Wireless Chips and IP: MRVL, IDCC, ARM, TSRA

It may still be a bit of a bumpy ride for semiconductor manufacturers, even as the smartphone market grows at a steady clip. According to Gartner, semiconductor revenue in 2010 is expected to increase 13% and rebound to 2008 levels of $255 billion as the PC market continues to strengthen, but in 2009, it is on pace to decline 11.4% to $226 billion. In 2010, PC shipments are projected to increase 12.6% to 336.6 million units. Let’s take a look at how Marvell and semiconductor IP players, ARM, Tessera, and InterDigital are benefiting from the recovering semiconductor market.

This week, Marvell Technology Group (NASDAQ:MRVL), a semiconductor company with annual revenue of $2.95 billion, reported its third quarter results. Q3 revenue increased 2% y-o-y and 25% q-o-q to $803.1million. Analysts had expected revenue of $770 million. Net income was $201.6 million or $0.31 per share compared to $70.9 million, or $0.11 per share last year. Non-GAAP net income was up 95% to $231.8 million, or $0.35 per share. Q2 analysis is available here.

GAAP gross margin was 57.5% compared to 55.0% last quarter and 52.1% last year due to improved product mix and cost reductions. Cash, cash equivalents, and short-term investments were $1.46 billion, up approximately $185 million sequentially and up $420 million from the same period a year ago.

With the semiconductor demand picking up, the company’s mobile and wireless business had a good quarter. The sale of products to the mobile and wireless end market was up over 40% sequentially and contributed approximately 20% of total revenue.

RIM’s next generation Bolt 9700 3G Smart Phone will be based on Marvell’s latest 3G URPS communication processor. In my most recent post semiconductors, I reported that Marvell intends to enter the cellular chip market in China and increase its wireless chip market share to 25% by 2012. It has now been selected as a strategic supplier for the launch of China Mobile’s multiple O-Phone/smartphones. Clearly a good design win.

Guest author Nalini Kumar Muppala, in his in-depth analysis on Marvell, said that the company needs to sell to other Tier 1 customers apart from RIM, and the China Mobile win is a good start. Marvell expects new design wins to continue to accelerate, but revenue from the mobile and wireless market is expected to decline in a range of mid to high single digits due to typical seasonal ordering patterns. Besides, the competition is brutal in this sector, and will make things very difficult going forward, with margins eroding fast.

Within the networking end market, sales increased by over 25% sequentially and represented 20% of total sales. Marvell expects networking revenue to accelerate in Q4 in a range of mid to high single digits on a percentage basis.

Revenue from the storage end market grew nearly 20% sequentially and contributed to over 50% of  total sales. Its share of the system-on-chip (SOC) market has expanded to approximately 60% on a unit basis during the quarter. Sales of new products were approximately $80 million, or about 10% of total revenue.

For the fourth quarter, Marvell expects revenue between $820 million and $850 million and non-GAAP EPS of $0.33 to $0.39, above Wall Street estimates. The stock is currently trading around $18 with market cap of about $11 billion.

Now let’s look at the IP players.

On October 27, ARM Holdings plc (NASDAQ:ARMH), a leading semiconductor IP supplier with annual revenue of $546.2 million, reported its third quarter results. Q3 revenue was down 8% to $123 million or £75.2 million. EPS was 0.53 pence and normalized EPS was down 3% to 1.34 pence. Q2 analysis is available here.

Gross margin increased to 92.9% compared to 91.2% in Q2 2009 and 89.9% in Q3 2008, mainly because there was a higher proportion of royalty and licensing revenue. The company ended the quarter with net cash of £121.72 million compared to £88.2 million in the previous quarter.

Total dollar license revenues declined 14% to $39.7 million, representing 32% of total revenues. License revenues comprised $30.9 million from the processor division (PD) and $8.8 million from the physical IP division (PIPD). ARM signed deals for 28 processor licenses in Q3, fifteen of which were for non-mobile devices such as digital TVs, microcontrollers, networking and storage. The remaining 13 licenses were for use in application and baseband processors in mobile computers and smartphones.

