The mobile space, particularly smart devices and smartphones, is currently characterized by uneven growth and growing fears that the market could be close to hitting a plateau sooner rather than later. Depending on the geography and type of market (developed or emerging), low-end devices are generally in greater demand than higher-end devices. Gartner had earlier estimated that smartphone shipments would grow to about 1.7 billion units by 2017, an announcement that tempered the wild optimism by investors regarding growth in the smartphone market segment. Qualcomm's (NASDAQ:QCOM) blistering revenue growth, therefore, came as a pleasant surprise to many investors who had braced themselves for less-than-ringing results from the giant chipmaker.
Qualcomm has emerged as one of the brighter spots in the sea of mobile uncertainty, the company having clearly demonstrated in the third-quarter, beyond a shadow of doubt, that there still exists plenty of upside potential in the smartphone market. Qualcomm's management is upbeat that smartphone users in emerging markets will eventually transition to higher-end devices.
Qualcomm recorded strong revenue growth in the quarter - 35% Y-o-Y (Year-on-Year). The robust growth was mainly driven by Qualcomm's CDMA (mobile hardware) division which shot up an amazing 47% Y-o-Y. The Technology License division grew 17%. Perhaps the best part of Qualcomm's fairytale story is that the company's hardware division, a segment that represents Qualcomm's net revenue, recorded the most growth.
The only weak spot in Qualcomm's otherwise outstanding quarter report was the 40.75% growth in operating costs. The increase was attributed by Qualcomm's management team to the company's shift to lower-margin system-on-chips for devices targeted at emerging market economies. Non-GAAP EPS for the quarter came in at $1.03, representing a respectable 21% growth Y-o-Y. This met analysts' expectations, meaning that although the EPS didn't surprise, neither did it disappoint, and that's good enough at this point.
Continued mobile evolution responsible for Qualcomm's strong revenue growth
Qualcomm has the continuing mobile evolution to thank for its sterling growth in revenue. The giant chipmaker supplies chips for bellwether mobile companies such as Apple, Inc. (NASDAQ:AAPL) and the Android platform. Qualcomm's huge growth in revenue was fueled by a strong demand for smartphone chips, and, consequently, helped quell fears that the smartphone market was very close to maxing out.
Apple's third-quarter results showed that the company sold more iPhones than Wall Street's expectations. Samsung Electronics Co (OTC:SSNLF) the world's largest smartphone-maker, had earlier added more fuel to the dwindling smartphone sales debate, when it issued disappointing earnings forecast. Investors had punished the company for failing to match its blistering 46% Y-o-Y growth and also for failing to meet its earnings guidance. Samsung has already launched products that cover low, middle and higher price points, leaving little pent up growth potential. It was therefore unrealistic to expect the company to sustain that kind of growth. Investors should give Samsung a much-deserved break - expect the company's revenue and earning's growth to be somewhere around the mid-teens in the coming quarter.
Asian market still has plenty of upside potential
Qualcomm expects the growing demand for its products to be mainly driven by robust demand in Asia and emerging economies. The company also expects that smartphone replacement rates in developed economies will fall only marginally, thanks to the incentives offered to subscribers by their carriers.
Qualcomm reported that the average selling prices for smartphones in both developed and emerging economies were on the up and up ( average selling prices for high-end devices is expected to grow from $219 in 2012 to $229 in 2013).
The rapid shift by network operators to Long-Term Evolution (LTE) technology, a high-speed wireless technology where Qualcomm commands the lead, is expected to provide even more lift for the company in the coming years.
Google (NASDAQ:GOOG) recently reported that it plans to use Qualcomm's Snapdragon processor in its latest high-profile Nexus 7 tablet. Of course this is good news for Qualcomm's bottom-line and its investors.
Intel Corp (NASDAQ:INTC) is Qualcomm's biggest competitor. The company's mobile push is finally showing signs of life after a stuttering start and spending many years in the doldrums. Qualcomm also faces quite a bit of competition from several small Asian chipmakers. The company's strong lead in LTE, however, is expected to help it beat Intel in the race to become the chief supplier of smartphone chips, and also help it to consolidate its position as the world's largest mobile phone chipmaker.
Qualcomm's management pointed out in its third-quarter report that despite the fact that Intel hasn't gained much market traction as yet, they are keeping a close eye on it and are fully aware of its capabilities - given an inch, it will grab a foot.
The Qualcomm-Alcatel Lucent Deal
Qualcomm recently reported that it will enter a joint venture with French communication equipment maker Alcatel-Lucent SA (ALU). Alcatel-Lucent's less-than-rosy financial position is well known to many investors. It is, therefore, only natural for them to wonder what Qualcomm could possibly gain from the partnership. The full details of the exact amount of funds each company will be sinking into the venture are not clear as yet; the two companies, however, have agreed to jointly invest $132 million in R&D to work extensively on small-cell technology. Small-cell technology places 3G, 4G and Wi-Fi networks in a shoe-box sized device thus allowing higher data capacity and increased signal strength in places where installing large towers is not feasible. The technology increases wireless data capabilities of high-traffic premises such as college campuses, shopping malls, or densely-populated city streets.
Contrary to what some investors seem to think, the small-cell project is not a lead balloon for Qualcomm. The joint venture will help Qualcomm move many steps ahead in small-cell technology, a field where the company lags behind. Indeed, Ian Ing, an analyst at Lazard Ltd, estimates that the deal will add anywhere from $0.08 to $0.29 per share in value at peak run-rate for Qualcomm's investors. Although the exact figures of how much each company will invest in the venture are not available, early estimates point to Qualcomm owning just 5%, or less, stake in the partnership. The concerns that Qualcomm made a bad move by entering into a joint venture with a company whose financial position is anything but secure are therefore largely unmerited.
Qualcomm certainly is executing, and its future outlook is a major source of optimism about the company. The macro-picture remains strong despite concerns of slowing growth, and this is heavily indicative for upstream manufacturers such as Qualcomm. The outlook for downstream OEMs, however, remains less predictable.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.