The NVIDIA (NVDA) analyst call on Thursday was characterized by a relatively short presentation and long question and answer session. Analysts pressed a variety of concerns while management explained their view of the technology space and their strategy for increasing revenue and profits. [See also call details at Nvidia Q1 fiscal 2012 analyst call news summary.]
The explaining was necessary because revenues were $962.0 million, up 8.5% sequentially from $886.4 million, but down 4% from $1.002 billion in the year-earlier quarter. GAAP net income was $135.2 million, down 21% sequentially from $171.7 million, and down 2% from $137.6 million year-earlier. GAAP EPS (earnings per share) were $0.22, down 24% sequentially from $0.29, and down 4% from $0.23 year-earlier. Those numbers include a $40 million payment from Intel for intellectual property (really, to keep NVIDIA a strong ally against AMD); take that out, and the y/y comparisons look worse, while Q1 last year was nothing to shout about either.
So what are the issues? NVIDIA is exiting the motherboard chip set business, which originally became necessary because of a dispute with Intel. AMD has cut heavily into NVIDIA's former dominance in the discrete GPU (graphics) chip and card business. NVIDIA's supercomputer graphics business actually shrank a bit, though management argued it would expand down the road.
That leaves the savior of the moment, Tegra, a chip that runs cell phones and tablets. The newest one is Tegra 2, which everyone admits is a big improvement over the original Tegra. Tegra chips generated $122 million in the quarter, which is a lot of money, until you compare it with losses from the humble chip set business, or the bulk of NVIDIA's revenue, or smartphone chip revenue of some competitors.
NVIDIA claims they are going to take market share in the discrete graphics chips for notebook computers segment. Their only real competitor, AMD, says the same thing. But the good thing about discrete GPU chip competition is there are just those two players. The competition between them is intense, but at least it is somewhat predictable.
In smartphones and tablet computers, however, almost everyone is licensing the core processor design from ARM and adding graphics, Wi-Fi, and cellular modems as best they can. The competition is multifold. Qualcomm was the pack leader two years ago, and still outsells NVIDIA heavily. TI is very competive and believes it now is closer to the heart of Google (maker of the Android smartphone operating system) than NVIDIA, 2010's sweetheart. Apple makes its own ARM based processor for the iPhone and iPad. If they all disappeared there would be Marvell, which dominates the hard drive chip sector and has slots in a number of phones, including the new OPhones in China. There are other players in Korea, Japan, and China. Then there are the non-ARM entries, mainly for tablets but eventually for smartphones, from AMD and Intel.
And anyone can license the intellectual property to make a smartphone chip. In other words, there could be more players in 2012, not less.
Which is too many players. Consolidation will take place, probaby around 2013 when smartphones have completed replacing the bulk of not-so-smart cell phones. While the competition so far has been on technology, with points for speed, usability, and low-power consumption, at some point price will become an important issue. Profit margins will be squeezed.
I certainly believe NVIDIA is as competitive as any of the other companies I named. But there are going to be losers. There will have to be losers. It is next to impossible to predict who they will be.
Given that, investors might want to think about going lower down the food chain, to the companies that make semiconductor manufacturing equipment like Applied Materials or printed circuit boards for smartphones like TTM Technologies.
Of the companies named above, I currently own stock in Applied Materials, TTM Technologies, Marvell, and AMD. In the past I owned stock in NVIDIA.
See also NVIDIA
Keep diversified!
Showing posts with label cell phones. Show all posts
Showing posts with label cell phones. Show all posts
Saturday, May 14, 2011
Tuesday, March 8, 2011
Marvell Technology: What Inflection Point?
Marvell Technology (MRVL) makes semiconductor chips for hard disk drives, cell phones, networking and telecommunications. Although for the most part Marvell has had a brilliant run since it was founded in 1995, recently the going has been rough, as reflected in its stock price. After a 52-week high of $22.87 last April, the stock closed at $15.81 yesterday, then bounced back a bit today. The release of quarter results on Thursday (the 3rd) and the analyst conference call caused a big sell off Friday, to $16.13, after closing Thursday at $18.22.
Should Marvell be abandoned, or is this a buying opportunity?
First, keep in mind that Marvell has a fiscal year that ends on January 30th. Their Q4s are typically seasonally slower than their Q3s because shipments of chips going into devices sold over the holidays typically are made in Q3. Q1 fiscal 2012 will end at the end of April; Q2 at the end of July; Q3 at the end of October.
On the other hand, a technology company with rapidly ramping revenues can sometimes overcome seasonal declines. Marvell has lined up two sequential q/q declines. In Q2 revenues were $896.5 million; in Q3 $959.3 million; in Q4 $900.5 million; and for Q1 guidance is for $800 to $850 million. That is worse than normal seasonality.
Last year Marvell CEO Sehat Sutardja, at the Marvell March 4, 2010 analyst conference call, predicted that Marvell would reach an "upward inflection point" within the next twelve months. We seem to be in a downward deflection point instead. Now Mr. Sutardja is saying that revenues (and profits) will ramp again in the second half of this year (more precisely, the second half of fiscal 2012). Should we discount his prediction, given he made it before and reality proved him wrong?
Let's look at why the prior inflection point prediction went awry. The hard drive market was not as robust as expected, mainly because global PC sales did not grow much in 2010. Marvell already has more than half of the market for the controller and other chips in hard drives, and in the latest quarter those still accounted for almost half of Marvell's revenue. Even with new products ramping up, the decline in hard drive chip revenue put a big dent in projections. Marvell is competitive in controllers for solid state drives too, but is not dominant there.
The other problem was Research in Motion (RIM), although Sehat did not mention them by name, everyone knew which customer he was talking about. It isn't that RIM (maker of Blackberry phones) is itself in trouble, despite competition from Apple and Android-based devices. Marvell makes chips for only a couple of RIM models. For those models there was an inventory issue, not with too much inventory, but with a change that results in Marvell holding inventory for RIM. The main issue is that in many developing nations RIM is moving 2.5G phones, and Marvell does not have a chip for 2.5G. However, Marvell should have such a chip later this year.
So two major sources of revenue Marvell counted on were down in Q4 and will continue to be down in Q1. But the big issue, the lack of an inflection point, has to do with OPhones in China. These phones sold slowly late in 2010. Sehat believes that is mainly a matter of introducing them and prices that were too high on the original models. During 2011 a number of Marvell based OPhones will be introduced in China at far more attractive prices, yet which maintain Marvell's own profit margins.
Hence, still an upward inflection point. I don't blame potential Marvell investors to take a wait and see approach. The problem (with not buying at today's stock price) is that Marvell, even in these "bad" quarters, is generating a lot of cash. The low price/earnings ratio for the stock reflects the "show me" attitude about OPhones. If you wait for the revenue ramp to be in the rear-view mirror, the stock is going to be a lot more expensive.
So watch for OPhone news out of China. Maybe consumers there will want iPhones or other alternatives instead. But if hundreds of millions buy the new Marvell-based OPhones, Sehat and crew are going to look a lot more far-sighted than they do right now.
I own Marvell stock and understand the risk of competing against the talented people at Qualcomm, NVIDIA, Apple, etc. Right now I would not sell my Marvell stock for less than $30 per share. Come this fall, depending on the OPhone ramp, I may need to change my estimate of its value.
