Smartphone Battle to Intensify; More Product Announcements in the Coming Weeks

With the vast majority of mobile phone related companies having reported their December quarter results, we have pushed up our sleeves and sifted through the data.

In doing so, several observations have come to light that support our key investment themes for the mobile ecosystem. As a reminder these themes are: smartphones are the new and intensifying battleground; increasing RF content bodes well for key suppliers, which should grow faster than device shipments; and mobile is moving beyond cell phones to other devices and services.

As such, we continue to see RF and technology suppliers as better ways to participate on these themes than investing in device manufacturers or as we have put it “buy the bullets, not the guns.”

With regard to those RF suppliers that we follow – RF Micro Devices (Nasdaq: RFMD),  Skyworks (Nasdaq: SWKS), Qualcomm (Nasdaq: QCOM), and InterDigital (Nasdaq: IDCC) – we continue to favor these companies and their respective shares.

While poring over recent industry and company data, we have found the following:

·      Smartphones continued to grow faster than the overall mobile phone market in 2009 and took shares from basic cell phones. According to IDC's Worldwide Quarterly Mobile Phone Tracker, device manufacturers shipped 54.5 million units in 4Q09, up 39% year on year. For 2009 in full, 174.2 million smartphones were shipped, up 15.1% from the 151.4 million units in 2008.  By comparison, the larger mobile phone market shrank 5% in 2009 to 1.13 billion units from 1.19 billion in 2008.

·      With approximately 1.13 billion handsets shipped in 2009 per IDC, we estimate overall smartphone market share grew to roughly 15%, up from 13% in 2008. In our view, these leaves ample room for smartphone growth to continue, particularly as new models at various price points are introduced in the coming quarters.

·      Top five smartphone market share companies in 4Q09 were Nokia (NYSE: NOK), Research in Motion (Nasdaq: RIMM), Apple (Nasdaq: AAPL), Motorola (NYSE: MOT) and HTC.

In aggregate these five accounted for 83% share of the smartphone market. But in the fourth quarter, RIM had 19.6 percent of the market while Apple represented 16 percent of shipments. Despite these respective shares, the greater share gainers were Apple, Motorola and to a lesser extent Research in Motion. That said, Motorola still lags with only 4.6% smartphone market share exiting 2009, up from 4.1% exiting 2008.

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In terms of operating systems, Nokia’s Symbian retained the top spot however, given Nokia’s relatively lackluster position in QWERTY devices through most of 2009m it comes a little surprise that it lost share during the year.

Top share gainers included Apple, Research in Motion and Google (Nasdaq: GOOG), while Microsoft lost significant share, falling to 8.8% of the market in 2009 from 13.9% in 2008. With multiple Android devices shipping toward the end of 2009 and several fold expected in 2010, we suspect Google will continue to garner share in the smartphone operating system market.

What we find rather interesting is that despite the smartphone push by a number of manufacturers, market share outside the top five vendors fell in 2009. With a number of Android powered devices already announced by a number of manufacturers, we continue to expect the smartphone market to be the next battleground among existing players and new entrants.

We say as we consider the following:

·      Samsung is expected to ship 8-10 million smartphones in 2010 compared to 5.7 million units shipped in 2009.

·      LG has said that it plans to launch more than 20 smartphones in 2010 and aims to ship a total of 10 million units of these smartphones this year.

·      Other companies such as Lenovo, Dell (Nasdaq: DELL), Acer, Huawei, Saygus and others including Google will be launching Android powered devices in 2010. Moreover, mobile carries, such as Sprint (NYSE: S), AT&T (NYSE: T), Vodafone and others, have made announcements that they will be making Android powered smartphones available in 2010.

We continue to struggle with product differentiation given the sheer number of Android powered devices expected to hit the market in the coming weeks and months. We have always believed that a portfolio of devices across capabilities and price points that are available through a wide variety of mobile carriers across the globe is the best recipe for success. That said, we believe Android will fuel the fire that is the smartphone battleground and there will be more than a few casualties as the smartphone segment matures. We continue to have concern for what are currently niche players, like Palm (Nasdaq: PALM), Garmin (Nasdaq: GRMN) and others.