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What to Expect From Qualcomm for the Rest of 2012

Evan Niu
July 20, 2012

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.

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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