Qualcomm (NASDAQ:QCOM) announced a very strong set of results for Q1 FY2012 on Wednesday, recording growth of close to 30% in revenues and 35% in operating profits over the year-ago quarter. Both chipset sales and licensing revenues had a strong quarter as demand for 3G/4G products continued to be solid globally and Qualcomm’s Snapdragons increasingly featured at the high-end of the smartphone market. Part of the strong performance last quarter could be attributed to the ramping up of production at additional suppliers as well as improving yields which helped it eliminate 28nm supply constraints towards the end of the quarter.
A strong Q1 prompted Qualcomm to raise its revenue and EPS guidance for FY 2013, mitigating concerns that a slowdown in iPhone sales may affect the chipset maker. A strong last quarter as well as an improved outlook for 2013 saw the stock rise more than 6% in post-market trading, bringing it closer to our price estimate. The fact that the company registered a 28% uptick in sales for FY 2012 and followed it up with 30% revenue growth next quarter despite not completely meeting demand, underscores the fundamentals of the market it operates in. The company has delivered on its 28nm supply ramp-up and this should help it address the burgeoning demand for mobile chipsets in 2013 and beyond.
Our revised $71 price estimate for Qualcomm is about 10% ahead of the current market price.
Sustained high demand for mobile devices
The smartphone market showed significant growth in 2011, and given the 42% year-over-year growth rates seen so far, 2012 final results will likely show that it was a strong year. Despite some remaining macroeconomic uncertainty, the consumer shift towards smartphones continues to be strong. At the same time, tablet growth is picking up serious momentum. Gartner estimates that tablets grew by over 250% in 2011, and will continue to grow rapidly for the next few years to reach about 370 million unit sales by 2016. 
Emerging markets such as China are seeing an explosion in demand for 3G capable smartphones. IDC expects China to have increased its share of the global smartphone market by over 800 basis points to 26.5% in 2012, leaving the U.S. behind at less than 18%. With a billion strong mobile subscriber base and carriers increasingly trying to transition their huge 2G base to 3G, China presents a huge opportunity for Qualcomm to not only gain from its chipset sales but also earn a steady stream of licensing revenues. (see Qualcomm Introduces Three New Entry-Level Chipsets To Target Emerging Markets)
We currently estimate that the 2G to 3G/4G transition will see 3G/4G penetration of mobile devices worldwide grow from about 50% currently to a little under 70% by the end of the forecast period. However, the increasing adoption of smartphones in the emerging markets buoyed by the growing number of low-end affordable smartphone options could see 3G/4G penetration increase to about 80% by the end of our forecast period. Such a scenario would add a further 10% upside to our price estimate.
28nm demand to remain high
Also, with almost all of the high-end flagship smartphones launching with LTE-support now, Qualcomm remains the LTE leader by quite a margin. Not only are its LTE baseband chipsets mature as they are three generations old already and built with the new 28nm technique that conserves space and power, but they also come integrated with its Snapdragon app processors. This LTE leadership has served Qualcomm well and thus far kept competitors from stealing market share. For example, Samsung’s Galaxy S III and HTC’s One X series had to be launched in the U.S. with a Snapdragon core earlier last year since rival chipsets did not play well with Qualcomm’s LTE basebands.
As for the 28nm chipsets, we expect demand to remain high especially since there is a lack of such designs currently in the market that not only deliver excellent processing speeds but also conserve space and power. With the supply chain issues mostly overcome going into 2013, Qualcomm should be able to leverage its stronger supply ecosystem to grow chipset revenues even better than earlier anticipated. Since 28nm chipsets are costlier compared to the other chipsets built on different manufacturing processes, it will also help chipset ASPs rise in the coming quarters.
However, competition is slowly catching up with Nvidia recently announcing a LTE chipset it plans to integrate into Tegra this year and Samsung making its Exynos chipsets LTE-compatible as well. Samsung’s growing market share in the smartphone arena is a big concern considering it also manufactures chipsets and could use that scale to use more of its own designs in its smartphones. Despite the threat, we believe that Qualcomm’s baseband supremacy, its diverse set of customers and strong focus on power conservation will continue to help it ride the mobile revolution for years to come.Notes:
- Gartner Says Worldwide Media Tablets Sales to Reach 119 Million Units in 2012, Gartner Press Release, April 10th, 2012 [↩]