See also:
http://www.marvell.com/
My March 2011 Marvell (MRVL) analyst call summary
Should Marvell be abandoned, or is this a buying opportunity?
First, keep in mind that Marvell has a fiscal year that ends on January 30th. Their Q4s are typically seasonally slower than their Q3s because shipments of chips going into devices sold over the holidays typically are made in Q3. Q1 fiscal 2012 will end at the end of April; Q2 at the end of July; Q3 at the end of October.
On the other hand, a technology company with rapidly ramping revenues can sometimes overcome seasonal declines. Marvell has lined up two sequential q/q declines. In Q2 revenues were $896.5 million; in Q3 $959.3 million; in Q4 $900.5 million; and for Q1 guidance is for $800 to $850 million. That is worse than normal seasonality.
Last year Marvell CEO Sehat Sutardja, at the Marvell March 4, 2010 analyst conference call, predicted that Marvell would reach an "upward inflection point" within the next twelve months. We seem to be in a downward deflection point instead. Now Mr. Sutardja is saying that revenues (and profits) will ramp again in the second half of this year (more precisely, the second half of fiscal 2012). Should we discount his prediction, given he made it before and reality proved him wrong?
Let's look at why the prior inflection point prediction went awry. The hard drive market was not as robust as expected, mainly because global PC sales did not grow much in 2010. Marvell already has more than half of the market for the controller and other chips in hard drives, and in the latest quarter those still accounted for almost half of Marvell's revenue. Even with new products ramping up, the decline in hard drive chip revenue put a big dent in projections. Marvell is competitive in controllers for solid state drives too, but is not dominant there.
The other problem was Research in Motion (RIM), although Sehat did not mention them by name, everyone knew which customer he was talking about. It isn't that RIM (maker of Blackberry phones) is itself in trouble, despite competition from Apple and Android-based devices. Marvell makes chips for only a couple of RIM models. For those models there was an inventory issue, not with too much inventory, but with a change that results in Marvell holding inventory for RIM. The main issue is that in many developing nations RIM is moving 2.5G phones, and Marvell does not have a chip for 2.5G. However, Marvell should have such a chip later this year.
So two major sources of revenue Marvell counted on were down in Q4 and will continue to be down in Q1. But the big issue, the lack of an inflection point, has to do with OPhones in China. These phones sold slowly late in 2010. Sehat believes that is mainly a matter of introducing them and prices that were too high on the original models. During 2011 a number of Marvell based OPhones will be introduced in China at far more attractive prices, yet which maintain Marvell's own profit margins.
Hence, still an upward inflection point. I don't blame potential Marvell investors to take a wait and see approach. The problem (with not buying at today's stock price) is that Marvell, even in these "bad" quarters, is generating a lot of cash. The low price/earnings ratio for the stock reflects the "show me" attitude about OPhones. If you wait for the revenue ramp to be in the rear-view mirror, the stock is going to be a lot more expensive.
So watch for OPhone news out of China. Maybe consumers there will want iPhones or other alternatives instead. But if hundreds of millions buy the new Marvell-based OPhones, Sehat and crew are going to look a lot more far-sighted than they do right now.
I own Marvell stock and understand the risk of competing against the talented people at Qualcomm, NVIDIA, Apple, etc. Right now I would not sell my Marvell stock for less than $30 per share. Come this fall, depending on the OPhone ramp, I may need to change my estimate of its value.
See also:
http://www.marvell.com/
My March 2011 Marvell (MRVL) analyst call summary
Thursday, February 17, 2011
NVIDIA Price Counts on Tegra Ramp
(original title: NVIDIA: Counting Chickens Before They Hatch)
As an analyst and investor, one of the main things I do is count chickens before they hatch. Today graphics chip specialist NVIDIA has a high price-to-earnings ratio (non-GAAP 62x trailing, 26x leading), indicating some investors are counting on a lot more chicken profits in the future than they have been seeing lately. Is this a smart assumption?
NVIDIA will have a profit boost for the next six years from its licensing deal with Intel. For the most recent quarter ending January 30, 2011 it booked $57 million for the litigation settlement portion of the deal (booked as a negative operating expense, not revenue). For each quarter it will book about $60 million in royalties.
Other than that, the last couple of years have been hard on NVIDIA. Q4 fiscal 2011 (the most recently reported quarter) revenues were $886.4 million, down 10% from $982.5 million in the year-earlier quarter. That does not sound like a high-growth company that deserves high PEs on its stock price. [for a fuller report on Q4, see NVIDIA Q4 fiscal 2011 analyst conference call summary]
What speculators are speculating on is a chip called Tegra. The first version was interesting but did not generate much revenue. The second version is available now in a few tablet and smart phone devices. It produced little revenue in Q4, but is supposed to contribute substantially to Q1. Therefore, instead of a normally seasonally down Q1, guidance is for a 6% to 8% sequential revenue ramp. That is impressive, if it happens.
In addition, the third version of Tegra, called Kal-El for now, is already sampling and is supposed to be in devices for sale for holiday 2011 shopping. Reviews of Tegra 2 are generally positive.
The NVIDIA vision is not just to dominate the smart phone and tablet markets. Future versions of Tegra are supposed to be powerful enough to go into notebooks, desktops, and ever servers.
Before you pay a premium for all them chickens, you might want to think about all the other chickens that will be on the market. NVIDIA's Tegra CPU unit is based on the ARM architecture, which anyone can license. The NVDA advantage is in graphics, but there are a number of companies that license graphics capabilities that were designed specifically to work with ARM. NVIDIA's were designed to work with the 8086 architecture of Intel and AMD.
Competitors each have some advantages. Apple, of course, is the perceived frontrunner. There is no guarantee that the iPhone is ultimately going to be defeated by Android-based phones or less likely competitors.
When it comes to ARM based chips for tablets and phones, each competitor brings some serious advantages to the court. Qualcomm has far more extensive experience in cell phones than NVIDIA does; so does TI. Intel and AMD want to get into the game. AMD gained a lot of market share against NVIDIA in discrete graphics cards for computers during 2009 and 2010; their fusion chips offer some extreme advantages, especially for tablet computing. Among a host of other contenders, Marvell (MRVL) should be noted, since they generate a lot of cash each quarter and have a lead in China, a much bigger market to fight over than the U.S. market. Then there are the Koreans, and Japanese, and numerous small innovators.
None of the other contenders have PE ratios as high as NVIDIA's. I have owned NVIDIA stock in the past, and if it had a low PE I might scoop up those chickens right now. I have always admired NVIDIA's technological skills, and the Tegra 3 is promissing. I don't see how it can be all that much better than competitors, however. Everyone has promissing designs, everyone is hustling to squeeze usability out of the same limitations of silicon.
I have done well recently with some hatchlings at Dot Hill, Dendreon, and TTM. On the other hand, I like to keep in mind Anesiva, where I correctly predicted its Zingo product would hatch (get FDA approval), only to watch it die a horrible death and then take the entire company into bankruptcy with it. The secret is to see them chickens before momentum investors drive up the stock prices. If you bought NVDA a year ago at $8.65 per share, congratulations. If you are thinking about buying it today at $25.48, you might want to consider that it could take NVIDIA a couple of years of outstanding growth to justify this price.
