The first three months of 2016 have been more challenging than normal for wireless semiconductor suppliers. While the first quarter is typically a seasonally down period for the industry, the first three months of 2016 have been particularly harsh according to the IHS Wireless Semiconductor Competitive Intelligence Service. Some wireless semiconductor segments such as core mobile handset ICs including analog and digital baseband, high level operating system (HLOS) processors, RF transceivers, and power amplifiers; have experienced a historically bad first quarter with a 16% sequential (Q/Q) revenue decline and a 10% drop in revenue year over year (Y/Y). The last time the core mobile handset IC market declined both on an annual and sequential basis in the first calendar quarter was in 2009, when revenue declined 7% for the full year.
The first quarter challenges continue to reflect a maturing smartphone space, and vertical integration in the supply of mobile handset baseband. Market growth challenges in the premium smartphone tier added to the challenging environment as well. Despite the weak first quarter, the market could return to growth in the second quarter as most of the flagship devices announced at Mobile World Congress were released toward the end of the first quarter or beginning of the second quarter. Additionally, by the end of the second quarter, suppliers may start to benefit from orders supporting the initial fall flagship releases (although most of this benefit will be in the third quarter)
In its first quarter earnings call, the leading market participant, Qualcomm guided to a rather flat second calendar quarter for its chipset business, in terms of mobile station modem (MSM) unit shipments. However as the Snapdragon 820 has been launched in several flagship handsets and thin-modems are likely become an even smaller portion of the product mix, the company expected more than ten percent sequential growth in revenue per MSM for the second calendar quarter in 2016.
The second largest supplier of core mobile handset ICs, MediaTek is set to report rapid sequential growth in the second quarter. Reported monthly sales (in TWD) were up by 61% in April, 52% in May, and 50% in June. Although the company operates in segments outside of the wireless semiconductor market, mobile handsets and media tablets comprised as much as 65% of the company’s revenue in the first quarter.
Mixed results are expected from other core handset IC suppliers in the second quarter, particularly those who supply RF front-end components. On a macro level, these companies are benefiting from the increased complexity brought forth by LTE-Advanced which continues to penetrate further into the smartphone market. However most of these suppliers’ revenue is concentrated among only a few leading smartphone OEMs, with some suppliers more diversified than others.
At the time of their first quarter earnings call, Skyworks Solutions management expected the company to experience a slight decline in revenue sequentially for the second quarter despite having success at OEMs such as Huawei recently. Qorvo guided to around 7% sequential revenue growth expecting around $650 million for the quarter, although this would represent a more than 3% drop on an annual basis. Broadcom Ltd. (formerly Avago Technologies) expected sequential revenue growth in its wireless segment of over 20%. It is particularly important to note that the Broadcom Ltd. fiscal year ends at the end of October/beginning of November. Thus, their next fiscal quarter concludes around the end of July. The additional month is particularly beneficial for Broadcom Ltd. as the production ramp of components supporting fall phone releases will be even more pronounced in July. Broadcom Ltd. produces both WLAN ICs and front-end components that are used in flagship phones from tier-one OEMs.
Growth in the second quarter does not ensure annual year-over-year growth in 2016. On its first quarter earnings call, MediaTek management indicated that their typical seasonality distributes revenue with 45% in the first half of the year, and 55% in the second half. However, this specific year they may see a 50/50 split, with the second half even having potential to fall below 50%. MediaTek’s unusual seasonality may highlight a need for wireless semiconductor suppliers to see growth in the second quarter in order to hedge against any uncertainty in the second half of the year. Factors such as vertical handset OEM integration, supplier diversification, and application market growth will continue to impact the core handset IC market in 2016, and after a soft start coupled with indications of irregular seasonality, it may be increasingly challenging to achieve the 8% annual revenue growth obtained in 2015.