Seeking Alpha
Long/short equity, growth, medium-term horizon, registered investment advisor
Profile| Send Message|
( followers)  

Back in December, I urged readers not to fret over Apple (NASDAQ:AAPL) supply cut rumors given Qualcomm's (NASDAQ:QCOM) market leading position within Apple's competitors. It's not that Apple isn't important. It's just less important to Qualcomm than to other Apple centric plays such as audio chip maker Cirrus Logic (CRUS).

Outside of Apple, Qualcomm's modem chips and processors can be found in Samsung (OTC:SSNLF), Sony (NYSE:SNE), Nokia (NYSE:NOK) and Google's (NASDAQ:GOOG) Android based smartphones and tablets, such as the Nexus 4.

During the quarter, Qualcomm's sales rose 29% from a year ago to $6 billion. Earnings per share increased 30%. This marked the first time earnings had grown faster than sales since March 2011. The sales success rests firmly on the shoulders of a decision to focus a tremendous amount of design attention on 28 nanometer chips.

The move from 45 to 28 has delivered on its promise for longer battery life and faster speeds. And, whether you agree smaller transistors provide better user experiences, leading edge OEM's are broadly embracing smaller over bigger. For instance, Apple's shifted to 28 nanometers in the fall iPad refresh -- just six months after the "new" iPad was launched.

At Qualcomm, interest in 28 nanometer was so strong it outstripped foundry giant Taiwan Semi's (NYSE:TSM) capacity in the first half of last year. The higher demand resolved by year end, which helped Qualcomm's QCT segment sales increase on the heels of 182 million MSM chipsets shipped last quarter - nicely above the high end of prior guidance.

This delivered a segment operating margin of 26% as OEM's ponied up for the latest generation. As a result, QCT revenue and operating profit rose 34% and 45%, respectively, versus last year.

But, Qualcomm isn't resting

The company announced a revamped branding of its Snapdragon processors in January, promising products with the Snapdragon 600 in Q2 and the Snapdragon 800 a bit later this year. The 600 and 800 processors offer impressive numbers - if you're an engineer. The 600 has a new Quad Core Krait 300 CPU operating at 1.9 Ghz and a modified Adreno 320 provides the graphics. The chip will battle for share against Intel's (NASDAQ:INTC) Clover Trail and Nvidia's (NASDAQ:NVDA) Tegra 4. The 800 is Qualcomm's top of the line chip and it promises to be blazingly fast compared to the current generation, offering 75% better performance than the previous S4 Pro. The chip includes the Quad Core Krait 400 CPU at 2.3 GHz with a brand new Adreno 330 GPU, which promises twice the compute performance of the Adreno 320. The performance gains are also tied to using Taiwan Semi's High Performance for mobile ("HPm") technology, better memory and signal processor, and the most updated LTE modem.

In modems, Qualcomm's market leading position in LTE and integrated 802.11ac Wi-Fi promise to keep it in strong demand with OEM's like Apple, who relies on Qualcomm for baseband chips. The new products are expected to help generate $23.4-24.4 billion in forecasted 2013 sales, up roughly 25% year-over-year at the mid point. Non-GAAP EPS is being guided to $4.25-4.45, up 17% at the mid point.

Overall, Qualcomm forecasts average selling prices per MSM will increase throughout this year as device makers continue to shift toward newer technology.

Additionally, the year was strong for its licensing segment too. Gartner estimates 169 million smartphones were shipped in Q3 last year, up 47% from the prior year.

In China, 47 million smartphones were shipped, up 115%. As China continues to move to next generation networks -- 3G penetration is just 29% there -- the trend should continue to support overall device growth; bullish for chip sales and license revenue.

Going forward, it's likely the company is hard at work investigating 20 nanometer and below designs.

These more complicated designs suggest Qualcomm has an opportunity to extend and expand the margin friendly success of its 28 nanometer franchise over the coming years, not months.

Source: Qualcomm's Bet On 28 Pays Off