My concerns re PWAV are numerous.
1. PWAV has an 86 percent concentration in one country, Korea. This one-country concentration actually increased from 1996 to 1997. Most of their business over the last year has been supplying digital cellular infrastructure amplifiers to three Korean companies there which are furnishing this infrastructure on a "triopoly" basis. However, the digital cellular program is more than 60 percent complete, and also SPCT has made substantial inroads into this business through sales to LG. While these three Korean companies intend to compete in the RBS market internationally once these programs are completed, they will then be competing against the likes of MOT, LME, Nokia, Nortel etc.
SPCT has a large degree of concentration at Nortel (about 58 percent recently). However, unlike say MOT, Nortel probably does not have the RF capability to build their own amplifiers without going to a lot of trouble. Also Nortel is supplying into programs on a worldwide basis, so indirectly SPCT has less country concentration than PWAV.
2. PWAV is experiencing declining margins most recent Q (from 41.2 to 38.4) due to shift in product mix from multicarrier cellular to single carrier PCS amplifiers. The single carrier PCS amplifier market has virtually no barriers to entry, there are probably 30 U.S. companies that could manufacture these products, including all the major OEMs such as QCOM, MOT, LME, etc. as well as major electronics manufacturers such as Harris Corp. As PWAV continues the shift away from multicarrier cellular, margins should continue to decline.
3. SPCT is spending about twice as much in R&D as PWAV. While R&D expenditure is not always a positive sign, it is indicative of SPCT's commitment to building barriers to entry in this field through R&D. Their R&D is mostly in the broadband high power PCS semiconductors needed to manufacture multicarrier PCS amplifiers. This is a high potential barrier to entry because these devices are either not available from semi manufacturers or they are of extremely poor quality. The semi manufacturers have a poor track record in the broadband linear high power device business. Very high field failure rates due to gradual deterioration etc. This makes it very difficult for other players to build multicarrier PCS amplifiers using merchant devices.
SPCT's concentration in multicarrier PCS is a make or break gamble. If SPCT can build a better multicarrier solution (lower cost and higher reliability), then OEMs such as MOT, LME etc. will shift from building their own single carrier PCS amplifiers to buying out SPCT multicarrier systems. Right now for the most part the major OEMs build their own single carrier amplifiers and can only be expected to buy out these amplifiers when the demand exceeds their capacity. |
