SiRF Technology: Multiple Growth Prospects Make It A Buy

| About: SiRF Technology (SIRF)
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Based in San Jose, CA, SiRF Technology Holdings, Inc. (SIRF) is the holding company of SiRF Technology, Inc., which is a fabless original equipment manufacturer [OEM] of global positioning system [GPS] semiconductor chipsets, semiconductor-based modules and associated software.

Strategically, SiRF's product line provides GPS capability to high-volume consumer and commercial systems. The company went public in April 2004. Conexant (NYSEARCA:CNXT) Systems has a 20% stake in the company, which was acquired during the sale of its GPS chipset unit to SiRF.

The GPS system consists of a constellation of 24 orbiting satellites and ground monitoring stations that are controlled and maintained by the United States Department of Defense [DoD]. A GPS receiver can calculate accurately any worldwide position within 10 meters or less. This accuracy may be enhanced via a new supplemental system being developed by the Federal Aviation Administration [FAA], designated the Wide Area Augmentation System [WAAS], which incorporates additional satellites and ground reference stations.

This will increase the overall positional accuracy to within three meters throughout the U.S. (and portions of Canada and Mexico) for properly equipped gear. Each satellite transmits low-power encoded radio frequency [RF] signals at two different frequencies one for military use and the other for civilian use. A GPS receiver must be in the line-of-sight of at least three different satellites to get a two dimensional location (latitude and longitude) reading, or four satellites for three-dimensional positioning (which includes altitude data).

The GPS receiver uses each of the satellites relative positions and triangulation algorithms to determine the precise location of the receiver. Specifically, atomic clocks onboard the satellites supply key time-tag information required for calculating the time taken by the transmitted signal to reach the GPS receiver. The relative distance between the satellite and receiver can be computed given this timing information and the known transmission velocity of the electromagnetic energy. Like wireless handsets, RF signals can penetrate (with some signal attenuation) clouds, glass and plastic, but not solid objects like buildings or hills.

SiRF's products provide GPS location awareness technology to other OEMs that embed the capability into the four targeted platforms: wireless handheld devices, mobile computing devices, other mobile consumer applications and automotive electronic systems. SiRF's ICs are found in wireless handsets, personal digital assistants [PDAs], notebook personal computers [PCs], digital cameras, watches, automotive navigation and automotive telematics systems, and automated toll roads.

IDC, an industry consulting group, expects wireless handsets to grow from 456 million units in 2002 to over 681 million units in 2006. Additionally, handheld devices and notebook PCs are estimated to increase from 48.5 million units in 2002 to 140 million units in 2006. Gartner, an industry consultant, estimates that 8.7 million GPS-based automotive navigation and telematics systems were sold in 2002 (of 211 million total vehicles sold) and expects this to increase to 16 million in 2005.

Another factor driving future growth is the Federal Communications Commission [FCC] mandated E911 regulation, which requires that all wireless carrier networks contain location technology. The network equipment should have been deployed by the end of 2005. Germany has deployed a GPS-based system used to tax commercial vehicles for highway usage, and Switzerland is in the process of deploying a similar system.

SiRF's GPS technology is implemented in four forms. First, SiRF supplies stand-alone chipsets to OEMs that are directly embedded into an OEM's device. Second, OEMs can purchase third-party supplied customized modules that have SiRF chipsets already embedded into the module. Third, SiRF licenses the intellectual property [IP] cores to OEMs that integrate the GPS technology into the OEM s chips or chipsets. The IP cores consist of the chipset design code as well as the embedded GPS algorithm software. Lastly, SiRF licenses enhanced software-based products, including IP cores and algorithms, for use in several specific end-market applications.

The company outsources semiconductor production to NEC (NIPNY), Samsung and STMicroelectronics (NYSE:STM) foundries. Each individual product is sole-sourced at only one of the foundries. Product assembling and testing is outsourced to three contractors, ASAT, ASE and STATS ChipPAC.

Competitors include Analog Devices (NASDAQ:ADI), Motorola (MOT), Philips (NYSE:PHG), Sony (NYSE:SNE), Texas Instruments (NYSE:TXN), STMicroelectronics, QUALCOMM (NASDAQ:QCOM), Garmin (NASDAQ:GRMN) and Trimble (NASDAQ:TRMB). Sales distribution is handled through a direct sales force, independent sales representatives and distributors.

During the fourth quarter, consumer applications contributed 40% of sales, wireless phones 20% and automotive 40%. The SiRFStar II product line continues to generate most of the revenue. Promate, Leadtek, Gateway and Motorola each accounted for greater than 10% of 2004 revenue, together generating 64% of the total.

SiRF Technology's products have a wide range of applications within the consumer, communications (wireless handsets) and automotive markets. The company's strategy is to supply the GPS capability to OEMs that can integrate it into its end products, rather than manufacturing a stand-alone end product.


