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Wednesday February 22, 2012
S&P calls on Qualcomm
by James Moorman, S&P Capital IQ Equity Analyst, S&P The Outlook  S&P Capital IQ recently reiterated our Buy opinion on shares of Qualcomm (QCOM), which designs and licenses technology used in mobile handsets. The company reported a very strong December quarter and stands to gain as more customers move to third generation ‘3G’ mobile networks, especially in emerging markets. We also believe QCOM stands to benefit from growth in China, in the chipset business as well as on the licensing end, as service providers migrate subscribers to 3G. We believe QCOM has established a strong brand with the Snapdragon line of products and will see solid growth at the higher end with the S4 products and at the mass level with the S1 family. We also believe the well accepted 8960 MSM line will record new design wins as major vendors announce new LTE (Long Term Evolution/4 G) handsets throughout 2012. QCOM’s revenue for the December quarter exceeded our esti- mate by 1.5% and earnings per share beat our estimate by 6.5%. Results were strong across the board; revenue from its Qualcomm CDMA Technologies (chipset) segment exceeded our forecast by 2.2%, driven by sales of 156 million MSM chipsets. The Qualcomm Technology Licensing (licensing) seg- ment also had a strong quarter, with revenue exceeding our estimate by 2.6%, based on September quarter sales at a midpoint of roughly 193 million handsets at an ASP midpoint of $215. The company also increased its fiscal 2012 (ending in September) revenue forecast at the midpoint by 3.8% and its non-GAAP EPS forecast by 3.7%. We expect a very strong fiscal 2012 for QCOM, due to increased traction with its S4 chipset family, and the 8960 MSM chipset in particular. We also expect strong growth in 3G/4G handsets in emerging markets that will benefit the QTL business. QCOM’s chipset segment posted a strong quarter, and we believe it is taking share. The company sold 156 million chipsets, boosted by new products. Snapdragon shipments were up over 120% in the quarter year over year. We believe Snapdragon chips are in 340 announced new devices and an additional 400 currently in design. We believe the 8960 MSM in the S4 family is seeing strong demand and will be a staple in the higher-end chipset family. We believe QCOM is also seeing strong traction with its lower-end S1 products for the lower-priced smartphone segment, a key, in our view, to penetrating China and other emerging markets. Management noted that shipments to developing accounts in China were up over 10-fold from the prior year. We believe the S4 8960 MSM could benefit later this year from the launch of Windows 8. Additionally, the company could make new chipset announcements at the Mobile World Congress in Barcelona at the end of February. The QTL licensing segment is benefiting from the global migration from 2G to 3G. We believe the company received license revenue in the December quarter based on device sales of $41.4 billion, comprised of a midpoint of 193 million devices shipped in the September quarter at a midpoint of $215 average selling price. QCOM estimates December quarter device sales of $47.5 billion to $51.5 billion. The company increased its 3G/4G device shipment forecast for calendar 2012 by roughly 10 million units at the midpoint to 910 million, or a range of 875 million to 945 million. We believe strong growth in China was the main driver for the increase, but the company is also seeing solid growth in Latin America and parts of the Middle East, Asia, and Africa. We believe lower average selling prices for smartphones will be a key to increased 3G penetration in emerging markets. Although this translates to lower license revenue per unit, we believe the increased penetration and surge in units will more than make up for this. QCOM could also benefit from a tax holiday on repatriation. The company ended the quarter with roughly $22 billion in cash and marketable securities, of which we believe $6.1 billion is onshore. QCOM paid out $461 million to shareholders, including cash dividends of $362 million, or $0.215 per share, and repurchased 2 million common shares for $99 million. We believe a U.S. tax holiday could provide a significant benefit to shareholders. Learn more about this financial newsletter at Standard & Poor's The Outlook. Related articles: 
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