Check out the latest Qualcomm earnings call transcript.
Qualcomm (NASDAQ:QCOM) has benefited greatly from the smartphone revolution through both its chip business -- known as Qualcomm CDMA Technologies (QCT) -- as well as its wireless technology licensing business.
These days, the smartphone market itself is no longer booming. In fact, according to market research company IDC, overall smartphone shipments are set to drop by 3% in 2018 "before returning to low single-digit growth in 2019 and through 2022." (Those estimates could also ultimately prove optimistic.)
Although Qualcomm is heavily levered to the relatively uninspiring smartphone market, the company is still making moves to try to outpace that market. Here are three ways the company is trying to do so.
Content growth in smartphones
Remember how Apple -- one of the world's top smartphone makers -- managed to post 18% iPhone revenue growth in fiscal 2018 even on flat unit shipments? That was the result of Apple getting paid more, on average, for each iPhone that it sold.
Qualcomm could benefit from a similar phenomenon in the smartphone chip market. The smartphone industry as a whole -- component suppliers, device makers, and wireless carriers -- are all working to enable the imminent transition to the 5G wireless standard.
During Qualcomm's most recent earnings call, the head of QCT, Cristiano Amon, said that with respect to 5G, "we expect 5G to be a significant expansion, even on existing units, both in revenue and earnings for QCT, but also to be an expansion of share."
We'll get to the second part about share shortly, but the first item is worth focusing on.
Here's more from Amon:
One is we have a lot more content in the device. Besides the performance of a premium-tier application processor and the 5G modem, we also have high traction on the RF front-end design, including the incremental value you get from millimeter wave modules, which is going to be very important. Certain markets, for example, the United States, will require millimeter wave.
Don't worry if some of these technical terms flew right over your head. The key things to note from Amon's commentary are the following:
- 5G-enabled smartphones will require more powerful applications processors and cellular modems than their 4G counterparts, allowing Qualcomm to sell pricier, more feature-packed chips.
- 5G smartphones will require more sophisticated radio frequency (RF) front ends. What Amon is saying here is that Qualcomm benefits from the fact that its own RF front-end chips are gaining traction and that the RF front ends of 5G smartphones will need to be more complex (e.g., they require more chips), which should drive up the dollar content of those 5G-capable RF front ends, boosting Qualcomm's business.
So, in a nutshell, the transition to 5G smartphones (a transition that'll happen in premium smartphones first but should percolate down to high-end, then mid-range, and then finally low-end smartphones over time) should help Qualcomm's chip business grow.
The market share comment
In addition to a dollar content boost as a result of the 5G transition, Amon also indicated that the move to 5G could help Qualcomm boost its market share in the applications processor market. The executive didn't dive too deeply into that, but the general idea probably goes something like this: Since fewer companies are likely to be able to develop competitive 5G modem solutions than were able to build 4G solutions, and since Qualcomm seems to be in the pole position with respect to the development of 5G modems, more smartphone makers will choose Qualcomm chips than they had during the 4G generation.
Time will tell whether that hypothesis plays out. After all, Huawei, Samsung (NASDAQOTH: SSNLF) (which is both a customer of and a competitor to Qualcomm in the smartphone chip market), MediaTek, and Intel (NASDAQ:INTC) have each talked up their respective 5G cellular solutions. However, this is something that investors should keep an eye on as a potential growth catalyst for Qualcomm.
Qualcomm has been trying to diversify its chip business beyond smartphone applications processors. Some of those efforts -- such as the company's failed bid to go after the data center CPU market -- haven't worked out. However, from a bigger picture perspective, Qualcomm's diversification efforts have been working.
For example, the company is making a serious push into RF front-end chips and appears to be succeeding here. On the company's last earnings call, CEO Steve Mollenkopf said this about the performance of its RF front-end efforts during fiscal 2018: "In fiscal 2018, our non-Apple RF front-end revenue nearly doubled year over year, reflecting the full-year impact of the TDK acquisition and revenue growth across all key OEMs, leveraging one of the broadest portfolios of RF front-end products in the industry."
The executive added that "given our strong design win pipeline, we expect to grow RF front-end revenues by [a] double-digit percentage in fiscal 2019." That's not all, though. The executive also explained that its order pipeline in the automotive space has ballooned to $5 billion, "up from $3 billion earlier this year."
While smartphone applications processors still represent QCT's bread and butter, the company is smart to try to pursue other opportunities, particularly as overall smartphone growth cools.