The communications market appears to hold the most significant near-term growth potential. The company already supplies GPS chips and IP to both Nextel (NYSE:S) (for its Integrated Digital Enhanced Network phones) and Motorola (for its 3G handsets). It was announced that eight different manufacturers have designed-in the next-generation SiRFStar III product within wireless handsets set to ramp-up production in the second half of 2005.

Management would only comment that each of these eight manufacturers may potentially have multiple products. Specifically, Korea's SK Telecom has designated three OEMs to embed the GPS capability within CDMA handsets that will be compatible with a SK Telecom service expected to roll-out later this year.

Furthermore, the newly formed SK Telecom-Earthlink joint venture will offer a location-based service platform within the United States in the future. A Tier I OEM was already awarded a small chipset production order for inclusion within a CDMA handset.

The SiRFStar III chipset will be designed into a WCDMA (wideband CDMA) handset by a European manufacturer, but will not ramp until early 2006. During the current year, it is expected that a number of location-based services will be launched in the United States, Europe, Korea and Japan.

Additionally, wireless network providers have been mandated by the U.S. government under the recent E911 rules to build the necessary infrastructure to provide accurate location awareness capability for GPS-enabled handsets, which should quickly drive GPS penetration into the U.S. handset market. This is a relatively under-penetrated market, with SIRF's global share at roughly 10% of total handsets incorporating GPS. We expect a broadening of the customer base as more of the leading handset manufacturers adopt the technology.

Growth of Semiconductors Along with Increased GPS Functionality

Not surprisingly cell phones have shown amazing growth in semiconductor content, and according to Info World most cell phones will have GPS capability by 2011. Very strong sales of cell phones were a major contributor to the year-on-year increase in microchip sales.

Cell phone unit sales increased by 31 percent from the first quarter of 2005 and ran substantially ahead of expectations. Unit sales are now expected to reach one billion this year. According to iSuppli, the average semiconductor content of a cell phone is now approximately $41 per unit. Cell phones now represent the second-largest market, after personal computers, for semiconductors. Cell phones and PCs now account for more than half of all semiconductor sales.

The SIA cited two factors: a substantially shorter replacement cycle and very robust demand in China for cell phone growth. China now has approximately 410 million cell phone subscribers. China is adding new subscribers at the rate of five million a month, and Chinese consumers appear to be choosing high-end phones with increased functionality. The replacement cycle for cell phones has declined from an average of 26 months to about 18 months, as manufacturers offer new products with smaller form factors and increased functionality.

In the consumer market, there are multiple near-term growth prospects. Currently, the SiRFStar II is contained within Research in Motion's (RIMM) BlackBerry 7520, which is used in conjunction with an integrated Nextel service. A European manufacturer has also designed-in the chipset into a PDA. With Research in Motion's legal woes apparently behind it we feel Sirf may have dodged a bullet in the consumer segment.


The automotive market also offers potential. Currently, LG Electronics has several OnStar products that incorporate the SiRFStar II chipset. OnStar announced late last year that GM is planning on building three million vehicles in the 2006 model year with the OnStar product. Several other automobile manufacturers are also considering the incorporation of OnStar products. On January 1, 2005 the German toll-road system officially launched a program in which certain commercial vehicles will utilize a GPS-based system to track and bill for usage. The plan includes 1.8 to 2.0 million trucks, but will increase over time as qualification for inclusion expands.

We believe that the semiconductor industry is a positive story in 2007, as inventory issues should be corrected by the end of the first quarter and demand will again pick up. The Semiconductor Industry Association [SIA] released its annual forecast for 2006-2009. The new forecast projects worldwide sales of microchips will reach $321 billion in 2009 an increase of 41 percent from the $227 billion record level in 2005. The forecast projects that sales will grow at a compound annual growth rate of 9% to $321 billion in 2009. According to the SIA, expected areas of application strength include PCs (up 10%), cell phones (up 13%), digital cameras (up 11%), digital TVs (up 56%) and MP3 players (up 35%). Unit sales of cell phones increased by more than 20% in 2006 to more than 1 billion units. With an average semiconductor content of $41 per unit, the cell phone market is now the second-largest consumer of semiconductors, after personal computers.

We also believe there is a fundamental shift in the semiconductor industry from Corporate IT to Consumer Demand. This shift will continue in the years ahead, as consumers all over the world are captivated by the richness and portability of digital media. Advances in computing, digital media processing and wireless technology are enabling the industry to create lifestyle-changing devices and gadgets that could only be imagined a few years ago. The changing nature of customers will affect every aspect of the business, from product design to marketing to demand forecasting.

