Is this really what investors have been waiting for? Qualcomm (Nasdaq: QCOM) released earnings yesterday, and the results were good, but nothing extraordinary. Still, the stock is pushing up sharply today, up nearly 8%. After numerous tech companies were slapped despite beating expectations on stellar quarters, the large jump in Qualcomm’s share price is surprising. I guess that’s all the more reason to stop trying to read the market’s mind and just buy great companies.
Qualcomm saw sales land at $2.71 billion, actually a 2% fall from last year’s results. Earnings per share edged up 7% past last year, but operating cash flow plunged 13%. The bigger headline is probably that the company turned back the tide on the decelerating average selling price (ASP) on mobile phones. Qualcomm collects a portion of the wholesale selling price, typically between 4%-5%, on every 3G mobile phone sold. The accelerating growth of Google’s (Nasdaq: GOOG) Android platform -- which is mostly on higher-end phones, more expensive phones -- is proving to be Qualcomm’s guardian angel.
There’s also stiff competition in Qualcomm’s chipset business. Shipments of CDMA phones have slowed, while WCDMA phone sales have raced ahead. Qualcomm controls the patents behind either technology, but its chipsets sales are generally better positioned on CDMA phones. Not that Qualcomm can’t compete in either technology, but head-to-head competition with competitors Broadcom (Nasdaq: BRCM) and Infineon is increasing.
That competition means more pricing pressure. Last quarter, Qualcomm saw a 10% annual increase in chipset shipments, but still faced a 26% tumble from last year’s pre-tax profit. Still, it’s worth noting that the worst may be over. Pricing appears to have improved, and chipset profits outpaced sales gains on a quarterly basis.
Part of what’s helping Qualcomm’s chipset business rebound is the company’s Snapdragon processor. Snapdragon combines the company’s expertise in chips that communicate with voice and data networks and an ARM (Nasdaq: ARMH) based processor on a single chip. As mobile devices shrink, manufacturers are looking for any way to save space and reduce power demands by integrating varying components. Qualcomm is up against Texas Instruments (NYSE: TXN) and NVIDIA (Nasdaq: NVDA) in the space, but has been scoring huge wins, especially in the Android space.
So, as colleague Eric Jhonsa pointed out last quarter, Qualcomm is becoming ever more tied to Android. The platform has provided not only key wins for Qualcomm’s chipsets, but is boosting the royalty fees it collects every month. For Qualcomm, the trick is slowing the bleeding on average selling prices while the smartphone boom spreads across the world and yields continuing volume gains.
Thanks to the Android, Qualcomm is pulling off that trick. However, with news of increasing Android activations leaking for months, we didn’t need last quarter’s results or guidance to know that Qualcomm’s fortunes were looking better.
