Wireless Industry Analyst

[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.

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.

I have, so far, refrained from expressing my opinions about my company, Atheros Communications (ATHR). But late last week, we announced that we will acquire u-Nav Microelectronics for $54 million that includes $15.4 million in cash and 1.28 million shares of Atheros common stock. This news has forced me out of my silence.

Firstly, I am happy that Atheros has added an extremely important strategic piece to its portfolio. I have, in my articles dating back to July, mentioned that the future of wireless is in integration-the ability of the same wireless chip or card to support multiple technologies. Qualcomm has been a traditional champion of this notion. Whether it is Snapdragon, its omnipotent chipset or its Gobi move, Qualcomm has been promoting integration around its core mobile capabilities. Broadcom, a key WLAN player, sought to expand its portfolio to include 3G, Bluetooth and completed it with GPS capabilities from Global Locate earlier this year. I had written that other semiconductor companies will hence have to acquire this technology through internal development, acquisitions or strong alliances. Today, I am glad that Atheros understands this as it positions itself as a future champion of the wireless industry. With its leadership in PC WLAN market and exciting solutions in Bluetooth and mobile WLAN, it is not surprising that Atheros got the “Most Respected Emerging Public Fabless Company” award from FSA this year. The GPS move can only help strengthen its future outlook.

Secondly, it signifies a bigger consolidation of the wireless industry and its various components. While I will not glorify this acquisition, I do wish to emphasize that the future survival of a wireless company is contingent on its portfolio expansion. These companies can no longer afford to be one-trick ponies. Thus, we are likely to see some significant trends through the next couple of years.

• Mobile companies shopping for other GPS companies: The problem is that not many small players with competitive solutions are available in the market today. Few names that crop up include SkyTraq, CellGuide, NemeriX etc. It will be interesting to see players like Marvell, NXP and Freescale get GPS capabilities.
• Companies may exit 3G space: A lot of the GPS action has taken off along with 3G technologies. The consumer also wants powerful devices. With the market slowly consolidating on the mobile side, players like Qualcomm and TI will thrive while Broadcom, STM and Infineon (each of whom have GPS in their kitty) could take a part of the pie, especially with interest from vendors such as Nokia and Apple. For the others, it is a do-or-die situation. If they cannot acquire GPS capabilities, they cannot be competitive and hence risk losing out in this space. This in turn implies a further consolidation of the market with companies announcing their exit slowly.
• More technology integration: We have a list of mobile broadcasting standards that fall in this list. SiRF, for example, complements its GPS core competence with DVB-H capabilities it acquired through TrueSpan in 2006. Qualcomm’s Snapdragon platform can integrate most broadcasting standards. We also have integration across multiple standards as demonstrated by Gobi.

Thus, the next two years will be fairly crucial for a lot of the wireless players. As for Atheros, at a price of $54 million, it won itself an entry into an important technology market, a good product, good engineering expertise and a ticket to the wireless future.

• Around 120 million laptops are expected to ship in 2008. I have assumed a CAGR of around 14% to project until 2012
• Start with a high 10% market penetration for Gobi in 2008 adding 5% every year hence
• Chipset cost starting $50 for 2008 and reducing to around $40 in 2012
• Royalty at 5% of chipset price
  
• Operating margins of 25% for chipsets and 90% for licensing fees

• re-inventing itself as it diversifies into new markets and product lines
• making handset vendors happy by reducing royalty rates 'somewhat' in return for a higher chipset market share.