Wireless Industry Analyst

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!]

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.

In my overview of Qualcomm’s fiscal second quarter 2008, I mentioned that the company’s broad range of mobile products positions it to exploit the cellular boom optimally. Before we look at the products themselves, it is illustrative to first peek into a few aspects of the mobile market that Qualcomm addresses.

According to Strategy Analytics, the mobile handset market grew 12% y-o-y while CDMA-based handsets (includes CDMA2000, WCDMA, EV-DO, HSDPA) grew 26% y-o-y. It is forecasted that by 2012, there will be about 1.6bn 3G subscribers in the world. The 3G goldmine, being CDMA-based, presents Qualcomm with an opportunity to monetize on every phone using these technologies. (You can find more on this topic here and here.)

While Europe, Japan, South Korea and the US continue to migrate rapidly towards 3G, emerging markets such as India, China and Latin America present equally bright opportunities for CDMA vendors. The challenge is to cater not only to the elitist user in the traditional markets, but also to the utilitarian consumer in the emerging markets looking for low-cost feature-phones.

Mobile computing and data will also be future growth drivers. As wireless networks mature, and convergence devices start to permeate the market, computing on-the-go will become a staple. Data-cards for high-speed broadband in the mature 3G markets will be an important component. Complementing this is the market for embedded broadband modems in internet-ready laptops.

Mobile computing not only opens up the opportunity for broadband modems but also for the core chipset itself. The challenge will be to make smaller, lower-power processors. Intel, for example, is targeting this market with its Ultra-mobile PC and the mobile internet devices (MID) market. The company hopes to revolutionize computing through the MIDs for the mainstream market targeting social networking and location-based services among other things. Apple recently acquired PA semi signaling its seriousness about convergence devices. As the mobile-phone packs more and more features and laptops become more nimble and mobile, the so-called convergence devices, as signified by such industry events, will emerge as the future of communications.

For Qualcomm, each of these product areas presents opportunities that can steadily grow its revenue. The company not only stands to make money on its own chips, but also for every CDMA-based chip sold in the coming years. Apart from the areas mentioned above, Qualcomm will also benefit from its portfolio of connectivity solutions (GPS, Bluetooth, mobile TV, and to a certain extent, WLAN.) In my next article on Qualcomm, I will focus on its strategy to address these market segments.

[Long Qualcomm at the time of writing]

[Originally for Sramana Mitra's site]

In the last two parts of this series, we looked at Marvell’s position and strategy in the wireless connectivity solutions market. These solutions serve another important purpose - to make Marvell’s cellular and handheld products competitive and complete. In this part, we will take a look at whether Marvell can successfully leverage its acquisition of Intel’s XScale business to create another line of business that will see the 20% growth that the management envisions.

Marvell offers the Monahan family of application processors based on the XScale architecture. It also offers baseband communication processors that are capable of GSM, GPRS, EDGE and WCDMA. Its solutions are part of the Motorola Q, Motorola ROKR2 and RIM Blackberry Pearl among other phones. Another notable product is the Samsung i780 that features its PXA310 application processor with Qualcomm’s MSM6200.

Marvell today commands about 25% of the mobile application processor market next to TI, but does not have as much of a play in the baseband market. The Santa Clara-based company sampled an integrated single-chip solution with HSDPA data capabilities and an application processor last year. Marvell hopes to see ramped up volume production and revenue in the second half of this year.

‘Tavor’, as this single-chip solution is code-named, will hold the key to Marvell’s ability to retain the RIMM account moving forward. Moving forward, Marvell hopes to grow with RIMM that commands around 50% of the smart-phone market share. This will be contingent on RIMM retaining its market share and also Marvell delivering competitive baseband solutions. You can read about competing baseband solutions here. ‘Tavor’ will also help Marvell retain its application processor market share as competitors move towards similar single-chip solutions.

