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Budget growth in developing markets remains strong, but pickup of Snapdragon 800 was worse than expected

On Thursday Qualcomm, Inc. (QCOM), one of America's largest semiconductor companies, reported its earnings and was treated to a four percent tumble in share prices.

I. Growth Grinds to a Halt

Qualcomm's results for its fiscal Q4 2013 (calendar Q3 2013) were good, but not great.  The company made $6.48B USD in revenue, up 33 percent from a year ago, and better than the $6.35B USD a Bloomberg survey of analysts expected or the $6.346B USD predicted by a Thomson Reuters analyst survey.

But the first symptom of Qualcomm's issues was witnessed in its weakening profit growth.  Net Profit (earnings) was up "only" 18 percent, rising to $1.5B USD ($0.86 USD/share).  Analysts had expected minor slowdown, as U.S. and EU smartphone growth slowed and smartphone pickups in India and China drove sales towards the budget end, where components see lower margins.  But they expected the slowdown to be somewhat less pronounced, estimating earnings of $0.94 USD/share -- a 29 percent increase.

China is now leading new smartphone unit sales growth, but it's a less profitable target for chipmakers like Qualcomm and their OEM clients. [Image Source: Chinadangvu]

As with the earnings reports of Apple, Inc. (AAPL) and Samsung Electronics Comp., Ltd. (KSC:005930), this reaction may have the general public scratching their head in puzzlement as they see double digit growth and billion dollar profits.  But to shareholders part of the valuation of shares of Qualcomm and two of its top component clients -- Samsung and Apple -- is based on an expectation of the large, continuous growth in profitability all of these companies have seen in the mobile era.  As that growth has declined investors are reevaluating share prices.

Stacy Rasgon, an analyst at Sanford C. Bernstein & Comp., LLC, comments to Bloomberg, "They’re seeing a bit of a slowdown in chipset [profit].  This wasn’t a bad report, but it's definitely not good."

II. Qualcomm Admits Snapdragon 800 Pickup Has Been Weaker Than Expected

Jim Williams Financial analyst Cody Acree, adds in a Reuters interview, "We know you can't get the same royalty revenue off of a sub-$200 phone that you get off an iPhone or the Galaxy line.  We're seeing evidence that the emerging-market impact is having pressure on revenue and earnings trends and it's forcing the company to react and cut its spending."


While most of Qualcomm's revenue comes from sales of its Snapdragon line of system-on-a-chip processors for mobile devices and for its chipsets, Bloomberg points out that Qualcomm has something in common with Microsoft Corp. (MSFT) in terms of mobile -- most of its profit in the mobile space comes from patent licensing.

Microsoft is estimated to have made close to a billion dollars last year quarterly, licensing its operating system-heavy patent portfolio to Samsung.  Qualcomm's patent portfolio focuses on hardware, not software, but is also highly valuable pulling in over a billion dollars per quarter in licensing from the likes of Apple, Samsung, et al.

In fiscal Q1 2014 (calendar Q4 2013) Qualcomm expects revenue between $6.3B and $6.9B USD -- analysts surveyed by Bloomberg expected $7.01B USD in revenue.  Profit is expected to rise to between $1.10 and $1.25 USD per share.  Qualcomm estimates that the average price of a phone that uses its CDMA chipsets will fall 1 percent in 2014 to between $216 and $230 USD.

III. New Segments, Fiscal Discipline are Keys to Qualcomm Sustaining Profit Growth in Challenging Market

Qualcomm's CEO Paul E. Jacobs, Ph.D, son of company cofounder Irwin Jacobs, wasn't afraid to admit that his company had made some miscalculations.  He told Reuters that his company had pushed the early release of the Snapdragon 800 -- a mobile processor that significantly outperforms the competition, only to be greeted by slow adoption.  

