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Sector Overview: Handsets

Posted on Monday, Dec 22nd 2008

An IDC report released last week said that the mobile phone market will slow down in 2009, with mobile phone volumes expected to decline 1.9% due to the global economic crisis. However, the converged device market is still expected to grow, although at a slower pace of 8.9% in 2009. IDC expects the handset market to recover by 2010, with the converged device market expected to return to 24% growth and mobile phones to about 5% growth. Let’s take a closer look.

In its release, IDC said that the downturn should not last beyond 2009. However, with emerging markets maturing, it expects that mobile phone market growth will not reach the levels experienced prior to the decline.

U.S. and Worldwide Mobile Phone Shipment Growth by Device Type, 2008–2010

RegionDevice Type

2008

2009

2010

USAConverged Mobile Device (Smartphone)

75.7%

3.1%

28.2%

Traditional Mobile Phone

-9.8%

-11.6%

-8.8%

Total Market

-0.3%

-8.7%

-0.7%

WorldwideConverged Mobile Device (Smartphone)

26.9%

8.9%

24.0%

Traditional Mobile Phone

4.6%

-3.5%

5.0%

Total Market

7.1%

-1.9%

7.7%

Source: IDC

In another report, Gartner says that smartphone sales in Q3 were weak at 36.5 million units, up just 11.5% versus 15.7% growth in the previous quarter:

Company

3Q08

Sales

3Q08 Market Share (%)

3Q07

Sales

3Q07 Market Share (%)

3Q08- 3Q07 Growth (%)

Nokia

15,472

42.4

15,964

48.7

-3.1

Research In Motion

5,800

15.9

3,192

9.7

81.7

Apple

4,720

12.9

1,104

3.4

327.5

HTC

1,656

4.5

1,315

4.0

25.9

Sharp

1,239

3.4

1,535

4.7

-19.3

Others

7,626

20.9

9,643

29.4

-20.9

Total

36,515

100.0

32,753

100.0

11.5

Source: Gartner

What is striking from these figures is the tremendous market share gain by Apple, which tops my Top Handset Stocks list. From just 3.4% last year, its market share has grown 327% to 12.9%. Clearly, the subsidized price and international launches, apart from the user interface, OS and enterprise features have helped the 3G iPhone gain handset market share. Though competitors are coming up with touch screen models, they don’t seem to match the simplicity of the iPhone’s UI quite yet. Recent earnings coverage is available here.  The stock is down almost 50% from last year and is currently trading around $89 with market cap of about $79.5 billion. It hit a 52-week low of $80 on November 20. Speculation, however, runs rife about Steve Jobs’ succession planning (or lack thereof).

Chart for Apple Inc. (AAPL)

Another strong performer has been Research in Motion (RIM), whose market share grew 82%. Over the past year, RIM has been trying to strengthen its presence in the consumer market, and currently about 45% of its BlackBerry customer base is non-enterprise.

RIM reported its third quarter results yesterday. Q2 earnings coverage is available here. Revenue for Q309 was up 66.3% y-o-y and 7.9% q-o-q to $2.78 billion on shipment of 6.7 million units. The total BlackBerry subscriber account base now stands at 21 million, up about 14% q-o-q. Net income was $396.3 million, or $0.69 per share versus $370.5 million, or $0.65 per share last year.  Adjusted net income was $477.3 million, or $0.83 per share. Analysts expected earnings of $0.81 per share on revenue of $2.83 billion. RIM ended the quarter with $2.49 billion in cash.

RIM released its touch screen model, Storm, with Verizon last month, and there were quite a few technical problems with the release. Though these have been solved with a software update, there have been stories of exceptionally high return rates. Verizon has, however, gone on record to say that Storm has the lowest handset return rate. Earlier in the month, RIM had lowered its guidance for Q3. Q4 guidance was therefore a pleasant surprise for investors. The company expects Q4 revenue between $3.30 and $3.50 billion and EPS in the range of $0.83-$0.91 per share. Analysts estimate $3 billion in revenue and EPS of $0.83. The stock has fallen over 60% over the year and is currently trading around $38 with a market cap of about $22 billion. It hit a 52-week low of $35.76 on December 2 after RIM lowered its guidance.