Marvell also aims to bring smart-phones into low-cost mainstream leveraging its core competencies. CEO Sehat’s comments on the company’s GPS strategy further ratify this line of thought. The ASUS 3G smart-phones branded as Vodafone 1210, which use Marvell’s communication and application processors, is a good example. The synergy in this relationship comes from the fact that both Marvell and ASUS are committed to low-cost products. (Incidentally, this low-cost philosophy is one solution to bring the convergence movement to the emerging markets. You can view this as complementary to the elitist band of phones from Apple, RIMM or Palm like Ms. Mitra points out in her recent post here.)

At the moment, Marvell is relatively behind the leading chipset vendors in its development efforts. It may hence not get a favorable look from existing handset vendors as it seeks a meaningful baseband communication processor market share that will justify its XScale acquisition. However, it will look to establish new relationships (like ASUS) to grow with its customers’ market share gains. Much like Broadcom, Marvell has a good relationship with PC/laptop vendors like Dell. This positions the company to understand and help these vendors enter the mobile space should they decide to. Bolstered by stable application processor sales, this risky strategy has huge upsides with relatively minor downsides.

[Originally for Sramana Mitra's site]

In my previous article on Marvell, I provided a brief overview of the company strategy and product portfolio. Before we move on to dissect the various business areas, let us take a brief look at the fiscal 2008 financials. Marvell’s total revenue for fiscal 2008 is $2.9bn at a gross margin of 48.7% and an operating loss of 3.6%. This represents a 29% increase from fiscal 2007’s revenue of $2.24bn. The net revenue increase is due to increased volume shipments of storage SoC, a full year’s revenue from the Intel acquisition and the printer business from the Avago acquisition.

The gross margin decrease from 2007’s 50.8% is primarily due to the lower margin cellular and handset products acquired from Intel. Marvell was contractually obligated to purchase from Intel under a supply agreement. With the terms of this agreement being met, the company has partly transitioned to its fabrication partners and is looking to get incrementally higher margins this year.

The operating loss was incurred mainly due to the 50% increase in the R&D expense. The company spent $971mn on R&D as compared to fiscal 2007’s $645mn. This comes directly from the additional salary and related costs of $161mn (about 5.5% of revenue) incurred in fiscal 2008 related to the Intel and Avago acquisitions. Fiscal 2007’s R&D expenses were also 80% higher than the fiscal 2006 numbers due to the personnel increase coming with the Avago, UTStarcom and Intel acquisitions. While the lay-offs and restructuring measures may bring the R&D expenses back to the 30% range, the total operating expense will be about 47%. This is alarmingly high as compared to the semiconductor industry average about 32%.

Marvell’s current cash and cash equivalents stand at about $600mn, 20% of its annual revenue. Broadcom, its similar-sized competitor has a cash position of about $2.3bn or 60% of its annual revenue. Western Digital accounted for 17% and sales to Asian customers represented 84% of fiscal 2008 revenues.

While Marvell has a broad portfolio, a significant portion of its revenue comes from the highly cyclical and competitive hard disk drive industry. Besides, even for a fan of long-term vision and strategic spending like me, the expenses and their outlook are staggering and out of proportion. But for fiscal 2006, when the OpEx was about 38% of the revenue, the company has in recent years had 45% or greater OpEx. It seems that Marvell’s growth comes with very high associated costs. Sehat reiterated in the recent conference call that the company is committed to a reduction of costs. I wonder how quickly and efficiently this can be put in place.

• Tough times for Mobile WiMax means a field day for the proponents of the other two competing 4G technologies, UMB and LTE. With its existing relationship with Qualcomm, Sprint may migrate to UMB as and when there is a demand for 4G speeds in the market. On the other hand, LTE is very much in the running, especially if all competitors opt for the technology thereby driving their respective costs down.
  
• Sprint's focus will now be to secure the customers and build a better brand image to stabilize the future. What is the point of investing billions if it cannot guarantee a loyal customer-base!
• Companies like Motorola, Samsung and Intel that have vested interests in the success of mobile WiMax may now step in and be more proactive with the roll-outs, especially with Clearwire. Sprint perhap is also hoping that some posturing can help drive the WiMax costs down as well.