Olaus Magnus, "Carta Marina", 1539 (source: wikipedia)
Why did the old Persians hold the sea holy? Why did the Greeks give it a separate deity, and own brother of Jove? Surely all this is not without meaning. - Herman Melville, "Moby Dick"
Navigators and cartographers of old were understandably gripped by the many mysteries of the ocean's wide liquid expanse and gave some credence to tales of sea monsters lurking in the waters, capable of destroying even the strongest ships and ablest crews. High Technology firms, despite constantly striving to quantify and control every conceivable variable in their operations, are still explorers at heart, attempting to chart the unknown and expand the horizons of human knowledge & achievement. And, of course, voyages of discovery are not without hazard.
In the previous editorial of this series, we examined seven companies to see how they were fairing on the Seven Seas of High Tech. It was clear from the analysis that the industry barometer is falling and a storm of as yet undetermined strength is gathering, as we can ascertain from a summary of their current circumstances:
The Big Iron - HP and IBM floundering & taking on water; Cisco battened down with reefed sail
Wintel - Microsoft surging across the waves; Intel making headway but with difficulty
Area 51 - both Apple and Google have lost trim and their sails are beginning to flap & spill air
If anyone wants to refresh their memory of the details, follow the link below:
Today we'll go over the remaining ten firms in the portfolio and see if we can glean anything else from the wind, waves and currents.
The Stone Masons
These companies are the cream of the crop of the semiconductor industry. They are leaders or major players in all the markets they serve and have the richest IP portfolios (both hardware and software) in the business. Thus, if there was any such thing as a 'red sky in morning' alarm in High Tech, it would be blasting loud and clear right about now:
Qualcomm's trace is nothing short of frightening. Though by far the strongest of the chip suppliers to the mobile phone market and dominant in both baseband and application processors for smartphones, the mighty San Diego firm looks like it took a torpedo amidships last quarter.
USS Yorktown, Battle of Midway, May 1942 (source: commons.wikimedia.org)
As predicted over 1 year ago on this blog, the smartphone market has saturated and is turning sharply down. The hope that an as yet untapped market of 4B-5B customers in the Third World will save the smartphone segment may prove true some time in the future, but not at today's First World price points for handsets and services. Remember: Third World mobile phone users are accustomed to feature phone offerings that include a handset, a full year of service and unlimited texting in the range of $20-$25. We won't be seeing smartphones penetrate this sector to any significant extent until a new semiconductor process technology arises to displace silicon and rejuvenate the IC industry.
Though equipped with the smartest executive management team along with the richest IP portfolio in the industry, as well as being very well positioned for the emerging IoT, AI, Robotics, Machine Vision and Voice Recognition/Activation markets, its exposure to the declining mobile computing market is the dominant factor in the company's financial profile. Qualcomm is thus broadside to the stormfront and is in dire peril.
Fire is the test of gold; adversity, of strong men. - Seneca the Younger
Qualcomm is pursuing low and medium end smartphone chipset solutions, but this alone will not be sufficient to stem the tide - pricing and competitive pressures are too strong. The company announced a 15% layoff (4700 people) and there has even been talk of breaking up the organization and selling off bits and pieces. However, disassembling and discarding portions of the company would be a huge mistake. If every captain and crew decided to run to the lifeboats and abandon ship whenever a storm arose, there'd be hardly any vessels in the water.
It's fair to say that Qualcomm management is very aware of the problem and its magnitude. It has been preparing itself strategically for at least a full year, ever since it initiated the acquisition of CSR to gain access to its Bluetooth technology and market presence - a purchase that has just completed:
M&A activity won't be enough to save Qualcomm, though. Ultimately, the solution to their problems lies within. As a wise man once said, "Always protect your mavericks, because despite all the trouble they can be to manage, they'll be the ones to save you in a crisis." In the case of Qualcomm, it means the firm needs to find people in their organization who are willing and able to climb the rigging and adjust the canvas as the tempest howls while a steady, strong and resolute hand grips the helm.
Qualcomm's future lies outside the mobile computing market. They will have to pursue emerging market opportunities with great aggressiveness to remain viable over the medium and long term. Their success in doing so will depend on the ability and willingness of executive management to delegate both power and responsibility down the corporate hierarchy to fully engage the talents and energies of the employee base to build leadership positions in fledgling segments such as the IoT.
Broadcom is the most stable company of this group. Though extremely strong in terms of engineering and IP, the company is stagnant at the executive level in terms of both management practices and preferences. The merger with Avago can't happen too soon, as Broadcom desperately needs a shakeup in both IP and leadership.
Mediatek peaked in Q3 of last year and has been declining ever since in the face of murderous competition from Qualcomm in the China market. Contrived $1B antitrust fines by Beijing have not been sufficient to trip up Mediatek's relentless California rival. Competitive pressures are intensifying as domestic Chinese firms attack Mediatek's 3G market share and some of China's smartphone manufacturers begin developing their own chipsets:
Nonetheless, I wouldn't write off Mediatek just yet. The company just announced a $3.7B acquisition of ILI Technology for its touchscreen IC offerings. It is also publicly proclaiming its sincerity in pursuing IoT and automotive applications:
A snag in its automotive aspirations are the presence of Qualcomm and Nvidia, who appear to have already beaten Mediatek to the punch. The company's efforts in this segment, though, should not be discounted too quickly - it is a premier SoC firm with plenty of IP and talent.
