From: peterk on the moderated Here is ML's take on Motorola's announcement. They still rate the Q a buy with target at 60.
Limited scope for Qualcomm at Motorola
Motorola’s comments at its Analyst Day suggested that Qualcomm’s position in
WCDMA chips is more limited than perceived before. We explain the issue below,
and note that it does not change our positive stance on the stock. We do not
make any changes to our model, given that Motorola is still expected to launch
Qualcomm-based handsets in 1H2008 and given that we did not change our
market share assumption back when Qualcomm announced the win.
Understanding the background
Motorola, like Nokia, is focusing on a platforming strategy, implying that many
types of handsets, including future models, are based on the same platform,
gaining better economies of scale via component reuse, quicker time to market
and shared R&D resources. As such, Motorola and Nokia prefer to only buy the
baseband chip (not the entire off-the-shelf product), customizing it to their
platform, and using their own modems, software and other components.
Qualcomm has taken the other approach, supplying its customers with complete
and integrated chips, including the software elements. While this strategy enabled
smaller players to “outsource R&D” to Qualcomm and reduce time to market, it
worked against the platforming strategies of Motorola and Nokia.
Motorola’s relationships with Qualcomm
Recently, Qualcomm announced it will be providing WCDMA chips to Motorola,
raising hopes of it becoming a key vendor. However, Motorola apparently sees
Qualcomm as a gap-filler, enabling it to quickly overcome market share losses in
WCDMA, temporarily putting aside its platforming strategy. However, over time
Motorola intends to shift to vendors that will be willing to design a chip to
Motorola’s specs. While some investors tried to paint Motorola’s comment in pink
colors, calling for some confusion in the message, our discussions confirmed the
temporary nature of Qualcomm’s business with Motorola. Qualcomm said in
return that it believes that one temporary phone will be followed by another
temporary phone, leading to a permanent flow of temporary products.
Game is not over though
Per management, Motorola is now discussing with semiconductor vendors (including
Qualcomm) a second source position, in addition to TI. Qualcomm management told
us that it is not ruling out adhering to Motorola’s requirements, given the size of the
customer. This leads us to believe that Qualcomm’s business with Motorola could
develop over time (in the positive scenario) into a relationships that resembles the
Motorola/TI relationships, implying higher volumes but lower ASPs and margins, given
that it may not include all of Qualcomm’s offerings, especially its software.
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