[Editor's note: The following is a revision of an article originally posted on April 5 that was disputed. The author has revised the article to clarify points raised in the dispute. (Apr. 8, 2011)]
continue[d) to demonstrate [the company's] momentum across all of [the company's] target markets. This momentum include[d] the addition of new licensees in the quarter that are developing chips for mobile solutions.
MIPS shares increased from $10.65 on October 25th, 2010 to $14.12 on October 26th, 2010, a 32.6% increase in a single day.
This statement, the resulting price movement of the stock, and its subsequent decline to $10 per share at the time of writing this article prompted us to evaluate the company and ask the question: Is MIPS Technologies relevant in the mobile chip marketplace?
Let's define 'mobile' for the purposes of this article: 'Mobile' in this article refers to mobile phones, handhelds and tablets, and the software and hardware which makes them work. More specifically, we can define mobile as those devices which use Google's Android open source operating system, because prior to its introduction, MIPS was nearly incapable of competing in the mobile market. MIPS points to this fact in its 10-Q filing from November 5th, 2010.
Also, let's define MIPS' competition for the purposes of this article. Whether MIPS likes to admit to this fact or not, MIPS is not only facing competition from direct competitors which offer substitutes for its offerings, i.e. intellectual property, but also companies which offer substitutes for its offerings in a bundled and complimentary manner with other offerings, i.e. a processor chip with in-house developed core, or a core developed by a MIPS competitor. And example of the former would be ARM Holdings (ARMH), and examples of the latter would be Qualcom (QCOM), Nvidia (NVDA), Intel (INTC), Texas Instruments (TXN) and so on.
We have examined MIPS Technologies' product/design descriptions as filed in its latest 10-K SEC filing, and we have found that, while Android may compatible with MIPS' designs (as it is with most designs developed by MIPS' competitors), none of MIPS' chip designs are designed or geared specifically for mobile phones and/or handsets.
Here are our findings:
- MIPS32 M14K and M14Kc Cores - designed for use home entertainment, personal entertainment and home networking.
- MIPS32 4K Cores - licensed by licensees including Zoran (digital TV, DVD (link)) , Atheros (no consumer mobile application (link)) , Lantiq (networking, home networks, no consumer mobile products (link)), Microchip Technology (no consumer mobile products (link)), Renesas Electronics (no consumer mobile products, TV only (link)) , MStar (DTV (link)) and others.
- MIPS32 24K Cores - licensed to fifty-eight companies, including Atheros, Broadcom (WiFi Home entertainment (link)) , Lantiq (networking, home networks, no consumer mobile products (link)), Trident (TV-related (link)), Toshiba (TV-related (link)) , Ralink (wireless networking, not consumer wireless products (link)), Sigma Designs (TV-related (link)), Renesas Electronics (researched above), Broadlight (Networking (link)), Cisco Systems (unable to find reference, but Cisco is into networking not mobile consumer products)and others.
- MIPS32 34K Cores - licensed by twenty two companies, including Broadcom, Mobileye (automobile sensors (link)), MStar (researched above), PMC-Sierra (printers, storage (link)), Wintegra (networking (link)) and others.
- MIPS32 74K Cores - licensed by twenty one companies, including Broadcom (researched above), Lantiq (researched above), Renesas Electronics (researched above), Sigma Designs (researched above) and others.
- MIPS32 1004K Cores - licensed by eleven companies, including Mobileye (researched above), PMC-Sierra (researched above), ViXS (home entertainment (link)) and others.
- MIPS32 and MIPS64 Architectures - licensed to eighteen active architecture licenses at companies including Broadcom (researched above), Cavium Networks (networking (link)), Netlogic Microsystems (networking (link)), Renesas Electronics (researched above), Sony (digital cameras (link)), Toshiba (consumer electronics, car devices (link)) and The Institute of Computing Technology of the Chinese Academy of Sciences (laptops, supercomputers (link)).
