There are a lot of things to like about Qualcomm (NASDAQ: QCOM ) . The company leads to the pack in mobile chipsets, has a patent treasure trove, and receives royalties off of millions of mobile devices around the world. But when Qualcomm posted its earnings release last week some investors were particularly concerned with one thing -- increased spending.
But should investors really be concerned with how Qualcomm is spending its money?
Spending money, and making money
For Qualcomm's Q2 2013, revenue was up 24% year over year, which was a record fiscal second quarter for the company. But despite the increase, some investors and analysts were more focused on the company's spending increase 21% from a year ago, and 11% sequentially. On top of that, the company expects spending to increase by up to 4% in the third quarter.
The spending comes at a time when prices for mobile devices are expect to drop. Chip maker NVIDIA (NASDAQ: NVDA ) , one of Qualcomm's top rivals, has already helped drive down the cost of LTE phones. The quad-core Tegra 4i processor is NVIDIA's first processor with an integrated LTE modem, and it'll soon find its home in phones under $200. The drop in LTE devices is happening a bit earlier than the industry expected and it has a direct impact on Qualcomm's patent royalties.
If LTE devices drop, then devices with 3G and 4G capabilities are likely to go down as well, since the technology is older. This means that Qualcomm's 3%-5% royalty from every CDMA device and other royalties from 4G and LTE devices could potentially bring in fewer dollars than before.
According to a Computerworld article, mid-range LTE devices are expected to come in around $200 this year, with low-end LTE hitting the market as early as 2014. This is lower than Qualcomm's estimates for 3G and 4G devices, which it says will be between $216 and $224 this year -- relatively unchanged from last year.
But despite the price drop for some mobile devices, Qualcomm will still receive royalties off of the growing 3G industry for the next decade. Even as cheaper phones make up the majority of smartphone growth in emerging markets, Qualcomm's 80% operating margin on its royalty business will still bring in substantial revenue for years to come.
On top of this, Qualcomm is still one of the top chipset makers. The company's chips can be found in Apple's iPhones, the U.S. version of the Samsung Galaxy S4, BlackBerry devices, and Nokia phones. Qualcomm stock investors concerned with the company's spending increase should consider both the Qualcomm's royalty revenue and its client diversification in the mobile device market. Many in the mobile space would envy such a position.
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