As an analyst and investor, one of the main things I do is count chickens before they hatch. Today graphics chip specialist NVIDIA has a high price-to-earnings ratio (non-GAAP 62x trailing, 26x leading), indicating some investors are counting on a lot more chicken profits in the future than they have been seeing lately. Is this a smart assumption?
NVIDIA will have a profit boost for the next six years from its licensing deal with Intel. For the most recent quarter ending January 30, 2011 it booked $57 million for the litigation settlement portion of the deal (booked as a negative operating expense, not revenue). For each quarter it will book about $60 million in royalties.
Other than that, the last couple of years have been hard on NVIDIA. Q4 fiscal 2011 (the most recently reported quarter) revenues were $886.4 million, down 10% from $982.5 million in the year-earlier quarter. That does not sound like a high-growth company that deserves high PEs on its stock price. [for a fuller report on Q4, see NVIDIA Q4 fiscal 2011 analyst conference call summary]
What speculators are speculating on is a chip called Tegra. The first version was interesting but did not generate much revenue. The second version is available now in a few tablet and smart phone devices. It produced little revenue in Q4, but is supposed to contribute substantially to Q1. Therefore, instead of a normally seasonally down Q1, guidance is for a 6% to 8% sequential revenue ramp. That is impressive, if it happens.
In addition, the third version of Tegra, called Kal-El for now, is already sampling and is supposed to be in devices for sale for holiday 2011 shopping. Reviews of Tegra 2 are generally positive.
The NVIDIA vision is not just to dominate the smart phone and tablet markets. Future versions of Tegra are supposed to be powerful enough to go into notebooks, desktops, and ever servers.
Before you pay a premium for all them chickens, you might want to think about all the other chickens that will be on the market. NVIDIA's Tegra CPU unit is based on the ARM architecture, which anyone can license. The NVDA advantage is in graphics, but there are a number of companies that license graphics capabilities that were designed specifically to work with ARM. NVIDIA's were designed to work with the 8086 architecture of Intel and AMD.
Competitors each have some advantages. Apple, of course, is the perceived frontrunner. There is no guarantee that the iPhone is ultimately going to be defeated by Android-based phones or less likely competitors.
When it comes to ARM based chips for tablets and phones, each competitor brings some serious advantages to the court. Qualcomm has far more extensive experience in cell phones than NVIDIA does; so does TI. Intel and AMD want to get into the game. AMD gained a lot of market share against NVIDIA in discrete graphics cards for computers during 2009 and 2010; their fusion chips offer some extreme advantages, especially for tablet computing. Among a host of other contenders, Marvell (MRVL) should be noted, since they generate a lot of cash each quarter and have a lead in China, a much bigger market to fight over than the U.S. market. Then there are the Koreans, and Japanese, and numerous small innovators.
None of the other contenders have PE ratios as high as NVIDIA's. I have owned NVIDIA stock in the past, and if it had a low PE I might scoop up those chickens right now. I have always admired NVIDIA's technological skills, and the Tegra 3 is promissing. I don't see how it can be all that much better than competitors, however. Everyone has promissing designs, everyone is hustling to squeeze usability out of the same limitations of silicon.
I have done well recently with some hatchlings at Dot Hill, Dendreon, and TTM. On the other hand, I like to keep in mind Anesiva, where I correctly predicted its Zingo product would hatch (get FDA approval), only to watch it die a horrible death and then take the entire company into bankruptcy with it. The secret is to see them chickens before momentum investors drive up the stock prices. If you bought NVDA a year ago at $8.65 per share, congratulations. If you are thinking about buying it today at $25.48, you might want to consider that it could take NVIDIA a couple of years of outstanding growth to justify this price.
Wednesday, January 12, 2011
Nokia N8: CPU, GPU Roles Shift
Most days I check Anandtech because the staff there does an excellent job of reviewing new computers, smartphones, and peripherals. By excellent I mean they actually give details about the software and chips used in the devices, and also run benchmarks. Today the only chip stocks I own are AMD and Marvell (MRVL), but my customers own (far larger) positions in other technology companies, so I follow the industry as best I can. Today's review of the Nokia N8 smartphone should be of particular interest to technology investors since it illustrates a fundamental shift in computing technology.
The N8 is "the first Nokia phone to have a discrete GPU." GPU is Graphics Processor Unit, as opposed to the more general purpose CPU, Computer Processing Unit. Smartphones are now expected to have excellent displays, which is hard to achieve without a GPU assist. But for years now AMD and NVIDIA (the rival makers of high-end GPUs for personal computers) have been talking about how computer work loads are starting to shift from being CPU-bound to GPU-bound. This is not just because of the need to have large, detailed, rapidly changing displays for gamers. It is because many ordinary computing tasks can be done faster if they are broken into parallel processes that accelerate results.
The Anandtech N8 article is the first time I have heard someone say the transition has already been made in an actual device (aside from professional video content creation machines). "You see, pretty muhc everything in the N8 runs around the BCM2727 media processor. I would hazard a calculated guess that appart from lightweight low-level OS functions and interfacing with the baseband and other radios, there isn't much else for the CPU to do on the N8."
I think that in effect the Broadcom (BRCM) GPU is acting as a DSP (digital signal processor) in addition to doing graphics processing, leaving the CPU little to do. Note that the 2727 (like AMD's new combo CPU/GPU chips) can output 720p HD video through an HDMI port.
NVIDIA has tried to place itself at the center of the GPU revolution, but it's anybody's game. There are two fronts right now: graphics for notebooks/PCs and graphics for cell phones/tablets. The graphics for smartphones can't display games on big screens at a high frame rate (which smooths the action) yet. But in 5 years, maybe sooner, they should be able to do that. The big differentiator is that anything that runs on batteries has to do its graphics work with minimal watts, but a machine plugged into the electric grid can do a lot more a lot faster, using a lot more watts (say, 200 watts versus 1 watt). NVIDIA's strategy is to keep rolling with its high end discrete graphics units while rolling out mobile combined CPU/GPU chips based on the ARM architecture. These would integrate its current offerings that work with ARM, but with the GPU on a separate chip.
AMD's strategy is called Fusion, which combines CPU and GPU on a chip based on the 8086 architecture.
Intel's strategy is to advertise, and hope that the reviewers dependent on its advertising revenue do a good job not mentioning that its current generation of combined CPU/GPU chips, code named Sandy Bridge, are instantly obsolete because they are a generation behind both NVIDIA and AMD in graphics capacity (ask for DX11 capable computers, and you have eliminated Intel, which had trouble implementing the now ancient DX10 standard) and in low-power consumption. Also, Intel is using its vast resources to get back into the ARM-based architecture. They sold their ARM mobile chip unit to Marvell Technologies a few years back. Marvell has since become one of the bigger players in ARM devices, most notably with its chips inside some Blackberry devices and the XBox 360 Kinect.
Then of course, in addition to Broadcom, we have Qualcomm, Apple, TI, Samsung, etc., scrambling to combine graphics and CPUs into single chips or small chip sets to power smartphones and tablet computers.
Software programming is changing too. Want a job? Show you can recode older non-parallel software for parallel processing on GPUs. Lots of shortages in that department.
For investors, you might want to buy a piece of every company in the race. I am certainly not certain who will emerge a winner. On the other hand, there are no pure plays here. A victory in smartphones would add very little to Intel's fortunes, or Samsung's, but it is essential to Qualcomm. Broadcom itself has a diverse set of chip products that cover Ethernet, set-top boxes, and Wi-Fi, among others.
