The first half of 2012 is now in the rear view mirror, and Qualcomm (Nasdaq: QCOM ) is enjoying just modest gains for the year, after the second quarter took back all the gains from the first.
The biggest challenge that the mobile chip giant has faced over the past couple of quarters has been supply constraints related to 28-nanometer chip production at primary manufacturing partner Taiwan Semiconductor Manufacturing. These same supply constraints are also holding back other fabless chipmakers, notably including Qualcomm rival NVIDIA (Nasdaq: NVDA ) .
The bottlenecks are hitting different parts of each company’s businesses. Both Qualcomm’s newest generations of discrete baseband modems, as well as Snapdragon application processors, are built on 28-nanometer, so it’s getting hit twice. NVIDIA only uses 28-nanometer in its newest Kepler GPUs, while its quad-core Tegra 3 mobile chip is built on a larger 40-nanometer manufacturing process.
What’s done is done
Looking forward, Qualcomm doesn’t expect supply demand parity until 2013, although it’s working with additional chip manufacturers to cope with the shortages. Tapping United Microelectronics, Samsung, and others will help it meet some of the surging demand for its newest batch of chips.
One important reason why Qualcomm is going to need a bunch of baseband processors is its presumed win in Apple’s (Nasdaq: AAPL ) sixth-generation iPhone. This year’s iPhone model will be the biggest upgrade in years and is expected to see record-shattering upgrade activity. For example, Piper Jaffray’s Gene Munster estimates that Apple will sell at least 80 million units of the new model in fiscal 2013, so Qualcomm needs to ensure it has enough baseband modems to go around, on top of meeting demand for its popular Snapdragon processors.
The company is also looking forward to continued mobile adoption in China, which bodes well for Qualcomm’s licensing business. Adoption of 3G in the nation remains relatively low, and increased penetration translates into more royalty dollars to Qualcomm. Looking at the most recent monthly figures from May reported by the three largest wireless carriers in the region, China Mobile, China Unicom, and China Telecom, 3G penetration now sits at 16%, roughly double the 8% penetration last May. That’s a lot of 3G royalty upside, not to mention that Qualcomm will also likely win some chip spots in the actual smartphones themselves.
Show me the money
When it comes to the financials, Qualcomm just announced its full-year guidance along with its most recent earnings report. The company had to reduce its outlook for the year as a result of slower-than-expected royalty-bearing device shipments.
|Metric||Prior Guidance||Current Guidance|
|Fiscal 2012 Revenue||$18.7 billion to $19.7 billion||$18.7 billion to $19.1 billion|
|Fiscal 2012 EPS||$3.41 to $3.56||$3.41 to $3.47|
|Calendar 2012 3G/4G device shipments||885 million to 945 million||875 million go 935 million|
Source: SEC filing.
Management did say it expects to get a big boost in the December quarter, as new devices are launched for the holidays, also coinciding nicely with the expected launch of the next iPhone.
Forget Wintel, what about Wincomm?
Another big event for Qualcomm later this year is the launch of both of Microsoft’s (Nasdaq: MSFT ) next-generation operating systems, Windows RT and Windows Phone 8. Much like Windows Phone 7 before it, Qualcomm has again been selected as the exclusive chipset that the OS is compatible with, so all Windows Phone devices carry Snapdragons inside. Windows Phone sales, overall, are still lackluster, but it’s still nice to get such a vote of confidence from the software giant.
Windows RT is Microsoft’s big splash into ARM-processors, and Qualcomm is lined up as a launch partner. It will be among three primary chipmakers, along with NVIDIA and Texas Instruments, powering the first wave of Windows RT tablets.
Much of the tech sector is banking on Windows 8 and Windows RT to reinvigorate an otherwise stagnant PC market, including Microsoft itself. Intel (Nasdaq: INTC ) will be in the Windows 8 flavor that supports legacy x86 apps and the traditional desktop mode.
What to expect when you’re expecting significant product launches
In my mind, the two biggest events for Qualcomm for the rest of 2012 are the launch of the next iPhone, as well as Windows RT tablets. One is a shoe-in for blistering unit sales, while the other has enormous, yet unproven, opportunity for Qualcomm to enter the tablet market that it mostly has not participated in as of yet.
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