Motorola Inc. is shifting its long-term, 3G-chip business away from Qualcomm Inc. in favor of Texas Instruments Inc., leading one analyst last week to downgrade his short-term rating on Qualcomm from “buy” to “neutral.”
A Motorola spokeswoman confirmed that the company would use Qualcomm “opportunistically” for 3G and maintain its current, non-3G CDMA-based business relations with the chip supplier. Qualcomm said it had no official word of such a shift.
Mark McKechnie, analyst at American Technology Research, said the reasons for Motorola’s shift were “purely business.”
Qualcomm’s chip prices or royalty rates are too high for Motorola, now hell-bent on cost management to maintain margins, McKechnie said. The analyst downgraded his firm’s rating on Qualcomm from “buy” to “neutral” as a result.
“The name of the game here is margins,” McKechnie said. “Long term, Motorola probably figures if it uses Qualcomm, it’s like all the other second- and third-tier players. Nokia [Corp.] has been successful with TI and Nokia has a lower cost structure because of that. If Motorola wants to succeed it needs that lower cost structure, it needs margins like Nokia’s.”
The issue appeared to be either a bit of “inside baseball” or a long-term matter that didn’t affect TI’s stock value. The firm’s stock traded down slightly at mid-week over news that it had narrowed its earnings guidance, effectively limiting the “upside potential” that often results in an uptick in value.
Reading tea leaves
McKechnie said his conclusions on Motorola’s shift to TI were based on remarks by Motorola executives at last week’s analyst day presentation and subsequent contact with company sources.
“When Stu Reed went into silicon strategy, he laid it out that he was going to continue to use Freescale [Semiconductor] for the near-term, into ’08, and that in the second half of ’08 he expected to ramp up with Texas Instruments,” McKechnie said.
“Reed didn’t say anything about Qualcomm until people started asking him,” the analyst continued. “When people pushed him, he said, ‘We did have some design plays with Qualcomm and we’ll probably use them in tactical areas where we have an[original device manufacturer] relationship or a carrier is pushing for it. But our long-term direction rests with Texas Instruments.'”
“They were very cagey in how they presented it,” the analyst added. “Apparently the technologists-the handset designers-at Motorola really favored Qualcomm.”
Both Motorola and Qualcomm offered carefully worded statements on their perspectives.
“We are moving to a controlled architecture for silicon and a multi-sourced approach to our vendors,” said Jennifer Weyrauch, spokeswoman for Motorola. “As for Qualcomm specifically, they are a strong CDMA supplier today and we will continue to use them on next-generation 3G devices opportunistically.”
“We have not been directly notified that anything in our sourcing relationship has changed and we also continue talks with Motorola on specific designs,” said Qualcomm spokeswoman Bertha Agia.
Qualcomm issues
McKechnie said he remains confident of Qualcomm’s long-term patent position, but will watch three issues to better inform his view of Qualcomm’s “legal overhang,” which is widely believed to be dampening its stock value.
The first issue broke last week when the Court of Appeals for the Federal Circuit granted Qualcomm a stay of a U.S. International Trade Commission ban on the importation of 3G handsets that threatened holiday handset sales for Qualcomm’s carrier and handset vendor customers. The news briefly boosted Qualcomm’s stock by about $1 to around $39 last Thursday.
The second issue is the remedy phase of a district court trial in Santa Ana, Calif., where Qualcomm lost a decision to Broadcom Corp. over video-compression technology. The third indicator for McKechnie is news from the American Arbitration Association’s involvement in the cross-licensing dispute between Qualcomm and Nokia. Last week brought no news on those two fronts.
Shifting strategy
McKechnie said that Motorola might be taking a page from Nokia’s playbook on cost management.
“What’s interesting to me is that Nokia announced its new sourcing strategy a month ago, bringing on three additional sources,” the analyst said. “I think Motorola paid attention to that and it has brought on a former Texas Instruments executive to help manage its silicon strategy. Motorola may have taken advantage of Nokia’s move away from Texas Instruments and the latter has moved resources over to address Motorola’s needs. I’m guessing that, in return for that, Motorola is backing away from Qualcomm.”
How the shift away from Qualcomm for 3G works for Motorola remains to be seen, according to McKechnie.
“Relying on Freescale for the next 6-9 months leaves a hole in their product line,” he said. “Part of Motorola’s problem, apart from following up the Razr, has been that it missed the 3G ramp. For them to get competitive again, they’ll have to get their 3G act together.”
“Pulling away from Qualcomm puts them at a disadvantage until they get their TI chipset designs ramped up in the second half of ’08,” the analyst concluded. “The Motorola guys I’ve talked to are pretty confident they’ll work things out with TI. But it’s a brand new architecture and there’ll be a learning curve. I’m in a wait-and-see mode on how the timing and volume ramp goes on that front.”
