How Qualcomm Benefits From Emerging Market Growth

Smartphones are taking off in emerging markets, and chipmaker Qualcomm is in a better position to benefit than its competitors.

Feb 2, 2014 at 1:00PM

The premium-smartphone market is nearly mature, which has left some investors worried about growth for chipset maker Qualcomm (NASDAQ:QCOM). But the company's latest earnings report and product lineup show the Qualcomm is setting itself up for growth in emerging smartphone markets.

In its fiscal Q1 2014 earnings report, Qualcomm posted revenue of $6.62 billion, up 10% year over year. Part of the earnings increase came from its chip sales, which were up 17% year over year despite a sequential 8% drop in average selling prices for chips. The drop in ASPs comes as emerging markets like China and India see more smartphone growth and Qualcomm has to sell cheaper chips to match the price points on the devices being sold. Qualcomm not only increased chip revenue, but also posted operating margins for its chip business, called QCT, at 19.6%.

It's chip margins, along with revenue, put Qualcomm off to a good start in 2014, especially when the company's outgoing CEO and chairman, Paul Jacobs, said back in November, "In fiscal 2014 we are facing some mix and demand factors which we currently expect will moderate our QCT growth."

That doesn't mean the company won't face continued price pressures because of emerging market growth, but Qualcomm is also adjusting its product lineup to address this.

An integrated processor for the masses
Just last month, the company introduced the Snapdragon 410, an integrated LTE 64-bit processor for devices priced at $150 or less. Qualcomm's device has several advantages over the competition. First, Qualcomm is a leader in integrated chips, and the Snapdragon 410 is no different. Though other chipmakers are adding baseband connectivity to their chips as well, Qualcomm's technology is still far ahead.

Qualcomm was one of the first chipset makers to ship an integrated 2G/3G/LTE chip that supports all bands and wireless standards, which the company calls "World Mode" -- and the Snapdragon 410 has it. This means as emerging markets build out their networks, Qualcomm's chip will be able to work on them. The company even addressed China specifically in the Snapdragoon 410 press release saying its chipsets are "poised to address the needs of consumers as 4G LTE begins to ramp in China." By 2015, LTE handsets are expected to account for 24.3% of all smartphones sold that year, which leaves Qualcomm and its 410 processor in a very good position in that market.

Foolish thoughts
Obviously, investors can't bet all of Qualcomm's 2014 growth on just one processor. The Snapdragon 410 is just part of Qualcomm's emerging-market strategy. Another is the company's strength in licensing revenue from 3G, 4G, and LTE technology. Qualcomm owns a massive amount of technology patents in these areas and has been able to benefit from smartphone growth across many markets because of it. In the most recent quarter, the company earned $1.9 billion from its patent licensing. As emerging markets build out their networks, Qualcomm will be able to collect licensing fees from new devices in these countries. As tech companies turn toward emerging market growth, Qualcomm's leadership in integrated chips, LTE baseband compatibility, and licensing revenue give it a strong advantage over the competition.

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