See full Anantech Nokia N8 Review
The N8 is "the first Nokia phone to have a discrete GPU." GPU is Graphics Processor Unit, as opposed to the more general purpose CPU, Computer Processing Unit. Smartphones are now expected to have excellent displays, which is hard to achieve without a GPU assist. But for years now AMD and NVIDIA (the rival makers of high-end GPUs for personal computers) have been talking about how computer work loads are starting to shift from being CPU-bound to GPU-bound. This is not just because of the need to have large, detailed, rapidly changing displays for gamers. It is because many ordinary computing tasks can be done faster if they are broken into parallel processes that accelerate results.
The Anandtech N8 article is the first time I have heard someone say the transition has already been made in an actual device (aside from professional video content creation machines). "You see, pretty muhc everything in the N8 runs around the BCM2727 media processor. I would hazard a calculated guess that appart from lightweight low-level OS functions and interfacing with the baseband and other radios, there isn't much else for the CPU to do on the N8."
I think that in effect the Broadcom (BRCM) GPU is acting as a DSP (digital signal processor) in addition to doing graphics processing, leaving the CPU little to do. Note that the 2727 (like AMD's new combo CPU/GPU chips) can output 720p HD video through an HDMI port.
NVIDIA has tried to place itself at the center of the GPU revolution, but it's anybody's game. There are two fronts right now: graphics for notebooks/PCs and graphics for cell phones/tablets. The graphics for smartphones can't display games on big screens at a high frame rate (which smooths the action) yet. But in 5 years, maybe sooner, they should be able to do that. The big differentiator is that anything that runs on batteries has to do its graphics work with minimal watts, but a machine plugged into the electric grid can do a lot more a lot faster, using a lot more watts (say, 200 watts versus 1 watt). NVIDIA's strategy is to keep rolling with its high end discrete graphics units while rolling out mobile combined CPU/GPU chips based on the ARM architecture. These would integrate its current offerings that work with ARM, but with the GPU on a separate chip.
AMD's strategy is called Fusion, which combines CPU and GPU on a chip based on the 8086 architecture.
Intel's strategy is to advertise, and hope that the reviewers dependent on its advertising revenue do a good job not mentioning that its current generation of combined CPU/GPU chips, code named Sandy Bridge, are instantly obsolete because they are a generation behind both NVIDIA and AMD in graphics capacity (ask for DX11 capable computers, and you have eliminated Intel, which had trouble implementing the now ancient DX10 standard) and in low-power consumption. Also, Intel is using its vast resources to get back into the ARM-based architecture. They sold their ARM mobile chip unit to Marvell Technologies a few years back. Marvell has since become one of the bigger players in ARM devices, most notably with its chips inside some Blackberry devices and the XBox 360 Kinect.
Then of course, in addition to Broadcom, we have Qualcomm, Apple, TI, Samsung, etc., scrambling to combine graphics and CPUs into single chips or small chip sets to power smartphones and tablet computers.
Software programming is changing too. Want a job? Show you can recode older non-parallel software for parallel processing on GPUs. Lots of shortages in that department.
For investors, you might want to buy a piece of every company in the race. I am certainly not certain who will emerge a winner. On the other hand, there are no pure plays here. A victory in smartphones would add very little to Intel's fortunes, or Samsung's, but it is essential to Qualcomm. Broadcom itself has a diverse set of chip products that cover Ethernet, set-top boxes, and Wi-Fi, among others.
See full Anantech Nokia N8 Review
Friday, January 30, 2009
Maxim and Microchip Report Fourth Quarter 2008
Maxim Integrated Products (MXIM) and Microchip (MCHP) both reported on their fourth quarters yesterday. Both are makers of digital and analog semiconductor chips, and to a certain extent are rivals. However, they serve different markets with different styles, so comparing them may give a good view of how the semiconductor market is evolving.
Microchip is known for its microcontrollers, which are microprocessors combined on a single chip with inputs and outputs designed to control external devices. A typical use might be controlling a consumer appliance or coordinating the systems in an automobile. It makes a wide variety of microcontrollers that are usually sold as standard parts. It also makes some analog devices (capable of creating radio wave forms, for instance) and other special parts.
Maxim makes standard parts that can be incorporated into circuit designs, but more of its business is in making special parts for particular products. These parts may or may not include a microcontroller; they often include both digital and analog circuits on the same chip.
Both companies saw demand dry up in Q4 as manufacturers who use their chips cut back on orders, both because of weak demand from their own customers and because they could save cash by depleting inventories.
Both companies cut back on their own production in order to save cash and to cut their own inventories, but both still believe their own inventories are too high if the economy remains down.
Microchip revenues were $192 million, down 29% sequentially from $270 million and down 24% from $253 million year-earlier.
Maxim revenues were $410.7 million, down 18% sequentially from $501.2 million and down 24% from $540.0 million year-earlier.
One reason that Maxim's revenues were not down as much sequentially as Microchip, but were down the same from year-earlier, had to do with notebook computers. Maxim makes parts for notebook computers, and had made a part for a particular Intel standard design. They lost that part in the latest transition. However, they have new design wins that they believe will enable them to regain some traction in notebooks in 2009, if notebook end demand does not crash even futher.
Both companies had a variety of one time charges and benefits in the quarter. Stripping those out, especially if you look only at cash flows, both were positive. Both sit on large accumulations of cash kept from more prosperous times. Both give investors generous dividends and see no need to cut the dividend at the current level of recession. At this moment's prices, Maxim pays a dividend of 6.22% at $12.45, and Microchip pays a 7.37% at 18.98. You can't get that from a Treasury or CD.
What about the future? Neither firm has good visibility, although it is fair for us to assume that when (or if, for pessimists) the economy revives the demand for their chips will also increase. Both plan on even lower revenues in the March quarter. Maxim believes that it will do well in its communications segment (which does not include parts for cell phones, but for infrastructure) because they are supplying parts for base stations in China, which is committed to continuing its 3G rollouts. They think their computer segment will do poorly as there is a lot of notebook inventory in the distribution channels. They believe cell phone inventories have been depleted (their parts are in high-end phones), so unless consumer demand drops off further, they expect their customers to start restocking soon.
Microchip has more customers, typically using smaller numbers of chips for a particular product. This makes it harder to know what their customers' plans are. Their book to bill ratio was a horrendous 0.7 at year's end, but they have seen a slight uptick in January orders over December. They believe they can return to growth even in a downturn by introducing new products, but their best trick is the flexibility of their expense side. They can cut expenses rapidly, already having done so in 2008. They believe they can remain profitable at almost any level of economic activity.
Microchip is known for its microcontrollers, which are microprocessors combined on a single chip with inputs and outputs designed to control external devices. A typical use might be controlling a consumer appliance or coordinating the systems in an automobile. It makes a wide variety of microcontrollers that are usually sold as standard parts. It also makes some analog devices (capable of creating radio wave forms, for instance) and other special parts.
Maxim makes standard parts that can be incorporated into circuit designs, but more of its business is in making special parts for particular products. These parts may or may not include a microcontroller; they often include both digital and analog circuits on the same chip.
Both companies saw demand dry up in Q4 as manufacturers who use their chips cut back on orders, both because of weak demand from their own customers and because they could save cash by depleting inventories.
