Monday, November 10, 2014

MediaTek Q3 results: Affected by transition to 4G, but high level of shipments maintained in Q3 and Q4

Recently, MediaTek released its Q3 2014 financial results, and revenues for the month of October 2014 have also come in. Although MediaTek has lost some market share to due the transition to 4G, its forecast for Q4 is somewhat better than expected by financial markets and it expects to maintain a high level of smartphone SoC unit shipments.

Lateness of integrated 4G solutions impacts results, but high level of unit shipments maintained

MediaTek reported sequential revenue growth for Q3 2014 of only 6% compared to Q2 2014, a relatively low increase given normal seasonal trends. In its Q3 results conference call, MediaTek cited the transition from 3G to 4G smartphones as a reason for the relatively low growth, since MediaTek has not yet ramped production of SoCs with integrated 4G baseband and currently still relies a two-chip solution to provide 4G. Competitor Qualcomm has already been selling SoCs with integrated 4G for some time and dominates that segment, providing a threat to MediaTek's market share. I believe that a lack of wafer production capacity at TSMC was also a major contributor to MediaTek's low growth in Q3 2014, which the company has not publicly commented on.

Even though 4G growth in markets such as China has been lower than expected, the lack competitive 4G solutions means that MediaTek has lost some market share as 4G adoption grows, as was already apparent when looking new product lines from major MediaTek customers in China such as TCL (Alcatel One Touch), Coolpad, Lenovo and ZTE, whose 4G models mostly use Qualcomm Snapdragon SoCs. Some loss of market share in China is corroborated by a market share report for smartphone SoCs in China in Q3 2014 from DigiTimes Research, although MediaTek still held greater than 50% of the market.

Q4 2014 forecast better than expected

Still, MediaTek maintained smartphone SoC solution unit shipments in the 90 to 100 million range in Q3 2014 and expects similar shipments in Q4 2014, somewhat better than expected by the market. The expectation that overall revenues for Q4 2014 (which also includes MediaTek's other diverse product lines) will fall in the range between a 6% decline and 2% growth from Q3 2014 is also better than expected by the market. For Q4 2014, MediaTek expects that more than 20% of its smartphone SoC shipments will be 4G (presumably mostly reflecting the start of shipment of new integrated solutions), representing about 20 million units, reaching a full year 2014 shipment target of 30 million units. MediaTek noted volatile movements in the ASP (average sellling price) of smartphone chips due to strong competition, with limited visibility for 2015.

MediaTek disclosed that for the whole year (2014), it expects to ship about 350 million smartphone SoC solutions (of which 30 million 4G), as well as 40 million tablet SoCs. For smartphone SoCs, although China is MediaTek's largest market, the export market (reflecting smartphone SoCs sold to companies in India and other countries, with a large proportion of low-end dual-core chips) is growing in importance, with its share growing from 30% of shipments in the first half of 2014 to 40% in the second half. The increased proportion of low-end dual-core smartphone chips in Q4 (although offset by the ramp of higher-end 4G solutions) is likely to contribute to MediaTek's slight revenue decline in Q4 2014 at similar level of unit shipments.

MediaTek will be more competitive in 4G performance segments, low-cost 4G solution to follow

Looking forward, MediaTek expects the ramp of its integrated 4G solutions in 2015 to result in a better product mix, which makes sense since new chips such as MT6752 and MT6795, both with octa-core ARM Cortex-A53 CPU, make MediaTek a lot more competitive for higher-performance segments. MediaTek has also indicated that its upcoming cost-reduced MT6735 and MT6735M SoCs, which will come to market in the first part of 2015, will improve its competitiveness for the low-cost 4G market.

In the near term, MediaTek only has the MT6732 to address the lower-priced part of the integrated 4G SoC market, but this chip is relatively expensive to manufacture for a low-cost solution, being more suited for the lower part of the mid-range segment. An important reason for the relatively high cost seems to be the use of an ARM Mali-T760 MP2 GPU, which although providing good performance and power efficiency, has a relatively large die area not suited for the low-cost segment. The upcoming cost-reduced MT6735 changes the GPU to a more cost-effective Mali-T720. The manufacturing process node may also play a role. Although information is scarce, it is likely that the MT6732 is manufactured using TSMC' s more expensive 28HPM process like MediaTek's higher-end SoCs, while the MT6735 will probably be manufactured using the more cost-effective 28LP process that is more suitable for cost-sensitive applications. In its conference call, MediaTek noted that the LP process is preferable for products for the entry-level segment.

Lack of production capacity likely to have affected MediaTek

Although not publicly discussed by Mediatek, I believe lack of wafer production capacity at TSMC (primarily earlier in the year) has significantly depressed MediaTek' s sales levels for recent quarters such as Q2 2014 and Q3 2014. In its Q3 2014 conference call, MediaTek noted that it needs to work with multiple foundry partners due to its size. Reports earlier in the year from sources such as DigiTimes provided hints that MediaTek has been facing a shortage of production capacity. It has been reported that MediaTek made a failed attempt to ramp production at GlobalFoundries in 2014, which would have affected its planned capacity. DigiTimes has also reported on planned MediaTek production ramps at UMC in the face of capacity tightness. Signs that MediaTek has not been able to satisfy demand for its chips are apparent in the tablet market, for which the company has several very competitive solutions that have not shipped in the volume (especially in China) that one would normally expect in an efficient market, opening up the opportunity to take market share for companies that do not rely on TSMC for production capacity such as Rockchip and Intel.

However, MediaTek's revenues for the month of October 2014 came in at NT$21.6 billion (US$706 million), representing an increase of 16.5% from the month of September, suggesting an improvement in its capacity situation. For November 2014, revenues dropped to NT$16.8 billion. MediaTek was already conservative about its Q4 revenues when October revenues were known, so the drop is likely to have been expected by the company. Factors involved could be seasonal declines in several product segments (including its legacy product segments), production transitions (such as from MT6592 to newly ramping mid-range SoCs with 4G), competition from Qualcomm and other players with low-end smartphone SoCs within integrated 4G (a segment for which MediaTek does not have a good solution in the near term), as well as being a reflection of the wafer shortage at TSMC that may have reached its peak a few months ago.

Sources: DigiTimes (DigiTimes Research smartphone AP shipments in China in Q3 2014), DigiTimes (MediaTek Q3 results), DigiTimes (MediaTek October 2014 revenues), MediaTek (Q3 2014 conference call)

Updated December 5, 2014.

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