has an outside chance.
WLAN: For platform stability issues, I will bet on Marvell grabbing this socket again. Broadcom may spring a surprise with its WLAN-BT-FM integrated solution.
Bluetooth: If WLAN belongs to Marvell, CSR, which is in the current iPhone, will likely own the Bluetooth socket again.
GPS: The next generation will have GPS and it will likely belong to Broadcom. This was recently ratified by a GigaOm report.
I cannot hypothesise on other components. But if I were to guess, I will bet on Apple retaining most existing suppliers. While I have been talking about these component suppliers for around a year now, some of these predictions may appear matter-of-fact to readers today. In any case, now that I have put it all in a list, let us see what my hit-rate is!
[Long IDCC at the time of writing]
Wednesday, June 4, 2008
With Nokia and InterDigital (IDCC) engaged in a prolonged legal battle over licensing issues, the title of this article is sure to raise more than a few eyebrows. I think that recent industry events make this an interesting but overlooked possibility. Here is why –
The IDCC-NXP connection: NXP has licensed IDCC’s 3G HSDPA ASIC design for its PNX6712 chip. The companies entered into this agreement for integration into NXP’s Nexperia cellular chipsets as early as August 2005. Talking about this during InterDigital’s 1st quarter 2008 conference call, its CFO Scott McQuilkin said, “We also completed our delivery of HSDPA technology to NXP and ASIC is now moving into production.”
The NXP-STM connection: STM and NXP entered into a JV last month merging their wireless businesses to acquire scale. You can read my extensive coverage of this event here and here. The formation of a solid number three player stints IDCC’s abilities to sell its SlimChip solution directly. But in the bigger scheme of things, it spells good news for the King of Prussia-based company as the JV widens its footprint. In the most recent quarter conference call, IDCC’s CEO William Merritt resonated this point saying, “Frankly we looked at the combination of ST Micro and NXP and said, ‘Great, they’re getting stronger and they have our IP’ and we love our licensees to be strong and pushing hard into the market..”
The STM-Nokia connection: Nokia last year decided on a multi-vendor sourcing strategy. It now sources 3G from both TI and STM. Additionally, it also transferred about 200 chipset design engineers to STM. This not only signals Nokia’s move away from chipset design, but also presents STM with the opportunity to grab more 3G business at Nokia. It is devoting R&D resources to baseband design and NXP’s team and product are an active part of the equation.
The performance conundrum: Data communication necessitates a better receiver design. Despite the design resources from Nokia, STM will take time to build a competitive solution on its own. On the other hand, the design that NXP has licensed from IDCC is one of the top-performing receivers today. Nokia cannot afford to lag in 3G performance especially considering its high-end mobile market competitors have good solutions. Samsung sources from Qualcomm and Infineon while Apple is expected to have an Infineon chipset in its impending 3G iPhone. So, for the moment, the IDCC design seems to be the most accessible ‘best’ 3G solution for Nokia.
In summary, as STM continues its 3G ramp up, it may use NXP’s design in its platform in the short-term. IDCC, by virtue of its license agreement with NXP, will directly benefit from this move. What is more, this will give IDCC a chance to be part of Nokia phones. Now, that begs another question. Are IDCC and Nokia factoring this in their licensing discussions?
Tuesday, June 3, 2008
In the last part of this series, I looked at the contrasting manufacturing strategies of STM and NXP. In this concluding piece, I will look at their product decisions, more specifically with respect to the wireless analog trade-off.
Wireless: With Nokia and EMP sourcing from multiple vendors, TXN’s strategy of using their baseband along with its application processor and RF modules for the mobile platform seems to have backfired. It has not pursued a 3G baseband product strategy and is hence in danger of losing its market share.
STM, on the other hand, has infused substantial R&D into baseband development as it revamps its product lineup. Nokia transferred its chipset design team to STM late last year. The Italian company has also created a JV merging its wireless business with that of NXP. NXP brings with it, complementary wireless connectivity solutions and a suite of baseband products (including 3G.) STM now has all the components to build mobile platforms for 3G and beyond and can compete effectively against Qualcomm and Broadcom.
So, while TXN appears to be losing its grip on wireless, STM has emerged as a strong player with the backing of the European handset vendors who command around 50% of the worldwide market. STM seems to be benefiting from its geopolitical alignment and is well-positioned to supplant TXN from its second position in wireless.
Analog: TXN has made the conscious decision to aggressively pursue analog as part of its strategy to maximize margins. The analog semiconductor leader understands that a substantial portion of the analog TAM still remains for it to tap into. The High Performance Analog (HPA) segment has been TXN’s champion growth driver. This segment, generating around 40% operating margins has grown at an average of 28% over the past two years. The analog business overall has grown by 11% over the same period. STM, on the other hand, has not focused as much on its analog business as it could. If it makes the right acquisitions, it can grow its analog share too.
In summary, the two companies have identified different niche areas to focus for growth despite directly competing in multiple markets. The strategic directions are meant to capitalize each company’s strengths. For STM, it is the geopolitical clout it carries with the European wireless players. TXN, on the other hand, is becoming a more nimble manufacturer by the day. It hopes to leverage this to dip further into the HPA market. Finally, while STM is looking to create more value through higher revenue, TXN’s value proposition comes from its impressive margins.
The company has a new CFO in Clyde Hosein who starts on June 23rd. Clyde brings about 25 years of finance and operations related experience in technology industries. Clyde replaces George Urioste who was Marvell's interim CFO since January 2008. George takes over as the acting COO to relieve Pantas Sutardja. Pantas will now focus on his role as the company's CTO.
