(Source: BBC News)
Chip licenser was the clearest winner in the mobile sector with an impressive performance, as usual

Apple, Inc. (AAPL) delivered mixed news in its earnings report this week.  While its profit was up (from $9.5B USD in fiscal Q2 2013 to $10.2B USD in fiscal Q2 2014), sales of growth of the iPhone was only modest (~17 percent) and iPad sales action shrank as the tablet market grew.
I. Samsung Echoes Apple, But Rests Hopes on GS5, Budget Offerings
Things were somewhat similar -- or perhaps even worse -- for Apple's archrival Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935), according to its just announced unaudited earnings results.  Samsung fell short of analyst hopes of W54T ($52B USD), announcing quarterly earnings of W53T ($51B USD) for Q1 2014.
Samsung saw an operating profit of 8.40T won (~$8.09B USD) in Q1 2014, down a little over 4 percent from Q1 2013 (when it earned W8.7T -- $8.38B USD).  Assuming that net profit is also destined to dip and given that Samsung Electronics also saw a dip in net profit in Q4 2013 (with a profit of W7.24T -- $6.97B USD), it looks poised to have seen its first two successive quarterly declines in profit since 2011.

Galaxy S4
Q1 2014 was the current call for the Samsung Galaxy S4, which launched last March.
[Image Source: AP]

Another mixed sign for Samsung Electronics is that the Galaxy S and Note lines now only constitute 59 percent of the profits of its mobile unit -- its most lucrative smartphone unit.  That could be viewed in a positive light (as in Samsung's revenue is more diversified and less dependent on premium sales) or negatively (profits are decreasing, premium sales decline is driving decrease).
Q1 2014 sales for Samsung Electronics were led by the aging Galaxy S4.  That points to the key source of hope that the fall in premium sales could reverse with the just launched Galaxy S5.  The Galaxy S5 is expected to carry lower margins that the Galaxy S4, but at least it's selling well; it has thus far been beating the Galaxy S4's sales pace from last year.

Samsung Galaxy S5
The Samsung Galaxy S5

Two key factors to its success are making buyers aware of its major upgrade to the Galaxy series' camera module (with Samsung's new ISOCELL technology) and on using incentives to drive sales.

The former improvement went unnoticed by many analysts, who focused primarily on the Galaxy S5's body design, which they felt wasn't enough of a step up from last year's Galaxy S4.  Analysts did appreciate that Samsung some trimmed 10 percent off the price of the Galaxy S5 versus its predecessor.  They also reacted positively to its plan to offer GS5 buyers an average of W600k ($578 USD) in incentives (apps, music, etc.).

But to some extent the GS5's success is less critical to Samsung as it's slowly shifting towards a mobile base more heavily driven by budget and mid-range smartphone sales.

According to Japanese investment house Nomura Holdings, Inc. (TYO:8604) and U.S. market research firm Strategy Analytics, Samsung Electronics sold 90 million smartphones in Q1 2014, up slightly from 86 million in Q4 2013.  That's weaker growth (~4.7 percent) than Apple even, although to its credit Samsung still outsells Apple more than 2-to-1 at present volume.

Both Samsung and Apple, the world's number one and two smartphone producers, manufacture their own system-on-a-chip (SoC) brains to go in their smartphones.  Qualcomm, Inc. (QCOM) vends the SoCs for most of the other smartphone manufacturers, and also provides modems and/or integrated circuits for Samsung and Apple devices.
Qualcomm's fiscal Q2 2014 (calendar Q1 2014) earnings were up in both revenue and profit, but gains on a year-to-year quarterly basis were so small, that analysts have grown convinced that the top chipmaker is in defense mode.
Qualcomm Snapdragon
Qualcomm grew its fiscal Q2 2014 revenue by 4 percent.  That took it to revenue of $6.37B USD for the quarter, versus the Thomson Reuters I/B/E/S average analyst hope of $6.48B USD.  Net income (profit) was $1.96B USD, up only 5 percent.  That was modestly better than the analyst average of ~$1.83B USD.
China saw a delayed rollout of LTE, which in turn drove lower demand in emerging markets for Qualcomm's modem chips, which provide international compatibility across numerous cellular bands and 2G, 3G, 3.5G, 4G, and advanced 4G standards.  But Qualcomm told investors that H2 2014 should more than make up for that.

Qualcomm modem growth
LTE rollout in emerging markets like China is expected to drive modem growth for
Qualcomm in H2 2013.

China Mobile will be leading the LTE push in China. China had initially plotted its own form of LTE, but switched over to a more traditional LTE scheme, like the kinds used in Europe and the U.S.  Once China Mobile's network goes live, Qualcomm expects to see a spike in demand of its most lucrative modems -- 4G LTE compatible models, such as the Gobi 9x35 modem.

Qualcomm Gobi

Qualcomm's new CEO Steve Mullenkopf, who replaced the departing Paul Jacobs, Ph.D, commented:

We delivered another solid quarter, driven by demand for our leading multimode 3G/LTE chipset solutions and record licensing revenues.  Looking forward, we are pleased to be raising our earnings per share guidance for the fiscal year. We continue to see increasing demand for our industry-leading chipsets and strong growth in calendar year 2014 of 3G/4G smartphones around the world.
Steve Mollenkopf
Qualcomm's new CEO Steve Mollenkopf is focused on global LTE and the 64-bit transition.
[Image Source: Jason Mick/DailyTech LLC]