Snapdragon 800
The Snapdragon 800 has seen slow pickup. [Image Source: Liliputing]

Mobile OEMs were content to mostly use the older Snapdragon 600 and only recently have begun to release models with the newer chip.  For example Samsung is using the Snapdragon 800 chip in its newer Galaxy Note 3 phablet, but thus far has failed to produce the rumored Snapdragon 800-driven Galaxy S4 "Advanced" model some expected.

Snapdragon 800
Snapdragon 800 pickup was worse than expected.

Mr. Jacobs remarks, "What we're trying to do is focus on the highest-growth opportunities.  We are investing heavily in the low end of the market to get our cost structure into a better place."

Faced with the reality that tablet and smartphone growth in developed markets may be tapering, Qualcomm is eyeing new markets.  In September it released a rare first-party device, the "Toq" smartwatch.  The new watch uses Qualcomm's Mirasol display technology -- a low power screen technology that's inspired by the chemical composition of butterfly wings.  Qualcomm believes the technology is a good fit for the wearable space, and hopes Toq will convinced others to license it.

Qualcomm Toq smart watch
Quacomm Toq [Image Source: AnandTech]

In addition to its hope of selling chips, chipsets, and screen technology to the wearable sector, Qualcomm is also hopeful that "connected homes" -- homes with smart thermostats and security/safety sensors -- will see increasing adoption, creating a new space for processor and chipset sales.

Still Qualcomm is also recognizing both of those markets may fail to live up to their hype and is preparing for the worst.  It told analysts that it expects to grow operating expenses (e.g. global employees, facilities, etc.) by only 5 to 7 percent in 2014, down from its average growth rate of 20 percent it's averages over the last few years.
Qualcomm is hopeful that the "connected home" trend, featuring products like Nest cellular-enabled thermostats and smoke detectors will take off.

Chief Operating Officer Steve Mollenkopf commented in an investor phone briefing, "In the near term, we’re seeing a little bit of a downshift in terms of tier.  In the second half we continue to see strong units and a little bit stronger mix."

Qualcomm predicted fiscal 2014 sales of $26B to $27.5B USD, a range whose midpoint value skews below the Bloomberg analyst expectation of $27.5B USD.  The midpoint of the earnings prediction for FY2014 would offer an 8 percent increase in revenue.  That would be a massive drop-off in growth from previous years.  Since 2010 Qualcomm has doubled its revenue, growing at a rate of 25 percent or more every year.  Now it expects growth could slow to a quarter of its previous pace.

III. A BlackBerry Bid?

An interesting side note from the Bloomberg report is CEO Jacobs' revelation that Qualcomm is interested in buying Canadian phonemaker BlackBerry, Ltd.'s (TSE:BB) patent portfolio.  BlackBerry was the subject of several potential buyout deals or inquiries.  The top bid came from Fairfax Holdings, Ltd. (TSE:FFH), who was expected to sell off at least some of the OEM's assets.

But as some feared, a deal with Fairfax collapsed during the "due diligence" phase.  Instead, Fairfax and other investors agreed to lend BlackBerry $1B USD in bonds, in exhange for firing its eternally optimistic, but somewhat delusional CEO Thorsten Heins.  
BlackBerry, Ltd.
Qualcomm is greedily eyeing a purchase of BlackBerry's patent portfolio, which could give a nice boost to licensing revenues.

Mr. Heins will be remembered for his weak leadership and bizarre predictions, such as his April assertion that the tablet market would be dead in fie years.  Instead, Mr. Heins' career is dead, and with a market cap of $3.52B USD BlackBerry appears a foot away from the grave, as well.

Given that low valuation, Qualcomm appears content to wait to swoop in later and buy the IP at an even cheaper price.  CEO Jacobs tells Bloomberg, "There were some assets that we were interested in and we were looking at, but obviously they got a new refinancing.  They have their own strategy. We’re waiting to hear where they are headed."

In other words, Qualcomm is ready to wait for BlackBerry to collapse under its own weight, and then make a bid for the IP when Fairfax and other investors turned to a fire sale to try to recover their lost share holdings and debt.