Both companies cut back on their own production in order to save cash and to cut their own inventories, but both still believe their own inventories are too high if the economy remains down.
Microchip revenues were $192 million, down 29% sequentially from $270 million and down 24% from $253 million year-earlier.
Maxim revenues were $410.7 million, down 18% sequentially from $501.2 million and down 24% from $540.0 million year-earlier.
One reason that Maxim's revenues were not down as much sequentially as Microchip, but were down the same from year-earlier, had to do with notebook computers. Maxim makes parts for notebook computers, and had made a part for a particular Intel standard design. They lost that part in the latest transition. However, they have new design wins that they believe will enable them to regain some traction in notebooks in 2009, if notebook end demand does not crash even futher.
Both companies had a variety of one time charges and benefits in the quarter. Stripping those out, especially if you look only at cash flows, both were positive. Both sit on large accumulations of cash kept from more prosperous times. Both give investors generous dividends and see no need to cut the dividend at the current level of recession. At this moment's prices, Maxim pays a dividend of 6.22% at $12.45, and Microchip pays a 7.37% at 18.98. You can't get that from a Treasury or CD.
What about the future? Neither firm has good visibility, although it is fair for us to assume that when (or if, for pessimists) the economy revives the demand for their chips will also increase. Both plan on even lower revenues in the March quarter. Maxim believes that it will do well in its communications segment (which does not include parts for cell phones, but for infrastructure) because they are supplying parts for base stations in China, which is committed to continuing its 3G rollouts. They think their computer segment will do poorly as there is a lot of notebook inventory in the distribution channels. They believe cell phone inventories have been depleted (their parts are in high-end phones), so unless consumer demand drops off further, they expect their customers to start restocking soon.
Microchip has more customers, typically using smaller numbers of chips for a particular product. This makes it harder to know what their customers' plans are. Their book to bill ratio was a horrendous 0.7 at year's end, but they have seen a slight uptick in January orders over December. They believe they can return to growth even in a downturn by introducing new products, but their best trick is the flexibility of their expense side. They can cut expenses rapidly, already having done so in 2008. They believe they can remain profitable at almost any level of economic activity.
I own Microchip stock, but not Maxim. I also own competitor Marvell (MRVL). Maxim is on my list to buy at some point, but I have a pretty lengthy list of companies to choose from given their valuations and compared to my ability to generate cash to buy them.
For more detailed coverage of their December quarters, see my Microchip analyst conference summary for Q4 2008, and my Maxim analyst conference summary for Q4 2008.
See also their company sites:
Keep diversified!
Thursday, November 29, 2007
Marvell Technology (MRVL) Valuation
Marvell (MRVL) management, employees and long-term investors were probably shocked by the huge drop in the stock price yesterday, the day following release of Q3 data (really fiscal Q3 2008, the 3 months ending October 27, 2007). While there are specific reasons that make a valuation of Marvell's stock widely open to interpretation, for the most part the drop reflects Wall Street trading program and analyst focus on short-term profits being mismatched with Marvell's strategy for long term growth.
I'm assuming you've have some background on Marvell Technology, which I've followed for a number of years and which I own stock in. If not you might want to check the following before reading further:
my Marvell page at Openicon (which has links to my prior articles on Marvell and to my summaries of Marvell analyst conferences).
www.marvell.com
No one is disputing, now, that Marvell is able to grow very quickly, both growing its interal divisions and by making strategic acquisitions. Q3 revenues were $758.2 million, up 15% sequentially and 46% from the year-earlier quarter. They were also well above guidance management gave at the beginning of the quarter. That is exceptionally fast growth for a company of Marvell's size. But it is just getting back to trend for Marvell. Here are annual revenue figures for the past few years:
2002 $505 million
2003 $819 million
2004 $1,224 million
2005 $1,670 million
2006 $2,238 million
The current annual run rate is $3,032 million. Call that $3 billion. Six times 2002 revenues.
But where's the beef? Using GAAP Marvell lost $6.4 million in Q3. And I like to use GAAP. On the other hand I like companies that make short-term sacrifices in order to be able to dominate an industry in the long run. The semiconductor chip industry is very diverse. What Marvell has done successfully is pick an area, become dominant, then pick a new area (or two or three) to compete in. Marvell always starts at the high end of the markets it chooses, introducing revolutionary technologies. Then it gains market share as these technologies spread to the middle market and then to the low-priced market segment.
Wall Street is mad because Marvell invests a lot of money in research. Not me. This investment is going to bear fruit.
Unless we enter a global recession 2008 is going to be a year of good profitability, on top of continued revenue growth, for Marvell. Here's why.
First, the profit figure is not as bad as the GAAP figure indicates. Marvell also released a non-GAAP figure, which was a Q3 profit of $86.2 million. This figure eliminates (from the GAAP numbers) $37 million in amortization expense and $56 million in stock-based compensation expense, which is a non-cash expense.
Well, GAAP requires stock-based compensation to have a $ equivalent because it dilutes shares. It is non-cash, and I believe in giving employees a stake in the company. The amortization expense is real too.
Keeping that firmly in mind, nevertheless on a cash basis Marvell was up $33 million. So they are cash flow positive. They also increased inventories in line with business to the tune of $85 million.
Going forward, Marvell announced a decrease in headcount of 400 workers or 7% of the workforce. In Q4 there will be a $8 million one time charge and about $4 million of benefit. In Q1 benefit shoud rise to around $10 million.
In addition, revenues (which are somewhat seasonal in semiconductors) should rise at least $30 million in Q4, which was management guidance. With operating expense being held nearly flat, and cost of goods sold should increase less than $15 million, a good guess is that net income will icnrease by about $15 million.
So at very least I expect GAAP net income to be in the black in Q4, with rapid acceleration upward after that.
There are a number of other factors that should accelerate profit growth. One is that the former-Intel application (cell phone) processor division's costs are set to go down as Marvell will no longer have to buy the processors from Intel at contracted prices. Instead they will be made in an Asian fab, which has already made sample chips and will be gearing up in 2008.
Marvell Technology has also had a large number of design wins that are going to ramp up revenue in 2008. They have introduced advanced video processing chips that will go into an increasing number of flat panel displays. They also announced breakthroughs in a Green technology for analog power supplies that are the result of 5 years of research and development.
Marvell could please the nearsighted wage-slave analysts of Wall Street by drastically cutting back on research and development ($252 million in Q3) and just marketing the hell out of the technologies they already have. Short-term traders would love that. But with a $3 billion revenue run rate, $1 billion a year in R&D begins to look reasonable. If Marvell cuts back R&D slightly and hits a $4 billion a year revenue run rate by the end of 2008, everyone will be heaping praise on CEO Sehat Sutardia and his team for their wisdom and perseverance.
All stocks are risky. At $15 a share today, I don't think Marvell has much risk left in it, aside from macroeconomic risk, but always diversify your portfolio and remember, if you don't buy low you can't sell high.
