Qualcomm (QCOM) announced a strong set of Q4 FY 2012 results on Wednesday. Revenue for the quarter increased 18% y-o-y and net profits soared 20% as continued strong demand for 3G/4G products worldwide drove both chipset sales as well as licensing revenues. Supply constraints at the 28-nanometer end eased through the quarter as the company ramped up supply at additional suppliers, helping it reaffirm its earlier guidance of being able to match 28nm demand with supply by the end of the December quarter. We expect the ramping up of 28nm supply, together with the holiday demand for new device launches such as the iPhone 5, the iPad mini and others, to help Qualcomm post a very strong next quarter.
Last quarter’s strong performance helps mitigate the supply chain concerns that have so far kept Qualcomm’s stock subdued this year. The fact that Qualcomm registered a 28% uptick in sales for the full FY 2012 despite not meeting demand underscores the fundamentals of the market it operates in. The company seems to be delivering on its 28nm supply ramp up and this should help it address the burgeoning future demand for mobile chipsets. In line with the strong performance, Qualcomm’s stock has shot up more than 7% in pre-market trading. We maintain our $69 price estimate for Qualcomm, about 11% ahead of the current market price.
Sustained high demand for mobile devices
Smartphones have shown significant growth in 2011, and we expect this to continue in 2012 as well. Despite economic uncertainties, a consumer shift towards smartphones continues to be strong. iPhone and Android based smartphones have registered incredibly high growth, helping the overall smartphone market expand by over 40% in Q2 2011. 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 increase its share of the global smartphone market by over 800 basis points to 26.5% by the end of 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 a steady stream of licensing revenues. (see Qualcomm Introduces Three New Entry-Level Chipsets To Target Emerging Markets)
We also expect Qualcomm to benefit from its longstanding association with Microsoft as the latter makes a reinvigorated two-pronged assault on the mobile landscape with the recently launched Windows 8 and Windows Phone 8. (see Qualcomm Readies Itself For Microsoft’s Mobile Foray) The growing adoption of mobile devices should help Qualcomm see its mobile chipsets, bolstered by its Atheros’ acquisition last year, gain increased traction.
28nm demand to remain high
As for the 28nm chipsets, we see the demand continue 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 as well. This is not only because of the 28nm manufacturing process but also the availability of an integrated radio on the chipset. Moreover, the integrated radio supports LTE which carriers in developed markets such as the U.S. are promoting widely. Two popular smartphones, HTC One X and Samsung Galaxy S III, which were launched in international markets with processors from rivals used Qualcomm’s Snapdragon S4 for the U.S. launch, primarily for the integrated LTE support. Competition is however slowly catching up with Nvidia’s and Samsung’s app processors recently achieving LTE compatibility, but Qualcomm still remains the benchmark with its LTE chipsets currently in the 3rd generation.
As Qualcomm adds more suppliers, the 28nm production process matures and the supply issues are overcome, Qualcomm should be able to leverage its stronger supply ecosystem to grow chipset revenues even better than earlier anticipated. Since 28nm chipsets are also costlier as compared to the other chipsets built on different manufacturing processes, it will also help chipset ASPs rise in the coming quarters.
We expect Qualcomm to continue to benefit from the diversified set of customers it has managed to woo, banking on its broad portfolio of Snapdragon chips that includes both integrated and standalone processors. A significant design win last year was when it added Apple to its broad customer base last year, replacing Infineon (now acquired by Intel) and becoming the exclusive baseband provider for both the iPhone and the iPad. Apple has since then migrated both the iDevices away from Infineon, with all the latest releases, including the iPhone 5 and the iPad mini, sporting Qualcomm’s basebands.
Disclosure: No positions.