Qualcomm (QCOM) rode a wave of new devices to another market beating quarter.
Average selling prices, which shows investors whether OEM's like Apple or suppliers like Qualcomm have pricing power, held steady in the quarter as new 4G/LTE baseband chips helped improve mix.
Despite faster emerging markets growth, where older, less profit friendly chips are common, strong average selling prices helped Qualcomm deliver $0.89 FYQ4 EPS, beating analyst projections by $0.07 and marking the third time in the past four quarters the company has positively surprised.
Overall, revenue rose 18% from last year to $4.87 billion, $200 million more than Wall Street hoped.
Chips, chips and more chips.
Qualcomm chips are increasingly being deployed in high end devices, allowing it to capture a sizable stake of the fast growing mobile market.
Emerging markets are increasingly shifting to content friendly 3G, which helped Q3 global smartphone shipments increase 44% TO 173.7 million units, according to Canalys. Since Qualcomm supplies the market leaders, this shift has given Qualcomm a big boost.
Among those market leaders relying on Qualcomm chips is Samsung (OTC:SSNLF), the largest seller of smartphones last quarter, shipping 55.5 million phones and capturing 32% market share, up from 22.7% the prior year. Many of those phones, including the U.S. version of the top selling Galaxy S3, feature Qualcomm's Snapdragon S4 and Gobi multi mode basebands.
Qualcomm's Snapdragon S4 ("MSM8960"), which is the fastest Qualcomm launch to reach 100 million shipped, not only won slots at Samsung, but within the newly launched Droid RAZR M, Nokia (NOK) Lumia 920 and inside Sony's Xperia Ion and Play. Also, the Snapdragon S4 Pro, paired with Qualcomm's mulitmode LTE modem, is inside Google's (GOOG) new Nexus 4.
These wins helped fiscal 2012 total chip segment sales increase 37% to $12.1 billion, producing a 19% operating margin. The results came despite early year headwinds as demand outstripped 28 nanometer supply, forcing Qualcomm to take on additional costs to tape out chips for other foundries. It appears those troubles have been resolved, as the company shipped 590 million chipsets, 22% more than the prior year.
Importantly, revenue per mobile station modem ("MSM") rose 9% from last quarter as the mix tilted to 3G LTE.
In FY2013, the company believes multimode 3G/LTE shipments will increase faster than processors, helping to boost average revenue per MSM again. This suggests operating margins, which were 16%, could benefit.
But, it's not just chips helping drive Qualcomm revenue higher.
Qualcomm's license revenue, generated from technology allowing mobile devices to connect to networks, grew 16% in FYQ4 as total devices sold by licensees increased 19%.
Some 210-214 million units paying license fees were shipped in the June quarter, up 12% and reflecting higher average selling prices. Full fiscal year license revenue rose 17% to $6.3 billion, generating an 88% operating margin. For FY13, the company believes licensee shipments of 3G/4G will increase 14%, supporting further license growth.
Content and license growth offers investor tailwinds into 2013.
In the iPhone 5, Qualcomm provides the PM8018 power management IC, the MDM9615 LTE modem and the RTR8600 multimode receiver. In the iPad 3, Qualcomm supplies the RTR8600 for 3G/4G/LTE and the MDM9600 chipset. It also provides a power management IC, the PM8028 in the iPad.
Qualcomm's content in these high profile devices, as well as those mentioned earlier, positions it nicely for the holidays.
As a result, management expects sales of $23-24 billion, up 23%, and EPS of $4.12-$4.32, up 14%, in FY2013, above consensus estimates - suggesting more market friendly analyst upgrades.
Average selling prices for 3G/4G are expected to increase slightly to $212 to $226, thanks to the positive shift in mix.
This pricing strength and emerging market demand is expected to offset headwinds tied to a decline in guidance for developed market 3G/4G shipments by 15 million. Worldwide, the company held guidance steady at 905 million shipments, up 14% year-over-year.
Qualcomm may also find itself the beneficiary of future tablet design wins at Amazon (AMZN) and Barnes & Noble (BKS). Both companies will likely search for a new processor partner given Texas Instruments' (TXN) decision to abandon future mobile development, which I wrote about in September.
Given Qualcomm holds key slots in big sellers from Samsung, Apple, Sony and Google and shares are trading more than 10% below their 52 week high, investors may find themselves rewarded for buying shares ahead of the holidays.