Sources: Reuters, Bloomberg

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Recurring theme
By Motoman on 11/7/2013 11:52:24 AM , Rating: 5
This happens all the time in technology markets, and it's kind of amazing that people don't remember that this has all happened before, and it will all happen again /battlestar.

1. Cool new technology matures and growth takes off like crazy.
2. Market penetration and mainstream adopotion drive huge volume.
3. Rapidly improving technology drives upgrades in the installed base.

...and then...

4. Market saturation appears
5. Product quality reaches the point where consumers no longer see a tangible benefit in upgrading vs. keeping existing devices.
6. The new sales and replacement rates reach a market equilibrium to sustain the install base.

This has happened everywhere...desktop PCs, laptop PCs, widescreen TVs, so on and so forth. Now it's happened with smartphones.

Recently we've been talking about the fact that people are holding onto computers for a lot longer rather than replacing them regularly...the reason being that they hit "good enough" a long time ago, and there's no benefit to the consumer to keep upgrading. For the vast majority of people these days, a 5-year-old or even 10-year-old PC does everything they want it to with grace and ease. 10 years ago AMD was making the Athlon 64 - which, realistically speaking, does all the web-surfing, word processing, and Farmvilling that the *vast* majority of consumers actually do with the computers just fine.

We're seeing the same phenomenon with smartphones. We'll see the same thing happen with tablets probably in the near future. And then the same thing will happen with whatever comes after that.

This has all happened before. This will all happen again.

RE: Recurring theme
By retrospooty on 11/7/2013 12:59:21 PM , Rating: 2
Yup... As fast as the Snap800 is, the buttload of Snap Pro's and 600's they sold over the past year are already plenty fast. No reason to upgrade for that. So long as you have a non OEM-bloated OS you are set with an older model as far as speed goes... Now res is another story ;)

RE: Recurring theme
By Motoman on 11/7/2013 1:49:14 PM , Rating: 2
Don't start that again Xp

RE: Recurring theme
By kmmatney on 11/7/2013 4:40:27 PM , Rating: 2
I finally bought cell phones for my 3 kids, for use with Ting. I ended up just buying pre-owned Epic 4G Touches (e.g. Galaxy S2) and a Galaxy Nexus in the $90-$100 price range. They are plenty fast, with 1.2 Ghz dual core and 1 GB RAM. As far as resolution, the Galaxy Nexus has 1280 x 720 resolution which is excellent. They can all play plants vs. Zombies 2 quite easily - what more do you need from a phone?

RE: Recurring theme
By Samus on 11/8/2013 2:23:37 AM , Rating: 2
I think the Galaxy SII is the best used smartphone out there right now for the money. It's pretty easy to find in the $100 range in very good condition, and the lack of LTE isn't a big deal for most people. 3G/WiMAX is still fine for Google Maps, email and light surfing.

But more to the point of performance and battery life. What's interesting is even Jellybean runs great on an SII and easily lasts 24 hours between charges. This was the phone that started the real threat to the iPhone.

RE: Recurring theme
By luv2liv on 11/7/2013 1:05:28 PM , Rating: 2
it took forever for desktop sales to slump.
im really surprised it took so fast for smartphone though!

RE: Recurring theme
By retrospooty on 11/7/2013 1:15:59 PM , Rating: 2
Its not "slumping" , its just that its not growing as fast as it was. Its still growing.

RE: Recurring theme
By michael2k on 11/7/2013 2:15:01 PM , Rating: 2
There is another factor at play too; not just saturation of the high end, but the mid-end has become sufficiently powerful that the ASP is dropping. That is implied in the article when stating that uptake of the S800 is lower than expected and S600 is still going strong.

Why pay for a $20 chip when a $12 chip will do? Why pay for a $50 screen when a $30 screen is still great? Etc, etc.

So this couples with the fact that your smartphone purchase will last an extra year instead as well, dramatically reducing sales figures over a long term period. IE, a 2011 high end smartphone is still going to be good, and comparable to a 2013 mid to low end smartphone, which is still going to be reasonable for many people.

