BMO Capital Markets analysts Tim Long, Ari Klein and Alex Spektor review Day 1 of the Mobile World Congress (MWC).
We attended Day 1 of Mobile World Congress (MWC) in Barcelona. As usual there were a lot of announcements across our coverage universe. We make no changes to our models or ratings.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Below we highlight some of our takeaways.
Qualcomm at MWC
At a Q&A discussion that included Chairman Paul Jacobs, Qualcomm, Inc. (NASDAQ:QCOM) reiterated its confidence in the progress it’s making with Chinese LTE licensing, but had no comments about the ongoing NRDC discussion. Qualcomm also had several QCT announcements.
Two new 64-bit, LTE-capable Snapdragon 600 chips, expected to appear in commercial devices by 4Q14. The chips are pin- and software-compatible with the previously launched 410, which we believe will give device vendors much-needed flexibility in creating multi-tier variants of the same phone.
Two new QFE23xx chips are multi-mode, multi-band CMOS power amplifiers (PAs) with integrated switches. The chips represent the second offering in the RF360 front end family, which was launched last year with the QFE1100 envelope tracker used in the Samsung Galaxy Note 3. The new PA is being used in a new ZTE flagship device, which we view as a positive sign for Qualcomm, Inc. (NASDAQ:QCOM)’s expansion into the RF front end, increasing BOM share beyond its current foothold in APs, basebands, and transceivers.
Not much has changed on the competitive front for basebands. We are expecting Qualcomm to dominate share through the end of 2014 for LTE basebands.
Nokia at MWC
NSN CEO Rajeev Suri gave an overview of the progress that the infrastructure provider has made. More will be discussed regarding strategy, capital allocation, etc. after the deal with Microsoft Corporation (NASDAQ:MSFT) closes later in the quarter.
The company has done a great job removing costs, in our view. The focus now is on revenue growth. On the hardware side, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) is emphasizing some new meaningful contract wins, as well as the potential for better partnerships. For Services, the company walked from seven of 59 contracts, and is now re-engaged in managed services.
We continue to believe that it will be difficult for NSN to grow revenues while at the same time maintaining gross and operating margin. Given the large cash pile that will come when the deal closes, we would not be surprised if the company becomes acquisitive to mask revenue struggles.
On the handset front, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) expanded its low-end device portfolio, including a new basic phone and Asha model. More interesting was the new X series of smartphones based on Android Open Source Project (AOSP). The three sub-$150 phones introduced are compatible with Android applications, but tie into the Microsoft suite of services and APIs to avoid any dependence on Google. We believe this is a smart move, given the high level of emerging markets growth in low-end smartphones, though any upside will go to Microsoft Corporation (NASDAQ:MSFT) when the deal closes.
Alcatel-Lucent at MWC
We met with Mike Schabel, Vice President, Small Cells, which is in the Wireless Business Line.
The small cell market is being segmented into three areas; residential, enterprise, and outdoor. Each market has distinct go to market, as well as different technology requirements. Small cells encompass 3G, 4G, and WiFi.
Alcatel Lucent SA (ADR) (NYSE:ALU) remains a leader in this market, although it is still nascent. ALU had 65 revenue generating customers for small cell at the end of 2013, many of which were using the products for more than one application.
Service providers globally have ramped up their small cell plans. Operators in the US, China, Japan, and Korea seem to be taking the lead, and Europe will likely be next.
The competitive landscape is heating up, with Ericsson announcing its Dot architecture today. We view Alcatel Lucent SA (ADR) (NYSE:ALU) as the leader, having emphasized small cells well before other leading macro base station vendors.
While we view small cells as important, and recognize Alcatel Lucent SA (ADR) (NYSE:ALU) ‘s strong position, the market is still not big enough to move the needle. We remain Market Perform on ALU shares.
Ericsson at MWC
Ericsson (ADR) (NASDAQ:ERIC) CEO Hans Vestberg discussed LTE growth and areas of focus for 2014. We continue to see ERIC as the leader in LTE, with approximately one-third of 4G RAN sales last quarter.
Ericsson (ADR) (NASDAQ:ERIC) ‘s own measurements show that half of the world’s LTE smartphone traffic passes through its hardware. We believe this proportion will soon begin to decline given the expected rapid increase of China’s LTE traffic, where ERIC’s share lags that of the locals.
Ericsson (ADR) (NASDAQ:ERIC) had several announcements of carrier trials of its Radio Dot System for indoor mobile broadband coverage, including Vodafone, SingTel, Telstra, and MTN. We view ERIC as a laggard in small cells, so the trials are a positive step forward in the small, but rapidly growing market.
Vestberg also touched on the recently announced partnership with CIEN. We believe access to the strong optical portfolio will be beneficial for ERIC, particularly as IPoptical convergence starts to play a bigger role, though its own router market (where we estimate very low single-digit share) will need growth to be truly meaningful.
BlackBerry at MWC
BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) was the subject of some positive news. BBM support will be available on Nokia’s X line of phones, thanks to the platform’s Android underpinnings, as well as on Lumia Windows Phones later in the year. We believe this is a timely announcement as BBRY’s own devices shrink as a proportion of BBM users. Granted, initial user contribution will be low, but in a post FB-Whatsapp world additional platform availability is something we think is attractive.
BlackBerry Ltd (NASDAQ:BBRY) (TSE:BB) ‘s real-time platform, QNX, is rumored today to have been chosen by Ford Motor Company (NYSE:F) to replace Microsoft Windows in the Sync multimedia head unit solution. We spoke with a Ford representative at MWC who reassured us of continued MSFT cooperation, so the rumors may be baseless. If true, we view this as a positive development for an already respected platform, particularly as BBRY looks to solidify revenue streams beyond its legacy businesses.