Qualcomm Inc.’s prospects for quarterly revenue and earnings due in April have brightened, while Texas Instruments Inc.’s forecast lacked luster.
Although both companies’ forecasts pertain to the current quarter only, analysts said the outlook for the rest of the year may look somewhat similar and, in part, reflects fundamental market conditions in the handset industry.
Qualcomm last week raised its revenue forecast for the second fiscal quarter ending April 1, based on higher-than-expected chip shipments. Revenue for the quarter is expected to reach between $2.1 billion and $2.2 billion, up from the previously forecast $2 billion to $2.1 billion. Earnings per share estimates rose to 48 cents to 49 cents per share, up from the previous forecast of 42 cents to 44 cents per share.
In contrast, TI narrowed the range of its expected revenue for the first quarter, ending March 31, to $3.07 billion to $3.22 billion, compared to the previously given range of $3.01 billion to $3.28 billion. The company expects earnings per share between 29 cents and 33 cents, compared to the previous range of 28 cents to 34 cents.
Analysts said that the forecasts reflected market conditions in the first few months of the year that are likely to affect chip makers going forward, although recent news about deals between handset vendors and chip makers also could affect earnings in subsequent quarters.
The rapid growth of 3G technologies such as W-CDMA, which also yields healthy margins, is helping Qualcomm, which sells W-CDMA chips and licenses W-CDMA technology to other chip makers (including TI), according to Will Strauss, principal at Forward Concepts. The greater GSM market’s slower growth, and slimmer margins in the low-cost handset market that are driving current sales, has affected TI’s revenue and earnings, the analyst said.
“W-CDMA is, in fact, the fastest-growing segment in the cellular market,” Strauss said. “GSM, which is by far the dominant market, is going to see slower growth. Qualcomm doesn’t participate in the GSM market, while that is TI’s main market. And don’t forget, when TI ships W-CDMA chips, it pays Qualcomm royalties.”
“When Qualcomm reports earnings, they’re based on both chips and royalties, while TI makes its money just on chips,” Strauss added. “And we know royalties are where the profits are.”
To foster the uptake of 3G services sought by their network operator customers, handset vendors are pushing W-CDMA chips down their portfolio lineup into mid-tier handsets, contributing to the rise in W-CDMA shipment volumes by Qualcomm and others, according to Martin Garner at Ovum.
Maynard Um, analyst at UBS Equity Research, agreed. W-CDMA chip sales have been strengthened by a closing price gap between W-CDMA and GSM handsets and the introduction of low-cost (under $100) W-CDMA handsets, the analyst wrote last week in a note to investors.
These fundamental chip business drivers may be influenced by recent news of specific deals between chip vendors and their customers, but not for several quarters, if at all, according to Strauss.
Deals going forward
Motorola has announced that it will diversify its chip suppliers to include Freescale Semiconductor, Qualcomm and TI-though the size of its deals with each company remains undisclosed. Nokia has announced a low-cost, single-chip deal with Infineon Technologies, which might eat into prior sales for TI. TI, in turn, is producing its own UMTS chip that it can sell to anyone without paying Qualcomm royalties, as it does for W-CDMA. Freescale, now owned by private-equity firm KKR, is no longer responsible for public reporting on quarterly earnings, perhaps freeing the company to pursue longer-term strategies. And Ericsson Mobile Platforms will have its own design of UMTS chips fabricated by ST Microelectronics, which could potentially hurt TI, because it already supplies 100 percent of those chips to EMP, according to Strauss.
The upshot?
The perennially volatile, mobile-chip industry is subject to underlying market trends that may or may not be buffeted by specific deals among the players. A long-awaited wave of replacement handset sales across the globe, perhaps stimulated by new, faster networks and compelling applications, is likely to lift TI’s boat in the future, Strauss said.
