Source: Qualcomm.
Chip designer Qualcomm (QCOM 1.41%) recently announced that it will be partnering with TDK Corp. (TTDKY 0.89%) in a joint venture to develop radio frequency (RF) front-end modules and filters. The endeavor isn't expected to be ready to roll until early 2017, but it shows that Qualcomm is looking toward the future and more growth opportunities.
Just the facts, ma'am
Qualcomm is known for its main processing chipsets in today's smartphones, as well as baseband modems in devices such as the iPhone. Now it's looking to get into more radio-frequency chips and filters -- the parts that tune in a device to a certain frequency to communicate or send data.
It therefore makes sense that Qualcomm would team up with TDK, which specializes in filters. The new joint venture will be called RF360 Holdings. Qualcomm will own 51% and have an option to purchase the remaining portion 30 months after closing the deal, which is expected early next year. The joint venture will have roughly 4,200 staff and initially $1 billion in revenue per year, according to the companies. The aggregate transaction could cost Qualcomm $3 billion over the first three years. That includes buying out TDK's portion.
What does this mean for Qualcomm's prospects?
As revenue has been slowing for Qualcomm because of slower smartphone chip and royalty growth, it's welcome news that Qualcomm management isn't resting on its laurels, but instead looking for the next growth area. Getting into the RF business will allow Qualcomm not only to offer a complete end-to-end solution, but it could also open it up to a higher growth market, as well as relieve the company from being too dependent on smartphones.
For example, Cristiano Amon, president of Qualcomm’s chip business, noted in a Wall Street Journal article that some smartphones already have 49 different filters embedded and predicted that this number could go as high as 100 filters by 2020. So while smartphones will probably continue to have only one main processing chip per phone, the number of filters will keep rising.
Also, RF filters are not only in smartphones. Anything that needs to tune in particular frequencies to communicate needs them. The list could include drones, robotics, and automotive applications. Therefore, the RF addition moves Qualcomm further into the Internet of Things megatrend. The RF front-end market alone is expected to be an $18 billion opportunity by 2020, according to Qualcomm, with filters as the main driver.
The deal isn't expected to close until early 2017. Once it does, it's expected to be accretive to non-GAAP earnings within the first 12 months. A lot can happen in the tech space in just one year, so the news isn't a major event quite yet. Nevertheless, the stock did add a few percentage points on the announcement, indicating that investors like the prospects.
Competitively, the addition will put Qualcomm against other RF and filter manufacturers. This list includes Avago Technologies Ltd. (AVGO 0.61%), which in turn is set to close its acquisition of Broadcom Corp. (NASDAQ: BRCM) in February. Qualcomm also confirmed that it will sell discrete RF front-end modules, pitting it against Skyworks Solutions (SWKS 1.83%) and Qorvo (QRVO 0.04%).
Overall, this is some welcome news for long-term holders of Qualcomm, but investors should continue to monitor whether Qualcomm will be able to pull it off and what the competitive landscape will look like a year from now. Investors will also have to be patient, but at least they can collect a nice dividend, currently yielding over 4%, while they wait.