The still nascent IoT market may nevertheless prove more promising in the long run. Mediatek announced a special company program to pursue IoT applications and foster startups in the IoT space a good six months ago. I was actually in Las Vegas last week attending the IoT Evolution Expo and had a chance to pass by the Mediatek booth. Though it became evident during conversations at the booth that the company has a very conservative Taiwanese cultural outlook, Mediatek does indeed appear to understand that the company's future will be determined by its ability to take risks and make quick, aggressive decisions in pursuit of emerging market opportunities.
Nvidia is the red-headed stepchild of the group. It continues its now 8 year long history of meandering, with no revenue growth trend despite its enormous R&D investments over the the last decade. While there is no plainly good news, there is some distinctly bad news:
There is little reason to believe that Nvidia will 'change its stripes' after all this time. Though the current executive team grew the company from its infancy, they are obviously incapable of taking it to the next level. Their overbearingly autocratic management style has proven antithetical to the now urgent need to extract the best in commitment and creativity from its very skilled employee pool. My forecast is for Nvidia to continue stagnating, with a revenue trend that will increasingly point downwards until there is a complete overhaul of leadership.
Joachim Patinir, "Portuguese Carracks off a Rocky Coast", 1540 (source: bbc.co.uk)
A somewhat refreshing surprise is offered by the leading European semi firms, all of whom appear to be sailing along reasonably well. Let's take a quick look at the numbers and then delve into the details.
The most notable change in the company's outlook is investor sentiment - particularly that of the French and Italian governments, who are large stakeholders in the firm:
Time has nearly run out for the current executive management team. STMicro was once a juggernaut in European microelectronics, a daring innovator and a competitor feared worldwide. Since early 2011, however, it has been adrift, rudderless and steadily sinking. I think it's a foregone conclusion that much of the executive staff will become castaways by the end of the year.
Infineon's acquisition of International Rectifier (completed in January) has been paying off handsomely all during the year, boosting results across nearly all of the company's product lines but, in particular, for power management applications (both consumer and industrial.) It has also given Infineon a local footprint in the American market, strengthening its position both in terms of geography and technology for the IoT, a strategic imperative for the firm.
I suspect that next quarter will be the last where the IR acquisition will boost year on year revenues. Nonetheless, Infineon has innate appeal in its domestic market (Germany, still the strongest local economy by far in the EU) and has managed its industrial-focused technology and product development well. My forecast is that the company will weather the gathering High Tech downturn adequately and will stand fast in the face of the storm.
NXP, though, is significantly more aggressive and has greater strategic vision than its German cousin and rival. The Freescale acquisition should close by the end of the year, at which point NXP's positioning in the general MCU market and the future of the IoT will be exceptionally robust.
Despite its current third place in quarterly revenues and a distinct flattening out of its growth curve over the last 3 quarters, I would predict that NXP will show greater strength than either of its European competitors and actually grow during the developing High Tech and general economic downturn while Infineon only manages to keep its bow pointed into the wind and STMicro gets swamped by the roiling seas.
A very clear leading indicator of High Tech market conditions is the programmable logic market. FPGAs and CPLDs provide a dependable 9-12 month early warning of changes in system market health. For anyone who has been earnestly watching the far horizon, the intensifying weakness of High Tech earnings results has been no surprise.
As usual throughout almost their entire histories, Altera and Xilinx continue to mirror each other. The companies have essentially interchangeable hardware and software product offerings and they think and act very much alike. So much could be done with bit-level programmable architectures that would massively expand their utility in many more applications spaces, even creating new ones in the way word-level programmable architectures branched from the MPU paradigm to create MCU, DSP, VPU and GPU engines. But such market-expanding and market-creating innovations will never spawn from either of these two intellectually sterile firms.
Renoir, "The Skiff", 1875 (source: commons.wikimedia.org)
He hath borne himself beyond the promise of his age, doing, in the figure of a lamb, the feats of a lion. - Shakespeare, "Much Ado About Nothing"
Perhaps Intel will be able to take Altera's programmable fabrics and toolchains in new directions when it completes the acquisition and experiments with novel combinations of fixed logic, CPU and FPGA/CPLD architectures for the datacenter. A company that is more in tune with potentially interesting new applications for programmable logic, though, is Lattice. Alone among the merchant FPGA/CPLD suppliers, it grew last quarter to an 8 year high. I suspect that it will be tiny Lattice, plying along quietly, unobtrusively, even modestly on courses others fear to take, that eventually assumes the leadership role for programmable logic in the IoT.
Yoshitora, "The Kamikaze Destroying the Mongol Invasion Fleet", 1863 (source: theartofjapan.com)
As we can collectively discern from this quarter's installment of the "State of the Union" series as well as from previous forecasts, High Tech is entering a difficult period. With few exceptions, all the leading companies we've reviewed are either struggling or in great jeopardy.
There are many macroeconomic factors at work here and we are not the only ones taking note of these changing times, as the recent volatility of worldwide equity markets plainly attests. We'll be examining these indicators in the next and final installment of the series, where we will once again travel to the slopes of Mount Parnassus, make an offering of gold and pose a question to the priestess of Apollo.......