Patents: The New Differentiating Factor in Mobility

Patents have become a strong issue in the smartphone industry with nearly every vendor engaged in lawsuits with competitors. Apple recently won a preliminary injunction that bans the sale of Samsung’s GALAXY tablet in most of Europe. After its successful lawsuit against Samsung, Apple has sued Motorola for its XOOM tablet infringing on the design for iPad. Let’s take a closer look.

Motorola Mobility’s Financials
Motorola Mobility (NYSE:MMI) recently reported second quarter revenue of $3.3 billion, up 28%. Net loss was $56 million or $0.19 per share compared to net income of $80 million or $0.27 per share last year and a loss of $81 million or $0.27 per share last quarter. Motorola ended the quarter with $3.2 billion in cash. Annual revenue in 2010 was $11.5 billion.

Home segment net revenue in the fourth quarter was $907 million, up 2%, and GAAP operating earnings were $62 million, compared to $29 million last year. Motorola said it maintained its leadership in key markets with set-top shipments up more than 10%.

Mobile Devices segment net revenue was $2.4 billion, up 41%, while GAAP operating loss was $85 million, compared to earnings of $87 million last year. During the quarter, Motorola shipped 11 million handsets, including 4.4 million smartphones and more than 440,000 Motorola XOOM tablets. XOOM is the first tablet with Android’s OS for tablets, Android 3.0 Honeycomb, and features a dual-core processor and high-definition 10.1 inch widescreen display.

During the quarter, Motorola expanded the DROID family at Verizon Wireless with the introduction of DROID X2 and DROID 3 both featuring a dual-core 1GHz processor, providing better gaming experiences, Web browsing, multi-tasking, and Adobe Flash video performance. It launched four new smartphones in China and announced plans to launch 10 devices in 2011 with Sprint.

For the third quarter, Motorola Mobility expects net earnings of breakeven to $0.11 per share. It expects 2011 net earnings per share of $0.48 to $0.60. Its stock is trading around $24 with market cap of about $7 billion. Its 52-week range is $20.77 to $36.54.

Samsung’s Financials
Samsung Electronics (005930.KS), the second-largest smartphone vendor with annual revenue of 154.63 trillion won ($142.78 billion), recently reported second quarter revenue of 39.44 trillion Korean won ($36.5 billion), up 4% y-o-y. Net income was down 18% y-o-y to 3.51 trillion won ($3.25 billion). The company cut its dividend to 500 won per share from 5,000 won per share.

Telecom drove revenue growth in the quarter. Telecom revenue grew 43% in the quarter because of the strong demand for the GALAXY SII smartphone. Samsung’s mobile device sales in the quarter increased in the high single-digit range sequentially, and the average sales price of handsets increased by more than 10%.

However, Semiconductor segment sales decreased 4%. The Memory Business recorded a 12% decrease in sales. Samsung reported that demand for commodity DRAM remained weak as global PC shipments saw low single-digit growth; however, higher growth was seen in server-related memory sales for data centers and for high-density mobile memory products for smartphones and tablet manufacturers. Display Panel business sales declined 9% and the Digital Media & Appliances businesses declined 5%.

During the quarter, Apple and Samsung became the top two vendors of smartphones, overthrowing Nokia for the first time. Apple’s iPhones accounted for 19.1% of the global smartphone shipments, followed by Samsung’s 16.2% and Nokia’s 15.7%, according to the research firm IDC.

Samsung expects the competition to remain tight in the third quarter, which typically sees increased consumer demand for electronics. It expects market demand for mobile handsets to increase by more than 15% in the second half, driven by consumers upgrading to smartphones.

Jeffrey McCracken on Bloomberg reports that Samsung is examining InterDigital’s patent portfolio after being invited to make a bid. Apple and Google are the other potential bidders and Apple wins the bid, it could be a big risk for Samsung and Google. Google does not have a strong patent portfolio and as a result its vendors HTC, Motorola, and Samsung are engaged in lawsuits over patent infringement. A consortium of vendors led by Apple recently bought Nortel Network’s patents for $4.5 billion and Google cannot risk losing another patent portfolio. Winning the InterDigital patent portfolio bid could also make a difference to Samsung in some of the pending lawsuits. Motorola Mobility CEO Sanjay Jha recently said,

“I would bring up IP as a very important for differentiation [among Android vendors]. We have a very large IP portfolio, and I think in the long term, as things settle down, you will see a meaningful difference in positions of many different Android players. Both, in terms of avoidance of royalties, as well as potentially being able to collect royalties. And that will make a big difference to people who have very strong IP positions.”

Patents are indeed becoming a differentiating factor for smartphone vendors and Motorola has the strongest patent portfolio among Android vendors. Motorola has filed lawsuits against Apple in October 2010 and Apple filed counter lawsuits. But is Motorola now looking to attack its fellow Android vendors HTC and Samsung?