Spreadtrum’s Bad 3G Bet Hits Profits 展讯通信押注3G失利拖累业绩
Former high-flying cellphone chip maker Spreadtrum (Nasdaq: SPRD) survived a high-profile short-seller attack last year, but it’s having a much harder time fighting weakening investor sentiment as its big bet on a homegrown Chinese technology looks increasingly like a dud. The bottom line in this saga is reflected in Spreadtrum’s stock, which fell 3.7 percent after it announced its latest quarterly results on Tuesday in New York. The drop continued a downward trend that has seen Spreadtrum’s shares lose about 30 percent of their value since last November when it began to grow apparent that its gamble on a Chinese technology called TD-SCDMA wasn’t developing as well as many had hoped.
Interestingly, investors seem to be focusing on the negative elements of Spreadtrum’s latest report, even as its first-quarter guidance and longer-term prospects looked more promising. Perhaps that’s because investors may be losing patience with a company that once looked quite promising due to its strong management and product development strategies, but has tended to disappoint in the last 2 quarters.
All that said, let’s take a closer look at Spreadtrum’s latest results, which show its profit tumbled about 30 percent in the fourth quarter of last year, continuing a trend that saw the figure fall by an even bigger 40 percent the previous quarter. Revenue fared a bit better, rising 6 percent but still not anything to get too excited about. Adding to the negative news, Spreadtrum’s margins continued to fall as the company’s TD-SCDMA phone chips failed to gain much traction.
On the more positive side, Spreadtrum forecast revenue growth of about 14 percent in the current quarter, about double the growth rate for all of 2012. It also said that margins would stabilize. The company is trying to carve a niche for itself by making low-cost smartphone chips, competing with names like Taiwan’s MediaTek (Taipei: 2454) and US-based Marvell Technology (Nasdaq: MRVL) in the lucrative but relatively low-margin business.
It aimed to use its base in China to develop the TD-SCDMA chips for the 3G network operated by China Mobile (HKEx: 941; NYSE: CHL), which is the world’s largest mobile carrier but also the only company in the world with a TD-SCDMA network. Unfortunately for Spreadtrum and other TD-SCDMA chipmakers, China Mobile has been slow to promote its 3G network, focusing instead on a newer 4G technology.
In its latest report, Spreadtrum noted that China Mobile is close to finally certifying its TD-SCDMA chips, meaning smartphones containing Spreadtrum chips can finally be used on China Mobile’s 3G network. Spreadtrum also said it has made some initial shipments of the TD-SCDMA chips to Samsung (Seoul: 005930). That means it won’t get any major revenues from the chips until the second half of this year at earliest; and it could quite possibly never get any major revenues if China Mobile continues its half-hearted promotion of the technology.
I’ll take this opportunity to be a bit contrarian and say that disappointments like this one for Spreadtrum are relatively common in the business world, where development of any new product is always a gamble. But rather than focus on this disappointment, investors might be more encouraged by Spreadtrum’s stabilizing margins and its previous record of relatively strong execution. I still think this looks like an interesting company, and its shifting decision to focus on more mainstream smartphone technologies going forward looks like a good one for the longer term, even though it will face stiff competition from other low-cost chip makers.
Bottom line: Spreadtrum’s latest results reflect disappointing progress for its gamble on a homegrown Chinese technology, but the company could still be a good bet over the longer term.
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