Qualcomm (QCOM) is the leader in development and commercialization of the Code Division Multiple Access (OTCPK:CDMA) technology. CDMA is one of the two main technologies used in global digital wireless communications networks, the other being Global System for Mobiles ((GSM)). Qualcomm owns a lot of intellectual property, including patents, patent applications and trade secrets related to the CDMA technology. The company uses this technology in its own products while it also licenses these patents to other companies. The company generates its revenues from selling integrated circuits or chipsets, software products and services that are used in mobile devices and in wireless networks, broadband gateway equipment, desktop computers, televisions and blu-ray players amongst numerous other products.
Dependence on one operating segment
The company's revenues are divided into three operating segments. The QCT Segment comprises of revenues earned from development and supply of integrated circuits and system software for use in voice and data communications, networking, application processing, multimedia and global positioning system products. This segment comprises of more than 63% of the company's revenues. The QTL segment comprises of revenues earned from granting licenses and providing rights to use some of the company's intellectual property. This segment comprises of approximately 33% of the company's revenues. The last segment of the company is the QWI Segment which comprises of revenues earned from providing development and other services to transportation and logistics companies, wireless network operators, and to government agencies. Approximately only 4% of the company's revenues are earned from this segment. Qualcomm does not seem to have a very well diversified stream of revenues. It heavily relies on the QCT segment, while the QTL segment comprises only of revenues earned from intangibles such as patents. The patents obviously have a shelf life, after which earning revenues from it becomes difficult. Thus, earning revenues from the QTL segment is largely dependent on the company's success in its R&D department.
The company had recently announced that it is going to increase its quarterly cash dividend from $0.25 to $0.35. Qualcomm has increased its dividend by 12%, 13%, 16% and 40% in the years 2010, 2011, 2012 and 2013 respectively. It further stated that it is replacing its old share repurchase plan with a new $5 billion share buyback plan. Looking at the company's past records, the company has returned approximately $20 billion through various stock repurchase and dividend plans. As of December 30, 2012, the company had cash and cash equivalents (including marketable securities) of approximately $13 billion and a healthy free cash flow of more than $1 billion in the last quarter (ended December 2012). These numbers not only present a very healthy financial position of the company, the dividend and buy-back policy also shows that the management of the company has confidence in the company's future.
Reliance on concentrated customers
95% of the company's revenues in 2012 were earned from international customers and licensees. This figure has remained approximately the same over the past three years. Customers in China, South Korea, and Taiwan, have generated 42%, 22% and 14% of Qualcomm's revenues in the year 2012. Although these countries and especially China represent the fastest growing economies in the world, any economic downturn in these countries may affect Qualcomm's performance indirectly. Over the past three years, Samsung Electronics, the South Korea based smart phone manufacturer has constituted more than 10% of revenues for Qualcomm. Other big customers of the company are Hon Hai Precision Industry Ltd., Foxconn (GM:FXCNF) and Apple (AAPL). LG Electronics (LG) and HTC (OTC:HTCCY) had together constituted more than 10% of the company's revenues in previous years. However, all these companies represent leading manufacturers of mobile phones and since Qualcomm has major patents for the CDMA technology, it seems understandable that these small number of companies form major customers of the company.
Since Qualcomm is in the chipset manufacturing industry, its direct competitors can be considered to be Intel (INTC) and Nvidia (NVDA). However, from my interpretation of Qualcomm's revenue stream, I feel the company faces more competition from new evolving technologies than from Intel and Nvidia. Qualcomm's fundamentals are based on the fact that it has dominance in the CDMA technology. In the US, the top five of the seven most used cell phone carriers use the CDMA technology. However, world over, most countries predominantly use GSM technology as opposed to the CDMA technology. The only reason so many carriers in U.S. use CDMA technology is because it was new when these companies started operations and by the time GSM came along, it was too late for the companies to set up new infrastructure for GSM. Another technology that will affect Qualcomm is the LTE (Long-Term Evolution) technology. This technology operates at a bandwidth, which does not necessitate backward compatibility, and hence takes away the need to buy licenses from Qualcomm. Infact, Intel and Nvidia have already come out with their own chips for the LTE enabled devices. China Mobile, which has approximately 65% of the customer base in China, uses a new technology called T-CDMA, which was developed by Chinese Academy of Telecommunications. This technology was developed so as to avoid paying royalties to patent holders for 3G/LTE technologies. Qualcomm has developed an all in one chipset that not only operates T-CDMA but also other technologies. If the company is successful in making China Mobile its long term customer, it could form significant revenue stream in the near future.
To summarize, I would like to note that although Qualcomm's rise has been majorly based on its rights and patents of the CDMA technology, recent advances in the technologies may affect the company's revenues in the short term. However, looking at the importance of CDMA technology in the wireless industry and more importantly, Qualcomm's effort to readily adapt to new technologies, as in the case of China Mobile, I feel that Qualcomm is here to stay and for good. The company definitely seems to be a good investment in the long term.