I'm assuming you've have some background on Marvell Technology, which I've followed for a number of years and which I own stock in. If not you might want to check the following before reading further:
my Marvell page at Openicon (which has links to my prior articles on Marvell and to my summaries of Marvell analyst conferences).
www.marvell.com
No one is disputing, now, that Marvell is able to grow very quickly, both growing its interal divisions and by making strategic acquisitions. Q3 revenues were $758.2 million, up 15% sequentially and 46% from the year-earlier quarter. They were also well above guidance management gave at the beginning of the quarter. That is exceptionally fast growth for a company of Marvell's size. But it is just getting back to trend for Marvell. Here are annual revenue figures for the past few years:
2002 $505 million
2003 $819 million
2004 $1,224 million
2005 $1,670 million
2006 $2,238 million
The current annual run rate is $3,032 million. Call that $3 billion. Six times 2002 revenues.
But where's the beef? Using GAAP Marvell lost $6.4 million in Q3. And I like to use GAAP. On the other hand I like companies that make short-term sacrifices in order to be able to dominate an industry in the long run. The semiconductor chip industry is very diverse. What Marvell has done successfully is pick an area, become dominant, then pick a new area (or two or three) to compete in. Marvell always starts at the high end of the markets it chooses, introducing revolutionary technologies. Then it gains market share as these technologies spread to the middle market and then to the low-priced market segment.
Wall Street is mad because Marvell invests a lot of money in research. Not me. This investment is going to bear fruit.
Unless we enter a global recession 2008 is going to be a year of good profitability, on top of continued revenue growth, for Marvell. Here's why.
First, the profit figure is not as bad as the GAAP figure indicates. Marvell also released a non-GAAP figure, which was a Q3 profit of $86.2 million. This figure eliminates (from the GAAP numbers) $37 million in amortization expense and $56 million in stock-based compensation expense, which is a non-cash expense.
Well, GAAP requires stock-based compensation to have a $ equivalent because it dilutes shares. It is non-cash, and I believe in giving employees a stake in the company. The amortization expense is real too.
Keeping that firmly in mind, nevertheless on a cash basis Marvell was up $33 million. So they are cash flow positive. They also increased inventories in line with business to the tune of $85 million.
Going forward, Marvell announced a decrease in headcount of 400 workers or 7% of the workforce. In Q4 there will be a $8 million one time charge and about $4 million of benefit. In Q1 benefit shoud rise to around $10 million.
In addition, revenues (which are somewhat seasonal in semiconductors) should rise at least $30 million in Q4, which was management guidance. With operating expense being held nearly flat, and cost of goods sold should increase less than $15 million, a good guess is that net income will icnrease by about $15 million.
So at very least I expect GAAP net income to be in the black in Q4, with rapid acceleration upward after that.
There are a number of other factors that should accelerate profit growth. One is that the former-Intel application (cell phone) processor division's costs are set to go down as Marvell will no longer have to buy the processors from Intel at contracted prices. Instead they will be made in an Asian fab, which has already made sample chips and will be gearing up in 2008.
Marvell Technology has also had a large number of design wins that are going to ramp up revenue in 2008. They have introduced advanced video processing chips that will go into an increasing number of flat panel displays. They also announced breakthroughs in a Green technology for analog power supplies that are the result of 5 years of research and development.
Marvell could please the nearsighted wage-slave analysts of Wall Street by drastically cutting back on research and development ($252 million in Q3) and just marketing the hell out of the technologies they already have. Short-term traders would love that. But with a $3 billion revenue run rate, $1 billion a year in R&D begins to look reasonable. If Marvell cuts back R&D slightly and hits a $4 billion a year revenue run rate by the end of 2008, everyone will be heaping praise on CEO Sehat Sutardia and his team for their wisdom and perseverance.
All stocks are risky. At $15 a share today, I don't think Marvell has much risk left in it, aside from macroeconomic risk, but always diversify your portfolio and remember, if you don't buy low you can't sell high.
Friday, August 24, 2007
Marvell's Huge Research and Development Budget
Marvell (MRVL) reported fiscal Q2 2008 earnings yesterday (August 23, 2007) with a GAAP loss of X or x per share. The stock lost 10% of its value in trading today. I believe some traders were hoping for a short-term pop because of rumors that a hedge fund had taken a position and that Marvell produced one part for Apple's iPhone cell phone. They overlooked the elephant in the room: Marvell's R&D (research and development) spending for the quarter. In fact the short-term sell-side analysts probably see the R&D budget as a negative. Here I'll focus on the future and the R&D expenses. For more on the past, see my notes on the Marvell analyst conference.
Marvell spent an astonishing $236 million on R&D in the quarter. Its revenues for the quarter were $657 million. So R&D was 36% of its budget. Compare that with, say Intel, which spent 30% of its revenues on R&D last quarter; or a more direct competitor, Linear Technology, which spent $47 million on R&D, or 17.5% of revenue.
It looks to me like Marvell is girding for war. They are not going to try to become the world's sole supplier of semiconductor chips, but they are going after a lot of cutting-edge, high volume, high margin business.
Some results are already rolling in. In May management guided Q2 revenues to $645 million; instead they came in at $657. Part of the differential probably came from chips that went in iPhones, but you have to remember that Marvell is already a big company. In fact it has pretty well made its intention clear: it is going after the 3G high-end phone market, not just Apple's tiny fraction of it. Last year it bought Intel's communication processor business (which this year is resulting in $36 million per quarter non-cash write offs of amortization costs, which really skews GAAP EPS downward). It was already developing its own communications processors. It also has some of the best analog radio technology in the industry. What it is doing is combining all of these functions - digital signal processing, general digital processing, and cell radio signal transmission with Wi-Fi and bluetooth. That is a killer combo. It does not mean there is no competition, or that any cell phone maker is required to adopt it. But those who do not may find themselves, in a year or two, at a severe competitive disadvantage.
Most companies that have done so well in making chips for hard-drive storage would see taking on the entire cell phone semiconductor industry as challenge enough. But not Marvell. It is also going after some other big hunks of business.
One is video processors for large screen TVs. Again, Marvell came to this game late. Again, the already have a foot in the door with some advanced silicon that makes for better pictures. Again, they are planning to solve a bunch of unsolved problems and deliver a solution that will be irresistible to the TV makers.
In parallel with that they are working on the DVD/ HD-DVD end of things as well.
Oh, and not satisfied with mere dominance in the hard drive industry, they have sunk a bunch of effort into R&D to make even better drive chips; they are confident they can gain revenues in this area.
Then there are their advance in LAN technology. And power management. And printer technology. I'm probably missing something, but that seems to cover the basics.
After a year in which Marvell and many other semiconductor makers got hit by inventory adjustments, slowed demand growth, and pricing pressure, Marvell's intense pursuit of new markets may be bearing fruit. Management believes Q3 revenues may come in around $710 million, up $53 million sequentially from Q2. I'll be very impressed if that happens.
More important, if they are right about design wins they are getting this year leading to significant new revenues in calendar 2008, I can't wait to see what Marvell looks like a year from now.
As to pricing the stock, you'll just have to choose your theory. I don't believe in buying stocks with high PE ratios, and right now if you use the GAAP numbers the PE ratio of Marvell is infinite. If you use non-GAAP numbers, it is pretty high. On the other hand I understand the value of R&D. Another company, trying to please short term investors, could have simply cut back its R&D budget in Q2 and shown some very impressive results. But as a long-term investor I'd rather have the company with the bad short term results, especially when its R&D arm has a record of paying off, as Marvell's has.
