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Throughout much of last year, Qualcomm (NASDAQ: QCOM ) experienced supply constraints with its 28-nanonmeter chips, resulting in its inability to keep up with demand. Last quarter, these constraints finally became a nonissue and Qualcomm is back to business as usual. As a result, it went ahead and slightly raised full-year guidance last quarter.
A big driver of success during the quarter were Qualcomm's 3G/LTE chipsets, which have been largely unmatched in terms of the competition, having controlled 86% of the LTE modem market in 2012. In the years ahead, the company will face increased competition from experienced chip makers, which will not only threaten this line of its business but likely put pressure on its profit margins.
The LTE bandits
Broadcom (UNKNOWN: BRCM.DL ) is the most recent company to join the LTE bandwagon. Set to be released next year, Broadcom's LTE solution will have a 35% smaller footprint than rivals, offers speeds of up to 150 megabits per second, and will work with multiple frequency bands to support worldwide use. This chip is intended for the "highest-end" smartphone and tablet market, which to me sounds like Broadcom wants a bigger piece of Apple's (NASDAQ: AAPL ) business. Both the iPhone 5 and the 4G-enabled iPad utilize Qualcomm LTE chips.
NVIDIA's (NASDAQ: NVDA ) acquisition of Icera in 2011 allowed it to command a 1% market share in the LTE space last year. Naturally, it intends to grow this market share by developing an integrated chip that combines both the Tegra processor with an LTE modem. The company feels that growing Tegra into a "big business" will take successfully combining these two elements due to the fact that the "vast majority" of the mobile computing market will be focused on integrated chips. To date, NVIDIA has only shipped discrete LTE chips separate from the Tegra 3 processor and the company is expected to have an LTE-integrated Tegra 4 chip available sometime this year.
It won't be until next year that Intel (NASDAQ: INTC ) really gets going in the LTE market. The company has only begun ramping up its efforts, which so far has amounted to shipping single-mode and LTE basebands to its customers and has yet to ship a combined voice and data solution on the same chip. As far as a full-blown Atom-LTE integration is concerned, investors shouldn't expect anything out of Chipzilla for a couple of years. The reason I say this is because CEO Paul Otellini said during Intel's most recent conference call that only "high levels of [Atom-LTE] integration" will happen in 2014.
Yesterday, JP Morgan downgraded shares of Qualcomm, citing an expected decline of smartphone growth in 2014, coupled with the fact that the company generated a "windfall" as a result of easing 28-nanonmeter supply constraints. The firm also expects Qualcomm to potentially take a hit on its royalty business, which represented 56% of its operating profits last quarter. The driver behind this decline is that average selling devices for mobile phones are expected to decline, for which Qualcomm is often compensated . Given how smartphones only make up 25% of the worldwide mobile phone population, there is still plenty of opportunity for Qualcomm to make up for an ASP decline with volume.
Many steps ahead
The future of mobile computing is simple in concept but extremely challenging in practice. It takes shrinking and integrating nearly every element necessary for the computing experience and placing them all onto a single chip. The end result is that fewer components will be needed and, therefore, huge leaps in power efficiency can be achieved. In the context of integration, Qualcomm remains well ahead of the competition, and is the only major player that has successfully implemented an LTE modem directly onto a Snapdragon node. Not even Samsung, which operates its own foundry, has released an integrated an Exynos processor with an integrated LTE modem. If this is any indication, it goes to show you how difficult the process of integration is proving.
As far as discrete modems are concerned, consider what Qualcomm COO Steven Mollenkopf said during the company's most recent fiscal fourth quarter conference call:
Our industry-leading modem technology continues to be a tremendous differentiator for us. As modem complexity continues to increase with multimode and multiband requirements, we are well-positioned with a single solution that offers a true global modem, supporting all cellular modes including CDMA, WCDMA, TD-SCDMA and both LTE TDD and LTE FDD, as well as the approximately 40 related RF bands.
Broadcom's announced LTE modem does not support all of the cellular modes mentioned. Worldwide smartphone manufacturers looking to streamline production are going to go with the solution that's the most widely usable around the world. Qualcomm may still remain the leader of the pact in this regard.
Research firm Strategy Analytics estimatesLTE smartphone shipments will grow from 90.9 million units in 2012 to 275 million units this year. Over 200% year-over-year growth is likely to keep the competition at bay and allow for new players to enter the market without too much disruption. Couple this with the fact that the smartphone industry will continue to transition into fully integrated chip solutions, which could mitigate some of the risk associated with increased LTE competition. Not to mention, Qualcomm will still receive royalties for LTE modems from other companies, which was the majority driver of its profits last quarter. Considering all these factors, I think these headline threats should ultimately be taken as an opportunity to buy Qualcomm, which seems to offer the total package for chip investors.
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