Total dollar royalty revenues in the quarter declined 6% to $62.3 million, representing 51% of total revenues. Royalty revenues comprised $53.1 million from PD and $9.2 million from PIPD. Sales of development systems were $14.0 million, down 4% while services revenue was down 9% to $7 million.

ARM expects full-year 2009 revenue to be about $460 million, in line with the market expectations at the time of the results release. However, analyst estimates have now ballooned to around $500 million.

In a recent post, I asked whether Intel, which is facing a serious threat from ARM in the convergence device category, would buy ARM. Nalini, in his Intel vs. ARM series takes a detailed look at ARM’s growth in the netbook market and evaluates the prospect of an Intel takeover. He concludes that though ARM is vulnerable to a takeover, its ecosystem of vendors would prevent such an event from happening, especially if Intel is the acquirer.

For its recent quarter, ARM achieved an average of 2.1 chips per mobile handset, up from 2.0 in the previous quarter, and mobile shipments accounted for 64% of processor royalty revenues. Acer, Dell, HTC, Nokia, and Sharp have recently announced products based on ARM’s Cortex processor. The stock is currently trading around $8 with a market cap of $3.34 billion after hitting a 52-week high of $8.48 on November 18.

According to Gartner, mobile phone sales increased 0.1% to 308.9 million units in Q309 while smartphone sales grew 12.8% to cross 41 million units. The increasing penetration of smartphones is beneficial for semiconductor players such as InterDigital and ARM.

InterDigital recently reported that despite the economic downturn, 3G handsets have continued to increase as a percentage of the total market. The company recently added Samsung and Pantech as 3G licensees and increased its share of the 3G handset market under license to 55%. The major unlicensed handset makers include the market leader Nokia, Sony Ericsson, and Motorola, and together they account for about one-third of the 3G market. InterDigital recently received a negative ruling in its patent infringement case against Nokia filed in 2007.

On October 28, InterDigital (NASDAQ:IDCC), an IP licensing company with annual revenue of $228.5 million, reported its third quarter results. Q3 revenue was up 37% to $75.5 million. Net income was $30.6 million or $0.69 per share, more than three times the profit in Q308 driven by reduced operating expenses and revenue from patent deals with Samsung as well as Pantech and Cinterion. Q2 analysis is available here.

InterDigital ended the quarter  with $413 million in cash and short-term investments and virtually no debt. It repurchased shares worth $25 million during the quarter.

Despite a surprisingly strong third-quarter showing, wireless technology developer InterDigital believes that analysts’ fourth-quarter expectations are too high. InterDigital expects fourth quarter revenue around $75 million to $76 million, slightly below the $77.5 million consensus view. The stock is currently trading around $25.30 with market cap of about $1 billion. It hit a 52-week high of $18.41 on October 28.

On October 29, Tessera Technologies, Inc. (NASDAQ:TSRA), an IP licensing company and a miniaturization technology provider with annual revenue of $248 million, reported third quarter results that beat estimates. Q3 revenue was up 4% to $66.1 million. Net income was $12.1 million, or $0.24 per share compared to a loss of $5.3 million or $0.11 per share last year. Microelectronics revenue was $59.1 million while Imaging & Optics revenue was $7 million. Q2 analysis is available here.

For the fourth quarter, Tessera expects revenue between $60.0 million and $62.0 million compared to analyst estimates of $70 million and last year’s figure of $69.1 million. Tessera has two major DRAM customers with volume-based pricing incentives that should reduce its microelectronics revenue sequentially in the fourth quarter of 2009 to a range between $53 million and $54 million. Its disappointing outlook caused the shares to slide, and the stock is currently trading around $26 with market cap of about $1.3 billion. It hit a 52-week high of $32.17 on October 12.