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MIPS Dips -- Time to Cash In Your Chips?

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Have I been too optimistic on MIPS Technologies (Nasdaq: MIPS  ) -- maybe even naive about its chances to challenge mobile-chip technologist ARM Holdings (Nasdaq: ARMH  ) ? On a day like this, it certainly looks that way.

MIPS shares were down as much as 33% today after investors had a look at the company's full-year and fourth-quarter report. Quarterly sales fell 24% to $17.6 million, hurt by lower sales of new licenses, while royalties based on actual chip production under such licenses fell by a modest 5%.

Non-GAAP earnings per share dropped from $0.15 to $0.04. Analysts were expecting better on both the top and bottom lines.

"We had strong results for our fiscal year, but our fourth quarter proved to be more challenging than we expected," said CEO Sandeep Vij. Yeah, I'd say so.

Vij remains confident in the future of MIPS. This disappointing quarter still saw three new license deals, including two customers entirely new to MIPS, as well as a few license renewals. But, Vij said, "we simply did not close all the opportunities we had identified at the start of the quarter."

In particular, MIPS' traditional stronghold in home-entertainment devices is being threatened by the encroachment of mobile technologies. As Vij explains it, high-end TV sets are incorporating more and more mobile applications to keep up with each other, which means more ARM and Intel (Nasdaq: INTC  ) Atom chips but less opportunity for the mobility-challenged MIPS.

It's not that MIPS is ignoring the mobile space -- it's just that these conquests take time. A few MIPS-powered handsets and tablets have appeared on the market now, but from small players and mostly in faraway markets. It’s beyond reasonable expectations for MIPS to knock ARM out of the next Apple (Nasdaq: AAPL  ) iPhone or big-ticket Android device from Motorola Mobility (NYSE: MMI  ) .

That has never been MIPS' target anyway. Instead, MIPS is looking toward Android and the range of cheaper devices with differing power needs that it could target. That market should grow, but falling too far behind at this crucial crossroads in mobile history could be a very big mistake.

MIPS shares remain a deep-discount alternative to expensive ARM shares, and even more so after a drop like this one. The fact that management doesn't have enough visibility into its end markets to offer guidance for the next year is troubling, and that CFO Maury Austin picked this moment to announce his retirement might raise further red flags. I simply can't tell where MIPS will go from here.

The best thing to do when the crystal ball gets cloudy is to just keep a close watch on MIPS. Our new Watchlist feature will help you do exactly that, so you'll be ready to take action when the picture clears up again:

Fool contributor Anders Bylund has written puts on Intel, but he holds no other position in any company mentioned. The Motley Fool owns shares of Apple and Intel and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel and Apple. Our services have also recommended creating a diagonal call position in Intel and a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.

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  • Report this Comment On August 05, 2011, at 5:51 PM, bsimpsen wrote:

    Yes, you are being naive ;-). MIPS has NO future in any system with a touch UI. That world will be owned by operating systems that do not run on MIPS.

    Even though ARM owns the mobile space, they have a hard time making money off licenses. So the best MIPS can expect is to have a very hard time making money.

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