Chart for Research In Motion Ltd. (RIMM)

OS

3Q08

Sales

3Q08 Market Share (%)

3Q07

Sales

3Q07 Market Share (%)

3Q08- 3Q07 Growth (%)

Symbian

18,179

49.8

20,664

63.1

-12.0

Research In Motion

5,800

15.9

3,192

9.7

81.7

Mac OS X

4,720

12.9

1,104

3.4

327.5

Microsoft Windows Mobile

4,053

11.1

4,180

12.8

-3.0

Linux

2,622

7.2

2,884

8.8

-9.1

Palm OS

780

2.1

383

1.2

103.3

Others

361

1.0

345

1.1

4.6

Total

36,515

100.0

32,753

100.0

11.5

Source: Gartner

Let us now look at the market leader, Nokia whose share has declined by about 3%. Its iPhone challenger, Tube, just doesn’t seem to have any differentiating features to stop its share slide. Although Nokia is not willing to lower its prices, it should at least work on innovating its products and the OS. In July, it bought Symbian but even Symbian’s market share is sliding. From 63.1% last year, its share is down to less than 50%. It has N97 lined up for release in 2009, which should hopefully deliver the goods. Recent earnings coverage is available here.

It is currently trading around $16 with market cap about $59 billion. It hit its 52-week low of $12.08 on November 21.

Chart for Nokia Corp. (NOK)

Palm also reported its Q2 results yesterday, and they were disappointing. Revenue declined 45% to $191.6 million. Net loss widened to $506.2 million or $4.64 per share, the company’s sixth consecutive quarterly loss. Excluding charges, net loss was $80.2 million or $0.73 per share.  Analysts expected losses of $0.36 per share on revenue of $228.1 million.

Although the success of Centro seemed to help Palm in its turnaround early in the year, Centro sales have slumped due to stiff competition from the low-priced 3G iPhone and also RIM. It has one last hope, its new OS, Nova, due for launch next month. It has been more than a year since Jon Rubinstein joined Palm as executive chairman. There are high hopes for the man who brought the iPod to life, and next month we will know where Palm is headed. The stock is trading around $2 with market cap around $241 million. On December 2, it hit a 52-week low of $1.14.

Chart for Palm, Inc. (PALM)

There are two likely acquisitions in the sector in 2009: Palm and Rim. Dell needs a handset business, and may acquire one of the two companies. Another possible acquirer is HP. It will be interesting to track the evolution of the industry which will most likely become the biggest provider of computing access to the next billion.

This segment is a part in the series : Sector Overview

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This is a great sector overview. Nokia and RIM are defending positions with inadequate products. Apple is coming on strong because they have arguably the best smartphone on the planet, without a clear number 2 competitor product that I can identify.

I identified Palm as a risky but potentially extremely lucrative investment shortly before you published this overview. Elevation Partners seems to agree and have invested $100 million since then. Palm has been trading above $3 lately, up from the $2 range when I identified them as a great investment.

Further, I expect Palm to ship handsets with Nova, the soon to be second best mobile OS, behind Apple’s OS X. Palm will quickly become the best technological challenger to Apple’s domination of the smart phone space. They will lack Nokia’s distribution and RIM’s installed base in the business sector. But Palm will have the best mobile OS outside of Apple shortly.

When I wrote to you, I doubted Palm’s ability to remain independent for long. With the additional investment from Elevation Partners, Palm can indeed stay independent long enough to build up an installed base for their Nova devices. Palm will still be a great takeover target, but their acquisition price just went up a whole lot. Palm is still a great buy at $3, even if a bit risky.

Palm will be a great pickup for Dell and HP. RIM and Nokia could also jump start the technology behind their smart phones much faster with a PALM acquisition. I wouldn’t rule out others such as Samsung and/or Microsoft. Palm would change the competitive prospects for almost any player in the cell phone space.

Realtosh Friday, January 2, 2009 at 5:55 PM PT