The only place I don't see that being true actually is tablets, what with their larger screens allowing for more involved and complex software interactions. The lynchpin there is that SW vendors have to create use cases to drive adoption of tablets. One possibility is that tablets displace PCs as PCs start getting retired. A 2006 dual core laptop is actually less powerful than an iPad Air (for many things) thanks to the GPU, the super fast networking, the SSD, and the highly constrained OS.

As I mentioned, however, it is up to Apple to release SW and OS updates that make such a transition more likely and more palatable. The same holds true for Google and Android, and Microsoft and Windows RT.

RE: Recurring theme
By fteoath64 on 11/8/2013 7:32:05 AM , Rating: 2
Talking about PCs. These things have not really changed for a decade!. Still the same old things but faster and only significant improvement is the LCD monitor. The OS is not really a great deal better unless you go for a tablet (not a PC then!). Every other parts works still the same way. ie No innovation.

If Apple and Android has not pushed tablets, we would not see retina class screens or 2560X1600 screens on a 10inch tablet!. Only laptops have some innovation in light weight and 10 hour batteries!. So why buy new when existing one functions almost as well ?. Year in and year out. Win 8 really kills the general PC market ...

RE: Recurring theme
By 440sixpack on 11/8/2013 12:55:04 PM , Rating: 2
Well said. This sums up the current scenario perfectly.

Also shows where the drive comes from for these new wireless carrier phone upgrade fees - new smartphones every six months + most people on an upgrade schedule of 24 months = more phones coming out than upgraders available.

RE: Recurring theme
By lukarak on 11/9/2013 3:35:53 AM , Rating: 2
I have experienced this in a number of things i own. I'm currently running an almost 5 year PC (i7-920, X58, 24 GB), a 3.5 year old laptop (MBP 13 2010, 16 GB RAM, 64 GB SSD), and 2.5 year old phone (HTC EVO 3D).

The screen on the phone is low res compared to today's flagships, but it is still 250 dpi+ and has 1GB of ram, which is still sufficient. I hope it will not break down, as i plan to keep it for at least another 1.5 years.

The laptop has probably the oldest OCZ SSD (SLC!) that manages sequential reads of 90 MB/s, so about 6 times slower than what is available today. But going from a mechanical HDD (with comparable sequential reads, if not higher) cut my boot times by a factor of 4. From 50 sth seconds to 15 seconds. About the same for application launches. I recently tried replacing it with a top of the line today's SSD (limited to SATA2, theoretically a few times faster than what i have) and managed to shave 2 seconds from the boot time. I returned it, as that small of an improvement isn't worth the price.

I have a 30'' screen for the desktop and laptop when i need it, and don't plan to upgrade to 4K, no matter the price, until this one dies. I can't see the pixels today, it's an IPS screen, so i don't see the need.
Specs wise, the desktop has been competitive these 5 years, and i don't see any announced content that it will not be able to handle if i keep it for another 4-5 years. Gone are the days where you had to replace your 486 because it couldn't run MP3s, your Pentium II because they couldn't run DIVX and so on.
I might consider going to a higher resolution laptop, but chances are i will do that only when this one dies.

I think we are approaching a point (or have already passed it) where things are just good enough, and any improvements are not as clear because while us humans can perceive a difference between 50 and 15 seconds, we can't do it so easily between 14 and 15 seconds.

By fteoath64 on 11/8/2013 7:20:35 AM , Rating: 2
I see a complete omission of their low-end chips due to the market erosion by Taiwanese and Chinese competitors who are making A9 compatible quadcores with various gpu combinations at a much lower price than Qualcomm. Even some of qualcomm's customers are using these competing chips for lower end products. That segment was shifting millions of units and evaporating before their eyes. This is a problem when a company just shoots for the flagship product and neglects the segments with volumes until a competitor steals them!.

"If you look at the last five years, if you look at what major innovations have occurred in computing technology, every single one of them came from AMD. Not a single innovation came from Intel." -- AMD CEO Hector Ruiz in 2007

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