Based on this research, we found no MIPS cores or architectures specifically designed for the consumer mobile market. Further, we examined MIPS' 10-Q issued on November 5th, 2010, which was the source for the press release from October 25th, 2010 cited above, and we found that MIPS refers to consumer mobile solutions in broad generic statements about all industries and target markets. Here are excerpts from the 10-Q related to mobile solutions:
Excerpt 1: "Our technology is broadly used in markets such as mobile consumer electronics, digital entertainment, wired and wireless communications and networking, office automation, security, microcontrollers, and automotive."
Excerpt 2: "Factors that could cause our revenue and operating results to vary from quarter to quarter include:
- the establishment or loss of licensing relationships with semiconductor companies or digital consumer, mobile, wireless, connectivity and business product manufacturers;
- changes in development schedules, research and development expenditure levels and product support by us and semiconductor companies and digital consumer, mobile, wireless, connectivity and business product manufacturers;"
Excerpt 3: "Technical innovations of the type critical to our success are inherently complex and involve several risks, including:
- our ability to anticipate and timely respond to changes in the requirements of semiconductor companies, and original equipment manufacturers, or OEMs, of digital consumer, mobile, wireless, connectivity and business products;
- our ability to anticipate and timely respond to changes in semiconductor manufacturing processes;
- changing customer preferences in the digital consumer, mobile, wireless, connectivity and business products markets;
- the emergence of new standards in the semiconductor industry and for digital consumer, mobile, wireless, connectivity and business products;"
Excerpt 4: "If we do not succeed in the mobile handset market, our medium to long term revenue growth may be adversely impacted. Our future success may depend, in part, on our ability to develop software, processor cores or other intellectual property that satisfies the requirements of developers, chip suppliers and manufacturers in the market for mobile handsets. We are committing resources towards research and development efforts for this market. If our development efforts are not successful or are significantly delayed, or if our IP product offerings and related designs are not widely adopted, our ability to achieve design wins in the mobile handset market may be limited. If we fail to license our technology to a significant number of customers in the mobile handset market, our medium to long term revenue growth may be adversely impacted."
In the same 10-Q filing filed with the SEC on November 5th, 2010, MIPS Technologies specifically mentioned "mobile solutions" only in the context that its "consulting and outside services expenses [which were] focused on mobile related end applications" had increased for the quarter. Here is MIPS statement:
"[...the company incurred] a $0.2 million increase in consulting and outside services expenses with significant focus on Android and mobile related end applications."
While MIPs cited their increased expenses, MIPS did not specify how much of their revenues are related to Android and mobile related applications. If MIPS believes that the mobile market is crucial to the success of the company (as quoted above), then MIPS should inform its shareholders what percentage of their revenues came from legacy intellectual property which was re-used for mobile solutions by MIPS customers, and what percentage of their revenues came from their newly created (perhaps Android-based) intellectual property for consumer mobile applications, if any, and and allow the shareholders to juxtapose those figures to MIPS' revenues coming from intellectual property used for end products in other markets/industries. At the very least, MIPS should stratify their revenues by clearly defined segments, in a similar manner to ARM Holdings' 20F filings.
Has MIPS licensed intellectual property which was not specifically designed by MIPS for mobile solutions, but MIPS' customers have used it in such way? Yes, companies such as China-based Action Semiconductors, China-based Ingenic, and "other leading MIPS licensees", have used legacy designs for mobile use, according to MIPS' report from February 2011, issued after MIPS management returned from the Mobile World Congress in Barcelona.
Here is the report with all MIPS' wins in the mobile market: (Important note: shareholders should keep in mind that this above report was issued at least three months after the October 25th, 2010 press release regarding 'momentum' in mobile solutions.) This document is probably the best publicly available proof of MIPS unenviable position in the Android-based mobile solutions market, and it describes how far behind their competitors they are in the Android-related R&D cycle. Here is one MIPS statement regarding Android, quoted from the same report from February 2011, more than three years after Android was operational:
"Our work with Android has opened the door for MIPS in mobile. As we move ahead to make deeper inroads into mobile, we recognize the importance of a broad ecosystem of third party support in easing time-to-market for our customers."