Right now I already own as much Marvell stock as my portfolio model allows, so I won't be buying more anytime soon. Even holding it at this level involves risk: just because Marvell is spending money on R&D does not mean it can sell any resulting technology. But that is a risk I can live with.
Marvell spent an astonishing $236 million on R&D in the quarter. Its revenues for the quarter were $657 million. So R&D was 36% of its budget. Compare that with, say Intel, which spent 30% of its revenues on R&D last quarter; or a more direct competitor, Linear Technology, which spent $47 million on R&D, or 17.5% of revenue.
It looks to me like Marvell is girding for war. They are not going to try to become the world's sole supplier of semiconductor chips, but they are going after a lot of cutting-edge, high volume, high margin business.
Some results are already rolling in. In May management guided Q2 revenues to $645 million; instead they came in at $657. Part of the differential probably came from chips that went in iPhones, but you have to remember that Marvell is already a big company. In fact it has pretty well made its intention clear: it is going after the 3G high-end phone market, not just Apple's tiny fraction of it. Last year it bought Intel's communication processor business (which this year is resulting in $36 million per quarter non-cash write offs of amortization costs, which really skews GAAP EPS downward). It was already developing its own communications processors. It also has some of the best analog radio technology in the industry. What it is doing is combining all of these functions - digital signal processing, general digital processing, and cell radio signal transmission with Wi-Fi and bluetooth. That is a killer combo. It does not mean there is no competition, or that any cell phone maker is required to adopt it. But those who do not may find themselves, in a year or two, at a severe competitive disadvantage.
Most companies that have done so well in making chips for hard-drive storage would see taking on the entire cell phone semiconductor industry as challenge enough. But not Marvell. It is also going after some other big hunks of business.
One is video processors for large screen TVs. Again, Marvell came to this game late. Again, the already have a foot in the door with some advanced silicon that makes for better pictures. Again, they are planning to solve a bunch of unsolved problems and deliver a solution that will be irresistible to the TV makers.
In parallel with that they are working on the DVD/ HD-DVD end of things as well.
Oh, and not satisfied with mere dominance in the hard drive industry, they have sunk a bunch of effort into R&D to make even better drive chips; they are confident they can gain revenues in this area.
Then there are their advance in LAN technology. And power management. And printer technology. I'm probably missing something, but that seems to cover the basics.
After a year in which Marvell and many other semiconductor makers got hit by inventory adjustments, slowed demand growth, and pricing pressure, Marvell's intense pursuit of new markets may be bearing fruit. Management believes Q3 revenues may come in around $710 million, up $53 million sequentially from Q2. I'll be very impressed if that happens.
More important, if they are right about design wins they are getting this year leading to significant new revenues in calendar 2008, I can't wait to see what Marvell looks like a year from now.
As to pricing the stock, you'll just have to choose your theory. I don't believe in buying stocks with high PE ratios, and right now if you use the GAAP numbers the PE ratio of Marvell is infinite. If you use non-GAAP numbers, it is pretty high. On the other hand I understand the value of R&D. Another company, trying to please short term investors, could have simply cut back its R&D budget in Q2 and shown some very impressive results. But as a long-term investor I'd rather have the company with the bad short term results, especially when its R&D arm has a record of paying off, as Marvell's has.
Right now I already own as much Marvell stock as my portfolio model allows, so I won't be buying more anytime soon. Even holding it at this level involves risk: just because Marvell is spending money on R&D does not mean it can sell any resulting technology. But that is a risk I can live with.
Thursday, August 2, 2007
Napster Versus Apple?
Can Napster take on Apple in the digital music market? You have to be kidding, right? Apple has a market capitalization of $117 billion. It dominates the MP3 player market with its iPod. It dominates music downloads with its iTunes service. It recently introduced the iPhone to enormous amounts of free publicity. In contrast Napster just reported $32 million in revenues for the June quarter and has operated for years without a profit, burning through much of its once substantial cash reserves. When people want to pay for music downloads, they use Apple; when they don't want to pay, they don't subscribe for $15 a month for Napster's (or Yahoo's, or RealNetwork's) music library of 4 million tunes, they just get it for free (or steal it, according to the music industry). Napster had just 770,000 paid subscribers world-wide at last count.
But wait, maybe you should look at the Napster story. After all way back in 2002 Apple was a loser company with a stock worth well less than a tenth of what it is today. Its Mac line was languishing, its Newton PDA had been a failure; go back to 1998 and people were practically giving away Apple stock.
So what is the Napster story? Napster management understood that they were being shut out of most of the music download market partly because of the dominance of Apple's proprietary iPods, which will not allow music subscription services to run. They also understood that people, especially young people, will pay for music only to the extent it is a hassle to get it for free. So while they did fight for share in the MP3 player space, they concentrated on the future, which they saw as music-enabled cell phones. For those of you who have not been paying attention, these phones have been around for a couple of year's now with almost no media attention prior to the iPhone launch.
Napster has built its own infrastructure capable of allowing telecoms to enable music subscriptions, ring tone downloads, and yes even single-tune sales to download to cell phones over the wireless networks. Right now you can buy cell phones from AT&T and other carriers that have the option of subscribing to Napster. Major cell-phone manufacturers are building the capability of using Napster into at least some of their cell phone lines. Nine, yes 9, carriers around the world are working with Napster to compete with Apple iTunes.
So when it comes to music, it is not clear who is David and who is Goliath. You might consider Goliath to be the telecoms, with Napster as one weapon they hope to use to defend themselves against Apple.
This is unlikely to be a linear process. Remember that Apple did not invent the portable music player. It made a deal with the music industry to sell songs, then did great job integrating hardware and software. Apple fans spread the word about iPod / iTunes much more successfully than they proselytized for the Mac computer mainly because iTunes took much of the geek factor out loading up MP3 players. And yes, iPods were filled with music ripped from CDs or illegally downloaded. The number of songs actually sold by iTunes compared to the number of songs sitting in iPods today is quite low.
So I see two major scenarios, and people can only guess at how market share will be split between them. The Apple wins scenario is this: there have been 100 million iPods sold (my guess is that about 40 million are now broken, so 60 million are still in use). Starting as soon as a lower cost iPhone comes out, whenever these 60 million people either break their current iPod or their cell phone, they are going to buy an iPhone. Yep, that is 60 million iPhones that could sell in the next 3 years. It could become uncool to own anything but an iPhone. Three years from now an iPhone could conceivably be priced around $100. Another factor pushing this scenario: people who have actually bought iTunes will only be able to play them on iPods or iPhones, so they won't be shifting much to non-Apple products.
The other scenario is that the cell phone makers and telecom companies succeed in pushing their various versions of 3G, music-enabled cell phones. Perhaps the Apple brand is tarnishing; perhaps some new fad will jump to the head of the cell phone pack. Given that iPhones are not for sale except for in Apple stores and AT&T stores, to some extent this is bound to happen.
What Napster lacks so far is a fan base that will show friends how to use Napster-enabled music players and cell phones. Sales people at cell phone stores could fill this role, but it is not likely to be a priority for them.
An early indicator comes from Japan. At the Napster analyst conference Wednesday (see my summary), management reported that in Japan they already have more cell phone subscribers than traditional computer subscribers. They have a deal with DoCoMo, which is promoting and selling Napster-enabled phones. The numbers are low so far and at least the first month is free, but expect to see this add to Napster revenues in the December quarter.
