Spreadtrum Soars On 4G, Camelot Clunks

China 4G boosts Spreadtrum

The latest earnings and outlook are breathing new life into low-cost smarphone chip maker Spreadtrum (Nasdaq: SPRD), but also showing why the market remains difficult for homegrown IT services firms like Camelot Information Systems (NYSE: CIS). Spreadtrum’s newly announced upside surprise could bode well for the broader field of companies that specialize in low-cost smartphones and their components, as China prepares to launch 4G mobile services later this year. Meantime, Camelot’s weak earnings are likely to continue for the foreseeable future, though at least it won’t have to publicly discuss those embarrassing numbers if its current bid to privatize succeeds.

Let’s begin with a look at Spreadtrum, which I’ve previously described as full of potential due to the recent explosion of low-cost smartphones. At the same time, however, the company made a bad gamble with its decision to bet big on a homegrown Chinese mobile technology called TD-SCDMA, which was used by industry leader China Mobile (HKEx: 941; NYSE: CHL) in its 3G network.

Weak promotion of TD-SCDMA by China Mobile ultimately led to disappointing sales for Spreadtrum over much of the last year, with the company’s shares losing nearly 40 percent of their value from peaks reached in late 2011. But China Mobile is showing growing signs of much more aggressive promotion for its 4G product, based on a related homegrown standard called TD-LTE. Most people expect China Mobile to get a 4G commercial license later this year, and the company is aggressively building up its inventory of 4G handsets in anticipation of the launch.

That build-up is most likely one of the biggest factors behind Spreadtrum’s sudden change in fortunes, which has prompted the company to sharply boost its previous revenue outlook for current quarter. According to its latest outlook, Spreadtrum now expects to post second-quarter revenue of $270-$278 million, an increase of about 45 percent from the previous year. (company announcement) The revised guidance represents a 22 percent increase of its previous guidance of $220-$228 million in revenue given just last month.

The company was rather vague in its explanation for the major upward revision, saying only that it was benefiting as consumers in developing markets upgraded their existing cellphones to low-cost smartphones. But investors certainly cheered the numbers, with Spreadtrum shares jumping 24 percent in after-hours trade after the new guidance came out.

While Spreadtrum’s news was good, the opposite was true for Camelot, whose shares have suffered from investor indifference over the last year amid a broader wave of negative sentiment towards US-listed China stocks. Camelot’s newly released results show why investors have lost their interest, with the company’s net loss ballooning to $4.3 million in the first quarter of 2013 from a loss of $800,000 a year earlier. (company announcement) The company did manage to post positive gains in its top line, though its 4 percent revenue growth was hardly cause for excitement.

Investors reacted with the same indifference to this latest report as they have for much of the last year, with Camelot shares largely staying flat around the $1.70 level. The lack of movement is largely due to Camelot’s privatization offer announced back in March, which would see a management-led group buy back the company’s US-listed American Depositary Shares for $1.85 each.

Camelot was later joined by Pactera (Nasdaq: PACT), China’s only other US-listed IT services firm, which announced its own privatization bid just last month. (previous post) The de-listing bids by both companies reflect the fact that China’s IT outsourcing firms are having difficulty copying the success of Indian rivals like Infosys (Mumbai: INFY). The Chinese firms came to the sector relatively late, and are facing tough competition in the global marketplace from not only the Indian players, but also big western names like IBM (NYSE: IBM) and Accenture (NYSE: ACN).

Bottom line: Spreadtrum could get a major new boost with China’s upcoming 4G rollout, while Chinese IT outsourcing firms like Camelot will continue to suffer from global competition.

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