Raymond James analysts Tavis C. McCourt and Daniel Toomey note the highlights from day three of the Mobile World Congress (MWC). They make special mention of some of the big news out of MWC: the RF Micro/TriQuint merger.
The following are our summary thoughts on Mobile World Congress (MWC) following 3 days of meetings, and copious amounts of coffee and ham. We note our Raymond James team has also published the following notes from our meetings in Barcelona.
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
Nokia, Microsoft, Google, Verizon, Apple: Devices at MWC
As we have written about for the last few years, the mobile device market is reaching its point of natural conclusion on form factors using a touch interface. Essentially every vendors’ pieces of rectangular glass looking similar, with some choosing metal casings and some choosing plastic, and some choosing larger rectangles and some smaller. The device market still smells like a continued commoditization of Android devices given the lack of differentiation, with the most interesting trend the growing presence of Chinese vendors both on the high end branded side (Huawei, Lenovo, ZTE) and on an ODM basis with vendors such as Alcatel OneTouch and Wiko, who are essentially Chinese incognito.
Nokia announces X product line at MWC
From an operating system standpoint, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)’s announcement of its X product line using an Android OS combined with Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V)/Microsoft Corporation (NASDAQ:MSFT) services was the most interesting announcement of the show. Industry insiders expect this development to continue under Microsoft and highlight the inability of Windows Phone to move down market given the hardware requirements and the tenuous nature of the Android strategy for Google Inc (NASDAQ:GOOG), as essentially even competitors can use it as an enabling OS while stripping out all ability for Google to monetize the device. Mozilla’s Firefox OS, although a disappointment in 2013, had a reasonably large presence at the show and continues to attempt to push a secondary mass market smartphone OS in emerging markets with what appears to be far more hardware and carrier support than last year.
Another interesting trend in handsets is the ability for Android to enable niche competitors that otherwise would not enter the mobile device space. A startup in the UK has licensed the CAT brand, developed 2 rugged Android phones, and has garnered placements at US carriers to serve a niche in the ruggedized smartphone market (Casio has had a nice niche at Verizon in the last few years).
No participation from Apple at MWC
Apple Inc. (NASDAQ:AAPL) does not participate in MWC, but commentary from industry participants we spoke with indicated that they expect Apple to do reasonably well in China and for the company to continue to grow its iPhone business year over year. Additionally, one can’t help but think the somewhat disappointing specs on the Galaxy S5 may help to benefit Apple in the high end smartphone market, especially if the iPhone 6 brings some interesting new hardware/software capabilities. The narrative of the last 12-18 months that Apple has been chasing Samsung on hardware specs may reverse if Apple is able to bring another new hardware innovation to market (similar to the fingerprint sensor in iPhone 5s) before Samsung.
Galaxy S5 launched at MWC
Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930)’s Galaxy S5 launch was viewed as somewhat underwhelming as the company has apparently given up on the race to build in as many new components and features as possible and is focused on improving the quality and user experience relative to the GS4. Although the GS5 was a bit of a yawner from a hardware perspective, Samsung’s second attempt at its Gear watch and its Gear Fit fitness band were far better received. The Gear Fit looks far sleeker/better than competing fitness bands we’ve seen, largely owing to a large and curved touch screen with easy access to running, walking, hiking and other apps. However, we did not get a chance to see the apps in action, and it is on the software side where Samsung has historically run into quality/functionality issues. Qualcomm, Inc. (NASDAQ:QCOM), Broadcom Corporation (NASDAQ:BRCM), Intel Corporation (NASDAQ:INTC), Marvell Technology Group Ltd. (NASDAQ:MRVL), RF Micro Devices, Inc. (NASDAQ:RFMD), TriQuint Semiconductor (NASDAQ:TQNT): Mobile SoC – It’s going to get really bad, and then it’s going to get a lot better – For us, the major takeaway from a mobile SoC standpoint was the continued domination of Qualcomm in high end LTE design wins.
MWC: LTE products ramp
Both Broadcom Corporation (NASDAQ:BRCM) and Intel Corporation (NASDAQ:INTC) had very few announced design wins of note, although Intel specifically indicated it expects to be the #2 LTE vendor globally this year. Marvell beat both of them and MediaTek for that matter, to market with an integrated LTE SoC, which surprised some at the show, although most expect the company to focus primarily on the Chinese end market in the near term. Intel indicated its Cat 6 discrete modem will be in commercial product in 1H14 with an integrated LTE SoC (with x86 processor) sampling in 4Q14. Intel confirmed that the design wins announced at the show would not provide enough volume to achieve #2 LTE unit share, so we do expect more design wins announced throughout the year with the company likely leaning heavily on Samsung as an OEM given the lack of discrete modem opportunity outside of Samsung and Apple. Broadcom declined to talk about timelines specifically on its LTE development, but indicated it expects to have design wins this year.
Industry participants we spoke with expect 3G and low end 4G SoC pricing to be absolutely brutal this year with a number of vendors looking to sustain relevance and win initial LTE designs, while Qualcomm is likely to be aggressive on the low end as well in order to make it as painful as possible for competitors to enter the LTE market. In China, the perception is that the vast majority of TD-LTE phones shipping today are using Qualcomm chips with a smattering of Marvell chips to come in 2Q. However, most expect China Mobile to ramp up demand meaningfully in 2H14 as MediaTek LTE chips become broadly available. Additionally, infrastructure vendors expect other Chinese carriers to begin LTE builds this year, making 2015 likely another big year for LTE device sales growth in China.
MWC: Qualcomm’s LTE license
As it relates to Qualcomm, Inc. (NASDAQ:QCOM), the company is sticking to its company line that it expects to get paid on both 5 mode and 3 mode LTE even if 3 mode LTE devices just end up purchasing a stand-alone LTE license at a slightly lower royalty rate. The point is somewhat moot in the near term as most of the phones shipping today on China Mobile Ltd. (ADR) (NYSE:CHL)’s LTE network are 5 mode, but as 3 mode starts to dominate in 2H14, the degree to which Qualcomm is successful in monetizing these devices will be crucial to growth in FY15 in our opinion. Qualcomm makes the point that it has been a long time partner of major Chinese OEMs such as Huawei, ZTE and Lenovo and one could make the case that the Chinese handset industry owes a lot of its success to Qualcomm’s long term investment in the country and its strategy to help larger Chinese vendors grow and serve as a counterweight to the growing influence of Apple and Samsung in the value chain. It certainly feels like ultimately the Chinese licensing negotiation will end up in some kind of quid pro quo arrangement with Qualcomm receiving some level of royalty in return for long term investment commitments in the country. However, this could take many more months, if not years, to finally get settled.
The biggest news out of the mobile chip industry at the show was the RF Micro/TriQuint merger, which was cheered by shareholders of both, and provides some much needed consolidation in the RF front end market. Noteworthy was Qualcomm’s first power amplifier/switch design win on a flagship ZTE LTE device, although it is still unclear the volume levels on this device or whether the RF360 product by Qualcomm will be used by ZTE globally or just in certain markets. Qualcomm suggested that investors should expect further design wins this year for RF360, that it will remain committed to CMOS solutions, and that it will continue to ramp up R&D resources to grow the product line over the next several years.