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Power To The IP Players

Posted on Friday, Jul 29th 2011

Semiconductor IP players like ARM Holdings (NASDAQ:ARMH) and InterDigital (NASDAQ:IDCC) have benefitted immensely from the booming sales of smartphones. ARM dominates the mobile computing space and has sets its sights on Intel’s (NASDAQ:INTC) domain of traditional computing. InterDigital, which has about 1,300 patents in cellular technology, recently announced that it is considering strategic alternatives, including a sale. Apple and Google are said to be among the interested companies. Let’s take a closer look.

Over the past year, the number of lawsuits in the smartphone industry has mounted, as has the competition. Apple has filed lawsuits against HTC, Samsung which use Google’s Android OS. Early this month, the U.S. International Trade Commission made a preliminary ruling in favor of Apple against HTC. Ryan Kim on GigaOM says that Android’s legal issues are reportedly prompting Asian manufacturers to reassess their mobile platform options, and Google will need to ramp up its efforts for Android to remain successful.

Patent ownership has thus become a major issue, and patents have become tremendously valuable. A consortium of vendors including Apple, Microsoft, Research in Motion recently bought Nortel Network’s patents for $4.5 billion. The final price is said to be five times the initial bid made by Google. Apple is reported to have paid $2.6 billion for the acquisition. Nortel’s portfolio of 6,000 patents relate to areas such as the wireless, Internet search, social networking, data networking, optical, voice, service provider, and the semiconductor sectors.

Danielle Kucera, Zachary Tracer, and Rita Nazareth on Bloomberg say that InterDigital’s 8,800 patents could be more valuable than the Nortel patents and the Apple–Google rivalry could drive up the value by 50%. InterDigital, with annual revenue of $394.5 million, saw its market cap rise to $3.4 million following its announcement last week. It is trading around $74, very close to the $75 valuation assigned by guest author Vijay Nagarajan three years ago.

ARM’s Financials
ARM this week reported second quarter revenue of £117.8 million ($190.2 million), up 27%. Normalized profit before tax increased 25% to £54.2 million ($88.3 million). Analysts were expecting pretax profit of £45.3 million on revenue of £109.1 million.

During the quarter, ARM shipped 1.1 billion ARM-processor-based chips into mobile phones and tablets and 0.8 billion ARM-based chips into a broad range of end applications, including digital TVs, disk drives, and microcontrollers. It signed 29 processor licenses for a range of applications including smartphones, mobile computers, servers, and smartcards. It also signed five licenses for its Mali graphics processor.

Despite its strong performance in the quarter, ARM hasn’t changed its forecast for the year. For the second half of 2011, ARM expects revenue of $385 million, which is less than analysts’ estimate of $395 million. ARM said Q4 royalties are harder to predict as continuing macroeconomic uncertainties may impact consumer confidence.

The stock is trading around $29 with market cap of about $39 billion. It hit a 52-week high of $30.27 on February 7. ARM’s share price as well as its computing efforts got a boost from Microsoft’s announcement that future generations of Windows operating system will support ARM-based chips. There is increased confidence in ARM’s chip designs, and Google also announced recently that its Chrome operating system will run on ARM technology. That doesn’t sound good for Intel.

Intel’s Financials
Intel recently reported second quarter revenue of $13 billion, up 21% y-o-y. Net income was $3 billion or $0.54 per share, up 2% y-o-y. Gross margin was 61%, slightly down from the last quarter. Analysts were expecting earnings of $0.51 on revenue of $12.8 billion. Intel repurchased stock for about $2 billion and paid dividends of $961 million.

Intel said demand for its latest product, Sandy Bridge, remained strong. PC Client revenue was up 11% y-o-y; Data Center revenue was up 11 % y-o-y; Atom microprocessor and chipset revenue of $352 million was down 15% y-o-y, and other Intel architecture revenue was up 84% y-o-y. The acquisitions of Infineon Wireless Solutions and McAfee, now Intel Mobile Communications, contributed $1 billion in revenue.

Intel expects third quarter revenue to be $14 billion, plus or minus $500 million, and gross margin of 64% plus or minus a couple of percentage points. Analysts expect $13.5 billion in revenue for the third quarter. The stock is trading around $23 with market cap of about $121 billion. It hit a 52-week high of $23.96 on May 18.


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