Further, MIPS registered mipsandroid.org, a domain used for collaboration between Android/MIPS open source developers in the summer of 2009 (we are uncertain when the website was actually operational), about two years after Android was introduced by Google and the Open Handset Alliance and was fully operational on ARM-based Qualcom chips in 2007.
We encourage the shareholders to critically evaluate the list of MIPS customers, the popularity of their mobile solutions end products, MIPS current mobile-related licensing/royalty fees, as well as potential revenues MIPS may collect from those customers. There may not be enough public information for evaluation of revenues, so we encourage the shareholders to ask MIPS the following questions:
- How much of MIPS revenues are from Android-based mobile solutions for cellular phones, tablets, and handheld devices?
- How much of those revenues are from legacy intellectual property, and how much of the revenues are from new and innovative intellectual property designed specifically for Android-based mobile solutions?
- Why did MIPS recognize the need for Android-related collaboration with outside partners so late in the competition stage?
- Did MIPS hire outside consulting help for Android because MIPS was incapable of performing Android development in-house, or were there other shareholder-value enhancing reasons for increasing the spending by $200K per quarter on Android consultants?
- What was the final expense for Android-related external consultants in 2010?
As opposed to MIPS, it is our opinion that the most successful competitors in the mobile solutions market will be companies such as Qualcom, Nvidia, and Intel, Texas Instruments (TXN) and so on, who have had no interest in MIPS' intellectual property, but offer their chips using direct substitutes for MIPS IP, and MIPS' primary competitor, ARM Holdings, which currently has 90% of the smart phone and feature phone chip market. These companies have spent significant amounts of time and expenses in research and development, and have consequently captured significant market share, whereas MIPS is at the infancy stage in this fast moving market. Is MIPS relevant in the current marketplace for mobile solutions? From the above facts, it is our opinion that MIPS Technologies is irrelevant to the current fast developing mobile chip set marketplace, because it does not have a competitive advantage, it does not have alliances with the producers and consumers of the most popular processors, it is late in the Android R&D cycle, and it is therefore incapable of competing with the dominant companies in the foreseeable future.
This is obviously our own conclusion based on our research and analysis of the company and its position in the competitive environment. But how does management feel about the company's position? As is the case with all securities, there is an information asymmetry between the security issuers and the security holders. The management team should know the company's position and its competitive environment much better than its investors.
So how did the management team react to the recent run-up in the stock price? On October 29th, 2010, only four days after the increase in the stock price, four insiders sold 570,815 shares, worth approximately $6.8 million. Including the sales on October 29th 2010, and until March 31st, 2011, seven insiders including the CEO, the CFO, the General Counsel, the VP of Marketing and Business Development, the VP of Sales, and two directors, sold a total of 1.138 million MIPS Technology shares, worth approximately $15.8 million. It is worth noting that the only direct purchase we were able to find for the CEO was an F-4 transaction from May 3rd, 2010, when he acquired 20,000 shares at $5.06 per share. The CEO's most recent sale was on March 28th, 2011, when he sold 16,666 shares at $10.78 per share. A chart depicting the stock price and the insider transactions is presented below. This interactive chart is available on the Nasdaq website.
From this chart, we conclude that MIPS Technologies' insiders are selling their shares during all periods of strength in the stock. We encourage MIPS Technologies' shareholders to carefully read and examine the company SEC filings, to evaluate MIPS Technologies' intellectual property designs and they relate to mobile solutions, their related revenues, and MIPS' position in the competitive mobile solution marketplace, and to focus on the timing and size of the recent MIPS insider transactions.
Disclosure: I am short MIPS. We own put options on MIPS stock.