Weili Dai, wife of CEO Sehat, is back in the executive team as the VP sales for the Marvell's communications and consumer business unit. Weili resigned as the company's COO last year due to stock backdating issues. She was relegated to a non-executive Director's role until the issue was resolved. As she and the company agreed to pay fines related to the SEC charges, Weili was presented with the opportunity of taking up an executive role again. The CEO wasted no time in executing on this opportunity praising Weili for her “great business acumen, strategic thinking and endless passion” while offering her the new role.
Sehat also seems to assure his employees that the bad times are over for Marvell as he mentioned this in a note to them - "Weili and I also want to take this opportunity to
thank all of you for your loyalty and support over the past 18 months. This has been a
challenging time for Marvell - and for us personally - and we truly appreciate your continued trust and all of your hard work.”
Maybe the bad times are indeed over. The company has had a good quarter, has demonstrated its commitment to expense management, has the stock backdating issue behind it, has good mobile products and design wins lined up, and has a full-fledged executive team in place. Let us wait and see if it is able to maintain this momentum.
Monday, June 2, 2008
Apple is expected to announce the 3G iPhone this month. Based on a reasonable set of assumptions, I have speculated that Infineon will continue to be at the heart of the iPhone. Clues that ratify this scenario have also been uncovered in the recent months. Recently, however, there were two industry events that made many question this theory. Here, I will take a look at these events and what they signify for the iPhone.
Firstly, Sehat Sutardja, Marvell’s CEO, had this to say in the company’s F1Q09 conference call –
“During the first quarter we achieved what I believe to be a very important milestone as we began volume shipments of our HSDPA communication processor to a key smartphone customer. We expect a steady ramp to high volume production throughout the remainder of the year.”
With the name of this ‘key smartphone customer’ not revealed, Apple and iPhone immediately got tagged to this remark. To me, the matter-of-fact statement appeared to reflect Marvell’s continuing relationship with RIMM.
The latest Blackberry Bold 9000 features Marvell’s Tavor platform. Tavor is a single-chip solution that combines a HSDPA baseband processor with a 624 MHz applications processor. The timelines of the Bold launch and Marvell’s shipment dates seem to corroborate as well. The RIMM angle, coupled with the difficulty in launching and testing a new platform with Marvell for the existing form-factor iPhone makes me believe that the Santa Clara-based company will not displace Infineon in Apple’s darling phone.
I will, however, not dismiss the possibility of Apple launching a second, smaller form-factor 3G phone with Marvell’s solution. Marvell’s Tavor may be ideal for a low-cost phone from Apple. The single chip will eliminate the need for a separate application processor. It will save space and power. Hence, it (or any single chip solution for that matter) will be a preferred solution a low-cost iPhone, if there is one. I also anticipate that Marvell will be able to bundle Tavor with its WiFi solution giving it a price advantage. So, in the eventuality of two iPhone models being launched, it is possible that both Infineon and Marvell have design wins at Apple.
This brings me to the other iPhone related news – the Infineon warning. The German company recently warned that it has received lower than anticipated orders for a project to supply HSDPA chips. Going with the premise that Infineon is indeed the 3G supplier for the iPhone, it is hard to tell if this warning pertains to Samsung or Apple or another customer. If it is for Apple, then, contrary to what is being written elsewhere, I don’t think it signifies any major delay in the anticipated launch of the 3G iPhone.
This may, however, signal one of two things. The first possibility is that Apple may not market the 3G iPhone as widely as anticipated (at least initially.) The second possibility, which ties up with the Apple angle to the Marvell statements is product mix. Apple may be planning on a staggered, complementary launch of two 3G iPhone models. This, in turn, could be the reason behind the lower volumes shipped by Infineon and the perceived secrecy associated with Marvell’s ‘key smartphone customer.’
In summary, I think Infineon will be in the 3G iPhone. While I feel that Marvell’s statements pertain to RIMM, I also see the company as a very good candidate for a second iPhone design that may also launch soon.
Sunday, June 1, 2008
[In this two part series, I will compare the strategies of TXN and STM]
The 2007 revenues for both companies topped $10 billion. With very broad product portfolios, they compete directly in many markets including communications, computing, consumer electronics, industrial and automotives. Each company owns and operates its own manufacturing
While TXN is a
With this as a background, let us look at the contrasting strategies that these companies are executing on.
Manufacturing: TXN has diverted its manufacturing capabilities towards analog slowly migrating towards the fabless model for digital manufacturing. This move away from the Integrated Device Manufacturer (IDM) model to a more hybrid strategy has allowed TXN to become more nimble.
In contrast, STM seems firmly committed to the IDM model spending substantially in Capital expenditure and process technology research. Although it is engaged in joint R&D efforts with other companies like IBM to gain scale, this strategy may make it increasingly difficult for the company to compete with the aggressive pricing and product strategies from the fabless vendors.
TXN has been executing well on its target of 55% gross margin and 30% operating margin. In contrast, STM is struggling with about 35% gross margin and an operating loss of about 5% in 2007. The company aims to reduce its operating expenses to about 28%. This still implies single digit operating margins for 2008.
I will conclude this series in the second part after peeking into the companies’ divergent product strategies. In the meantime, for a detailed overview of these companies, I will direct you to my TXN valuation series here, here and here and to my STM valuation series here, here and here.