I believe both Napster and Apple are set to prosper in the next few years. Apple is the safe bet, so the returns, while good, are not likely to be as significant as Napster's will be if it succeeds.
I own some Napster stock; I do not currently own Apple stock.
But wait, maybe you should look at the Napster story. After all way back in 2002 Apple was a loser company with a stock worth well less than a tenth of what it is today. Its Mac line was languishing, its Newton PDA had been a failure; go back to 1998 and people were practically giving away Apple stock.
So what is the Napster story? Napster management understood that they were being shut out of most of the music download market partly because of the dominance of Apple's proprietary iPods, which will not allow music subscription services to run. They also understood that people, especially young people, will pay for music only to the extent it is a hassle to get it for free. So while they did fight for share in the MP3 player space, they concentrated on the future, which they saw as music-enabled cell phones. For those of you who have not been paying attention, these phones have been around for a couple of year's now with almost no media attention prior to the iPhone launch.
Napster has built its own infrastructure capable of allowing telecoms to enable music subscriptions, ring tone downloads, and yes even single-tune sales to download to cell phones over the wireless networks. Right now you can buy cell phones from AT&T and other carriers that have the option of subscribing to Napster. Major cell-phone manufacturers are building the capability of using Napster into at least some of their cell phone lines. Nine, yes 9, carriers around the world are working with Napster to compete with Apple iTunes.
So when it comes to music, it is not clear who is David and who is Goliath. You might consider Goliath to be the telecoms, with Napster as one weapon they hope to use to defend themselves against Apple.
This is unlikely to be a linear process. Remember that Apple did not invent the portable music player. It made a deal with the music industry to sell songs, then did great job integrating hardware and software. Apple fans spread the word about iPod / iTunes much more successfully than they proselytized for the Mac computer mainly because iTunes took much of the geek factor out loading up MP3 players. And yes, iPods were filled with music ripped from CDs or illegally downloaded. The number of songs actually sold by iTunes compared to the number of songs sitting in iPods today is quite low.
So I see two major scenarios, and people can only guess at how market share will be split between them. The Apple wins scenario is this: there have been 100 million iPods sold (my guess is that about 40 million are now broken, so 60 million are still in use). Starting as soon as a lower cost iPhone comes out, whenever these 60 million people either break their current iPod or their cell phone, they are going to buy an iPhone. Yep, that is 60 million iPhones that could sell in the next 3 years. It could become uncool to own anything but an iPhone. Three years from now an iPhone could conceivably be priced around $100. Another factor pushing this scenario: people who have actually bought iTunes will only be able to play them on iPods or iPhones, so they won't be shifting much to non-Apple products.
The other scenario is that the cell phone makers and telecom companies succeed in pushing their various versions of 3G, music-enabled cell phones. Perhaps the Apple brand is tarnishing; perhaps some new fad will jump to the head of the cell phone pack. Given that iPhones are not for sale except for in Apple stores and AT&T stores, to some extent this is bound to happen.
What Napster lacks so far is a fan base that will show friends how to use Napster-enabled music players and cell phones. Sales people at cell phone stores could fill this role, but it is not likely to be a priority for them.
An early indicator comes from Japan. At the Napster analyst conference Wednesday (see my summary), management reported that in Japan they already have more cell phone subscribers than traditional computer subscribers. They have a deal with DoCoMo, which is promoting and selling Napster-enabled phones. The numbers are low so far and at least the first month is free, but expect to see this add to Napster revenues in the December quarter.
I believe both Napster and Apple are set to prosper in the next few years. Apple is the safe bet, so the returns, while good, are not likely to be as significant as Napster's will be if it succeeds.
I own some Napster stock; I do not currently own Apple stock.
Wednesday, July 25, 2007
Semiconductors Mixed, but Texas Instruments Rebounding
When Motorolla (MOT) warned of disappointing results, and then turned in revenues that were sequentially down 7.5% and down 19% from year earlier, it created some profound worries about the health of the semiconductor industry as a whole. [See my 7/19/2007 MOT summary] Now that more companies have reported, in particular Texas Instruments (TXN) on Monday, July 23rd, it seems that on the whole the industry is not in bad shape. The inventory correction from the second half of 2006 does seem to be over, although different companies are coming out of it with different timings.
A lot of detail about the industry can be gleaned from the TXN analyst conference held July 23. Texas Instruments revenues were also down, in this case 7%, from the year-earlier. But they bounced up 7% on a sequential basis and hit the midrange of management guidance. They said they turned away some unprofitable business at the low end of the cell phone market. Motorola, of course, makes cell phones; their failure to be able to market low end phones profitably really hurt them. Texas Instruments makes parts for the phones; that is working out better, at this moment. Orders were up 8% sequentially, inventories are in good shape, and 3G (high-end) mobile phone demand is growing. In order to meet the demands of the low-end market TI has brought out LoCosta (yep!) integrated cell phone chips that should start generating revenue in 2008.
Keep in mind that Microchip warned that it would only grow 2% sequentially, Xilinx was only up 1% sequentially, Altera was up 5%, AMD and Intel had mixed results. To me the overall picture is one of recovery with a real possibility of relative strength in Q3 due to the leanness of inventories. As individual companies win and lose contracts or consumer interest there will continue to be a lot of volatility against the general trend. This is particularly true of semiconductor chips used in the telecommunications sector. Right now analog chip design needs seem to be growing at a faster pace than digital; getting all these communications protocols right seems to be tougher than moving forward in digital processing.
In fact, it is time to start worrying about 2008. I believe that growth is going to be good due to continued rapid expansion in Asia and healthy expansion in Europe. The United States market is still a concern due to issues outside of semiconductors, notably housing, employment, and consumer willingness to spend.
More data:
Motorola investor relations page
Texas Instrument investor relations
A lot of detail about the industry can be gleaned from the TXN analyst conference held July 23. Texas Instruments revenues were also down, in this case 7%, from the year-earlier. But they bounced up 7% on a sequential basis and hit the midrange of management guidance. They said they turned away some unprofitable business at the low end of the cell phone market. Motorola, of course, makes cell phones; their failure to be able to market low end phones profitably really hurt them. Texas Instruments makes parts for the phones; that is working out better, at this moment. Orders were up 8% sequentially, inventories are in good shape, and 3G (high-end) mobile phone demand is growing. In order to meet the demands of the low-end market TI has brought out LoCosta (yep!) integrated cell phone chips that should start generating revenue in 2008.
Keep in mind that Microchip warned that it would only grow 2% sequentially, Xilinx was only up 1% sequentially, Altera was up 5%, AMD and Intel had mixed results. To me the overall picture is one of recovery with a real possibility of relative strength in Q3 due to the leanness of inventories. As individual companies win and lose contracts or consumer interest there will continue to be a lot of volatility against the general trend. This is particularly true of semiconductor chips used in the telecommunications sector. Right now analog chip design needs seem to be growing at a faster pace than digital; getting all these communications protocols right seems to be tougher than moving forward in digital processing.
In fact, it is time to start worrying about 2008. I believe that growth is going to be good due to continued rapid expansion in Asia and healthy expansion in Europe. The United States market is still a concern due to issues outside of semiconductors, notably housing, employment, and consumer willingness to spend.
More data:
Motorola investor relations page
Texas Instrument investor relations
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