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Motorola bombshell could hit Skyworks and RFMD

Nose-diving sales within Motorola's mobile devices division suggest an inventory glut and could spell problems for key suppliers.

Last week s dismal trading update from Motorola looks like it could spell trouble for GaAs chip manufacturers RF Micro Devices and Skyworks Solutions.

Motorola, which is ranked number two in the world behind Nokia for mobile phone sales, is now expecting to miss its sales target for the first quarter of 2007 by a country mile - and big problems at its handset division are to blame.

Having previously told the market that it would post sales of between $10.4 billion and $10.6 billion in the opening quarter, Motorola has slashed that guidance to just $9.2 billion-$9.3 billion because of low phone sales.

Its mobile device business unit, which is currently running at an operating loss despite a global market share in excess of 20 percent, was singled out for criticism by Motorola CEO Ed Zander:

"Performance in our mobile devices business continues to be unacceptable," Zander said. "We now recognize that returning the business to acceptable performance will take more time and greater effort."

Motorola s handset woes are two-fold. First of all, it has admitted to having a limited portfolio to offer in the high-end 3G sector. Second, in emerging markets such as Africa, India and South Asia, it appears to be unable to compete on price with its main rivals.

"The lower volume is due largely to a shift in the mobile devices business to focus on long-term gross margin improvement rather than on market share growth," said the company.

In other words, Motorola had been selling phones at a loss because it was being undercut by strong competitors, but it has now decided not to chase market share at such a cost. "The company chose not to match prices in all instances," is how Motorola puts it. The trouble is that many of its phones are now too expensive for these emerging markets and aren t selling.

With volume sales of its phones appearing to have slowed dramatically, there is likely to be a knock-on effect on all of its major suppliers - including the GaAs and RF chip vendors - with inventory likely to build up.

As the market-share leaders in power amplifiers and front-end modules, and major suppliers to the top-ranking phone vendors, Skyworks and RFMD are more exposed than most to Motorola s misfortune. Each supplier attributes in the region of a quarter of its annual sales revenue to the handset vendor.

Unsurprisingly, the share values of both RFMD and Skyworks dropped sharply after Motorola s bad news, although RFMD s stock price has now made up much of the initial loss.

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