Qualcomm is in the midst of shifting its production globally towards 64-bit CPUs.
Aside from the revenue miss and wariness regarding Qualcomm's predictions of LTE modem growth, Qualcomm also is suffering from a Chinese antitrust investigation into ugly allegations that it engaged in bribery to outsell domestic rivals like Chinese SoC-maker MediaTek, Inc. (TPE:2454) and Chinese telecom equipment and handset provider Huawei Technology Comp., Ltd. (SHE:002502).  Qualcomm reportedly used these abuses to overcharge and exclude rivals, with its large portfolio of international wireless patents.
Qualcomm's lawyers are reportedly negotiating with Chinese bureaucrats, trying to avoid the worse case scenario, a fine which Reuters reports could be as hefty as $1B USD -- or roughly half a quarter's worth of profit for the chipmaker.
MediaTek reports its earnings on April 30.  NVIDIA Corp. (NVDA) -- another smaller SoC producing rival to Qualcomm -- saw a rise in revenue and profit in its fiscal Q4 2014 (calendar Q4 2013), but a slight erosion in gross margin.  It reports its fiscal Q1 2015 (calendar Q1 2014) earnings on May 15.  An estimate on predicts a 16 percent growth in net profit, although part of that is likely due to NVIDIA's new Maxwell GPUs.  
The Tegra 3 and Tegra 4 failed to attract many OEM design wins as they waged war with the Snapdragon S4 and 200/400/600/800 series chips from Qualcomm.  NVIDIA is hoping for better luck against the Snapdragon 210/410/610/810 (64-bit) with its brand new Tegra K1 SoC.  Early benchmarks suggest that the Tegra K1 in quad-core configuration should be able to best anything other than perhaps the unreleased Qualcomm Snapdragon 810.
III. ARM -- The King is Back, Baby
ARM Holdings is the silent force behind the smartphone and tablet industries, posting strong double-digit growth most quarters, as the mobile market continues to grow.  Mobile CPU makers virtually universally adopt its instruction sets.  And it also offers pre-designed CPU and GPU cores for chipmaker partners to customize.  Given that it has no direct production presence and operates purely as a licenser, ARM maintains superb margins.  But, much like Apple and Samsung, it's influence and strong financials have earned it high analyst expectations.
One might expect that ARM Holdings plc (LON:ARM) would suffer given the weak profits from Qualcomm and Samsung.  Last quarter ARM saw modest licensing revenue gains, but fell short of analysts' high hopes.
But despite the trouble spots from Samsung and others, it appears that the modest iPhone sales and gains of new licensees such as MediaTek helped surge the chip designer [PDF] to a 16 percent revenue growth from $263.9M USD in Q1 2013 to $305.2M USD in Q1 2014.  Both overall normalized net profit and revenue fell roughly in line with Bloomberg's average analyst expectations.

ARM powered
ARM Holdings is back to meeting or beating analyst expectations, thanks to strong processor licensing growth in Q1 2014.

One soft spot was royalty payments growth, which rose 8 percent on a year-to-year basis, versus the ~32 percent growth in mustered from 2012 to 2013.  This was probably the biggest place where the soft sales of the premium smartphone industry impacted ARM's earnings.
Smartphone makers pay ARM royalties a month in advance.  Given the slow sales, partner chipmakers simply used up their existing inventories, leaving ARM with the shortfall in growth.
On the other hand ARM made up for that with an impressive showing in its licensed core designs.  With partners like Samsung finally warming up to its 64-bit core designs, processor licensing revenue rose 38 percent to $111.6M USD for the quarter.
ARM Chief Financial Officer Tim Score offered optimistic commentary about Q2 2014 and H2 2014.  In Q2 2014, he pointed to a likely boost from the Galaxy S5, which -- as mentioned -- is seeing strong sales.  In H2 2014, he expects that sales driver will be complemented by Apple's rival offering, which is expected to be called the iPhone 6.

Tim Score ARM
ARM CFO Tim Score [Image Source: Andy Lo Po]

Mr. Score also expects growth to continue in budget smartphones, as customers move away from premium feature phones towards budget entry-level smartphones, which typically carrier more power processors and bigger licensing payments to ARM.
There were other positive signs as well.  Intel Corp. (INTC) -- ARM's only real rival in the mobile instruction set business -- saw a painful 61 percent drop in mobile chip revenue to $156M USD (that segment also includes communications applications).  The message is clear.  Intel's chips aren't gaining any ground to the chips of ARM's partners like Qualcomm, Apple, and Samsung.
Mr. Score also relates another piece of good news, stating:

There has been an inventory correction in smartphones [that hurt Q1 2014 revenue], [but] that looks to be unwinding.  We saw TSMC showing very strong guidance for their second quarter, which will inform our Q3 royalties.

He's referring to the Taiwan Semiconductor Manufacturing Comp., Ltd. (TPE:2330) (TSMC), a top third-party fab used by ARM chipmakers.  TSMC said it expected to possibly set a revenue record in Q2 2014, in a conversation with Deutsche Bank AG (ETR:DB1) analysts.  TSMC will be bringing its 20 nm process online, which should offer a key boost to ARM, helping it keep pace with Intel, which is currently manufacturing on the 14 and 22 nm nodes.

ARM is finally moving to 20 nm production in Q2 2014.

Looking even further ahead, ARM will be targeting FinFET chips in either 2015 or 2016 on the 14 or 16 nm nodes.  

ARM partners

TSMC's 16 nm node is expected to produce the first FinFET-based ARM 64-bit chips.

ARM 16 nm

ARM is also working with Samsung, GlobalFoundries, and International Business Machines Corp. (IBM) on the die shrinks.

Sources: Samsung [press release], Bloomberg, Qualcomm [PDF], ARM Holdings [PDF]

"I mean, if you wanna break down someone's door, why don't you start with AT&T, for God sakes? They make your amazing phone unusable as a phone!" -- Jon Stewart on Apple and the iPhone

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