On April 20, 2007, SiRF Technology Holdings announced results for the first quarter of fiscal year 2007. Pro forma quarterly EPS and revenue both slightly missed expectations. Revenue for the quarter was $67.3 million down 9.3% sequentially and up 27.7% compared to the year ago quarter. Overall the breakdown of sales by platform changed slightly, with revenue for the automotive market at 53% of total revenue, Wireless accounted for 19%, and Mobile computing and Consumer accounted for 24%, while the IP portfolio accounted for the final 4%.

Gross margin for the quarter was 55.0%, down 60 basis points (bps) from the previous quarter's 55.6%. The operating expenses of $25.9 million were higher than the previous quarter s $22.0 million. The operating margin was 16.4%, down -950 bps sequentially from 25.9%. On a pro forma basis, SIRF had a net income of $12.0 million, or a 17.8% net income margin, compared to $15.7 million, or a 21.2% net income margin in the previous quarter.

Fully diluted pro forma earnings per share [EPS] was $0.21, compared to $0.28 in the December quarter and $0.16 in the year ago quarter. The pro forma estimates exclude $7.3 million in stock compensation expenses, $1.1 million in amortization of intangible assets and $0.8 million in acquisition-related contingent payments. In Zacks calculations of Pro-Forma EPS, stock option expenses are added back in. Days of inventory was up by 5 days to 63. Inventory turns were 6, slightly lower from the prior quarter. The company ended with a cash and investments balance of $187.5 million, compared to $170.2 million in the fourth quarter and $110 million one year ago. SIRF has a very low debt load of $3.1 million Management anticipates first quarter 2007 revenue in the range of $69-72 million (up 2.5%-7.0% sequentially due to seasonality). Pro forma EPS is expected to be in the $0.20-0.25 range.

In March 2006, SiRF Technology Holdings Inc. acquired TrueSpan, a technology company with communications systems expertise, for cash and stock. Founded in September 2004, TrueSpan is developing a silicon and software platform that brings high quality digital audio and video experience to consumers in mobile environments. Its technology includes a sophisticated orthogonal frequency division multiplexing [OFDM] engine, optimized to support multiple mobile digital video broadcast standards. TrueSpan has development teams in Long Beach, Calif. and Bangalore, India. As part of this acquisition, SiRF also announced that Sanjai Kohli, founder and CTO of TrueSpan and one of the cofounders of SiRF, will become CTO for SiRF.

In January 2006 SIRF acquired ImpulseSoft in a cash-and-stock deal worth Rs 67.5 crore. ImpulseSoft, an Indian start-up founded in 1999, provides BlueTooth solutions for the automotive and consumer market in India.

SiRF presently trades at a multiple of 27.5x our estimate of 2008 earnings (P/E) (pro-forma adjusted for Stock option comp). The announced design wins indicate a growing acceptance of the technology within the wireless handset manufacturing community. The company reported an extremely strong quarter as records were set for revenue, operating profit, and shipment volume followed by a weak quarter. Significant revenue ramping will probably not occur until the second half of 2007. Therefore, visibility will be limited through the current quarter. We believe this company has solid long-term potential, and will outgrow the industry in the next several quarters. Consequently, we are setting our $26.00 price target, with a corresponding 32.5x P/E.


  • SiRF faces customer concentration risks, since roughly 64% of its quarterly revenue comes from its four largest customers (Motorola, Promate, Leadtek and Gateway).
  • Competition in its target markets has resulted in pricing pressure, as average selling prices [ASPs] have declined.
  • SiRF Technology's products address the new and emerging GPS market. Therefore, the market segmentation and the size of total addressable market is still uncertain.


    The top institutional holders are DWS investment, Fidelity Management & Research, Janus Capital Corp., Seasons Capital Management, Wellington Management Company, and Oppenheimer funds that together hold roughly 37.4% of total shares outstanding. All the major holders with the exception of Fidelity and Oppenheimer increased its positions in the three months ended March 2007. Insiders hold approximately 6 million shares. Insiders were net sellers of the stock over the last six months.


  • The communications market appears to hold the most significant near-term growth potential. The company already supplies GPS chips and IP to both Nextel (for its Integrated Digital Enhanced Network phones) and Motorola (for its 3G handsets).
  • In the consumer market, there are multiple near-term growth prospects. Currently, the SiRFStar II is contained within Research in Motion's BlackBerry 7520.
  • The automotive market also offers potential. Currently, LG Electronics has several OnStar products that incorporate the SiRFStar II chipset. OnStar announced late last year that GM is planning on building three million vehicles in the 2006 model year with the OnStar product.


    SiRF reported March quarter results that slightly missed consensus expectations on the top and bottom-line. Key wins at SK Telecom and LG Electronics should contribute to significant growth throughout 2007. The current market valuation appears reasonable. Several end markets appear to be near-term catalysts that have the potential to significantly revise expectations upwards. Consequently, we are maintaining our Buy recommendation on the shares of SiRF.

    SIRF 1-yr chart: