Wireless Chipmakers Marching On

Amidst doom and gloom elsewhere, the wireless chipmakers are looking relatively robust. Yesterday, Qualcomm, the leading semiconductor company with annual revenue of $11.14 billion, reported strong sales in the second quarter that beat estimates mainly due to strong demand in China. However, it also reported a loss due to legal costs. Last week, Broadcom and Texas Instruments also experienced stronger-than-expected demand in China. There have been other interesting developments in the semiconductor industry, with Qualcomm and Broadcom ending their disputes and entering into a patent agreement. Further, Broadcom also made a bid to acquire Emulex. Let’s take a closer look.

Qualcomm reported Q2 revenue of $2.46 billion, down 5% y-o-y and beating estimates of $2.35 billion. Net loss was $289 million or $0.18 per share compared to net income of $$766 million last year and $341 million last quarter. Analysts had expected profit of $0.29 per share. Q1 analysis is available here.

Total cash at the end of the quarter was $14.0 billion, compared to $13.1 billion at the end of the first quarter and $10.6 billion a year ago. Operating cash flow was $1.26 billion, up 33%. During the second quarter, the company paid $528 million in dividends or $0.32 per share relating to dividends declared in the first and second fiscal quarters. Early in the month, it increased its quarterly cash dividend to $0.17 per share payable in June.

By segment, Qualcomm CDMA Technologies (QCT) revenue declined 19% y-o-y and 1% q-o-q to $1.3 billion. QCT shipments increased 10%, driven by increased demand in emerging markets especially China. Qualcomm Technology Licensing (QTL) revenue was up 20% y-o-y and down 5% q-o-q to $0.95 billion. In Qualcomm Wireless & Internet (QWI), revenue was down to 9% y-o-y and up 4% q-o-q to $176 million.

Last year, it ended its dispute with Nokiaand at the Mobile World Congress (MWC) in February of this year , it entered into a platform development agreement for 3G UMTS smart-phones, initially for North America, to be launched in 2010. At the MWC, Nokia also announced that it will be sourcing Broadcom chips for 3G.

With the multi-year agreement with Broadcom in place, its legal battles have come to an end and Qualcomm expects to focus on improving its core business. As per the agreement with Broadcom, it will pay $891 million in cash over a period of four years, of which $200 million will be paid in the quarter ending June 30, 2009. Apart from the monetary benefit, Broadcom is also likely to win more business and increase its market share.

Qualcomm expects fiscal third-quarter sales to be in a range between $2.4 billion and $2.6 billion. Analysts were expecting $2.35 billion in revenue. Operating income is expected to decline to about $850 million.

Expecting to see continued growth and expansion of 3G networks and an increased demand for its chipsets, Qualcomm raised its full year guidance. It now expects sales between $9.8 billion and $10.2 billion, above the analyst consensus of $9.69 billion. It is currently trading around $43 with a market cap of about $71 billion.

On April 21, Broadcom, No.2 on my list of Top 10 Semiconductor stocks with annual revenue of $4.6 billion reported its first quarter results. Q1 revenue was down 17% y-o-y and 24% q-o-q to $853.4 million including $19 million in royalty from Verizon. Net loss was $91.9 million, or $0.19 per share compared with net loss of $159.2 million, or $0.32 per share last quarter and net income of $74.3 million, or $0.14 per share last year. Q4 analysis is available here.

Gross margin, excluding the Verizon royalty, was 46.5%. GAAP gross margin, including Verizon royalties, was 47.7%, down about 280 basis points from last year mainly driven by adverse mix and additional inventory reserves taken during the quarter. Total cash and market securities were $1.96 billion with positive cash flow from operations of $91 million. With this strong cash position, Broadcom launched a $764 million bid to acquire Emulex, which makes technology used in computer data centers.

By segment, broadband communications revenue declined sequentially with the largest declines coming in the broadband modems and set-top boxes. In the mobile and wireless market, Broadcom experienced sequential decline driven by seasonality and by lower consumer demand, reduced Verizon royalties, and normal Q1 seasonality weakness. Its enterprise networking target market also declined due to reduced demand from controller and switching customers. However, it experienced strong demand due to infrastructure projects in China.

For the second quarter, Broadcom expects revenue to increase in the range of $900 to $975 million. Gross margin excluding Verizon is expected to improve slightly by roughly 25 to 50 basis points. It expects growth in the broadband communications and the mobile and wireless segments. However, enterprise networking business is expected to decline. It is currently trading around $24 with market cap of about $12 billion. The stock hit a 52-week high of $24.40 as the agreement with Qualcomm was announced.

On April 20, Texas Instruments (TI) (NYSE:TXN) which has annual revenue of $12.5 billion, reported a better-than-expected first quarter driven by demand for chips in Asia. Q1 revenue was down 36% -o-y and 16% q-o-q to $2.09 billion. Net income was $17 million or $0.01 per share compared with $662 million last year and $107 million last quarter. Analysts expected a loss of $0.04 per share on revenue of $1.9 billion. Q4 analysis is available here.

TI reduced its inventory by $277 million, and worked with distributors to reduce channel inventory by $132 million. It expects to increase production levels moderately during the second quarter. It also reduced operating expenses by $258 million or 27% from a year ago and by $101 million or 13% sequentially. Gross profit was $806 million, down by $950 million from last year and $291 million from the fourth quarter mainly due to under utilization and lower revenue. Gross margin was 38.6% of revenue in the quarter.

Cash flow from operations decreased to $251 million in the quarter. Much of the decline from last quarter was associated with the increase in receivables that resulted from strengthening of business late in the first quarter as compared with the deteriorating conditions late in the fourth quarter. It repurchased 6.6 million shares in the quarter for $101 million in and paid dividends of $141 million. It ended the quarter with $2.43 billion of cash and short term investments.

3G communications infrastructure in China was the most notable area of better than expected strength. In the last few weeks of the quarter, TI also had better than expected demand from notebook computers, some areas of the hand set market as well as from LCD based HDTV’s.

By segment, Analog revenue declined 36% y-o-y and 20% q-o-q to $814 million. Wireless revenue declined 40% y-o-y and 15% q-o-q to $551 million. Embedded Processing was slightly better with a decline of 26% y-o-y and 7% q-o-q to $316 million, mainly due to strength in communications infrastructure revenue.

TI is focusing on growth in Analog and Embedded Processing. In the quarter, it acquired CICLON Semiconductor, a specialized supplier of analog chips for power management.

TI believes that the worst of the inventory drain is over and that customers have realigned their production with lower customer demand. TI orders in the quarter were $2.19 billion, up 18% sequentially. However, TI cautions that the second half of the year would reflect the real end consumption trends. For the second quarter, it expects revenue in the range of $1.95 to $2.40 billion, or a decline of about 7% to a growth of about 15%. EPS is expected to be in the range of $0.01 to $0.15. It is currently trading around $17 with a market cap of about $22 billion.