For a change, wireless chipmakers have legitimately good news to report. The past few weeks have seen a swath of upgraded business forecasts from
RF Micro Devices
The only fly in the ointment: There's a risk that the chipmakers' customers -- the handset makers -- will encounter trouble in the upcoming quarter as a
glut of new phones are unloaded on the market. That's already created speculation about the potential for an inventory overhang in the fourth quarter, which could backfire and hurt the wireless-component suppliers as well.
The trouble stems from an oversupply of cell-phone handsets, as new Chinese players jump into the game and existing manufacturers release a wealth of new models with cameras, games and other fancy features.
"You probably have a larger number of handsets being introduced in the third and fourth quarter than
at any other time, and it's not only the traditional three players --
, which have roughly two-thirds of the handset market -- but 25 new Chinese handset players as well," says Sandy Harrison, an analyst at Pacific Growth Equities.
The phone makers themselves seem to be hurting amid heightened competition, as shown by the admission from the No. 1 global vendor, Nokia, that its average selling prices are likely to fall in the third quarter compared with the prior quarter and last year's levels.
So far, wireless chipmakers seem to have dodged the same troubles, aided by the sheer growth in unit volumes of handsets, as well as a shift toward pricier silicon for the latest crop of high-end phones. Earlier this week, for example, TriQuint noted that wireless components actually are likely to see slower price declines this year than in the past two years, with average selling prices sliding by only around 5% to 10% instead of more than 20%.
The relatively cheery results at wireless-component outfits are at odds with the somewhat worrying competitive outlook for their customers.
"The component makers do well on the front end because they're just selling bullets to people firing at each other. They don't care who wins," say Harrison. "But when all the handset makers make too many phones, the component guys lose at the end of the day -- it will just be at a later point
than the handset makers."
Harrison believes the latest round of upwards earnings revisions owes more to seasonal strength -- following on highly cautious initial guidance -- than to sustainable growth trends. He has a neutral rating on RFMD and
; his firm hasn't done banking for either. "I'd like to see
handset sell-through" before getting more positive on either name, he explains.
"It will be very hard for everybody to gain market share simultaneously," says Sanford Bernstein's Adam Parker, taking a similar line. "Ultimately by the end of the calendar year, there may be an emergence of excess wireless inventory. At some point it comes home to roost. You can't have a permanent disconnect between OEMs and component suppliers."
The only exception, adds Parker, would be if semiconductors were to become so sophisticated and high-priced that they would account for a bigger percentage of a handset's overall value. But nobody expects that to happen. Indeed, even up-market silicon used in advanced 2.5G phones has suffered significant price drops over the past year: A 2.5G chip that would have sold for $17 in 2002 now retails for around $9.75.
As the high-end phones become more common, Parker says the price premium for those chips will erode further, hurting companies such as TI. Up to now, the shift toward 2.5G has helped buoy TI's selling prices (even as leading customer Nokia sees its own prices come under pressure). But Parker believes the blended average selling price in TI's wireless business could fall in the first part of 2004, pressuring earnings estimates. That, combined with inventory worries, has led him to tag TI with a market perform rating.
Sanford Bernstein, Parker's firm, doesn't do banking.
To be sure, the bearish case scenario is only one possibility for wireless chipmakers. In a development that could reduce oversupply in handsets, the Chinese government is reportedly mulling a decision to pare overproduction in the domestic market, according to a report in
The Wall Street Journal
"If you cut the number of suppliers,
chipmakers won't sell as many bullets, but they may not get hurt as much in the back end because there's less inventory build," notes Harrison. "When there are fewer players, it won't be as good on the front end, but it also won't be as bad on the back end."
On the demand side, it's also possible that consumers could step into the breach and buy up enough new phones to keep business humming for component suppliers.
One hedge fund analyst argues that new phones with a host of cool features are likely to appeal to consumers, thus reducing the potential for an inventory overhang.
"I don't think there's a clean short thesis," says the analyst. "You've just got to be careful. Ultimately it comes down to checking channels, making sure that the phones are selling through and seeing what Motorola, Nokia and
have to say."
should be able to shed some light on the situation in October and November, when clues start to emerge about the strength of holiday selling. For now, it's tough to say whether the upbeat outlooks from wireless chipmakers can last.