Qualcomm's (NASDAQ:QCOM) recent earnings report, at first, shook a lot of people (this Fool included). The full year revenue guide for fiscal year 2014 was well below consensus, and while the earnings per share guidance was strong (implying improved operating margin), a good portion of this is attributed to the fact that Qualcomm is committing to (and baking into its forecasts) at least $4 billion in share repurchases (which lowers share count and boosts EPS). That being said, the next and likely final catalyst for Qualcomm's shares is coming up on Nov. 20 when the company's management presents at its analyst meeting.
What to expect?
Qualcomm's CEO set some pretty bold goals at the recent call, claiming that the company would be able to grow its top and bottom lines at a double-digit percentage CAGR over the next five years. While robust growth has characterized the company's top line over the last several years largely due to the boom in smartphone sales (Qualcomm benefits both as a silicon provider and as a major wireless IP holder), the party in the high-end handset space is slowing down.
The major growth drivers for Qualcomm going forward appear to be in a couple of major buckets:
1. Increased content share in handsets/tablets
2. Attempting to ride the growth of, and take share in, the low end of the handset market
3. Expanding its silicon reach into areas beyond handsets/tablets
At the analyst meeting, it is likely that management will significantly play up the company's efforts in each of these markets. So, what can investors expect?
Mobile content increase likely to come from connectivity and integration
There are plenty of chips that go into a mobile device. While the apps processor (and in the case of a phone) the modem, is important, there are plenty of other chips that go into these devices. For example, Qualcomm is probably going to talk about how it will attempt to grow its share in connectivity at Broadcom's (NASDAQ: BRCM) expense.
Interestingly enough, Broadcom's connectivity share has held pretty steadily despite challengers like Qualcomm really stepping up to the plate. Ripping away sockets from Broadcom will be tough, and achieving technological leadership to do so will be even tougher, but Qualcomm will certainly make a pass at it. The biggest hurdle here is that despite the fact that Qualcomm's market capitalization is nearly ten times that of Broadcom's, Broadcom spends about half of what Qualcomm does on R&D-much of that on connectivity. It will be interesting to see Qualcomm's management outline its strategy here.
The low end of the market is all about designing for cost
While the high end of the smartphone market is saturated, the low end is still ripe for unit (and revenue) growth. Qualcomm has all of the key ingredients to build system-on-chip designs for any mobile segment, but as with any engineering endeavor, optimizing for the correct design points and making the right trade-offs is as much an art as it is a science. Qualcomm noted on its recent earnings call that it would be designing its next generation low end parts to be more cost-optimized. Investors should hope for some more details, particularly on what sort of gross margin expansion the company expects to see from these efforts.
Boldly going where Qualcomm hasn't gone before
Obviously Qualcomm's chip expertise (CPU, graphics, memory controller, and integration of it all) is very useful in markets outside of the mobile system-on-chip market (although very few are as lucrative or high growth). It's likely that the company will talk up potential aspirations to expand into one or more of the following markets:
- Automotive/in-vehicle infotainment
- Set-top box
- Micro-servers/communications infrastructure
- Internet of Things/wearables
These are all markets that could use precisely the kind of skills and IP that Qualcomm has in house. For example, NVIDIA claims that its backlog for its automotive/in-vehicle infotainment products is rather robust and Intel, too, cites embedded systems as a whole as a major growth driver (up in the double digits year over year in the most recent quarter). Micro-servers, too, require chips that are very similar to what a high end mobile system-on-chip looks like. Finally, set-top boxes – which require SoCs with strong CPUs, GPUs, and other IP blocks – could be an area of expansion, although Qualcomm would face stiff competition from Broadcom and ST-Micro.
The nice thing, though, is that Qualcomm can expand into these markets with fairly minimal risk as most of the R&D for most of the individual IP blocks is already developed and paid for – all that's left is to develop/license the remaining IP and to integrate it. Easier said than done, but Qualcomm's track record is excellent.
Foolish bottom line
While Qualcomm's stock initially took a beating on its earnings report, it's clear that investors don't want to miss the upcoming analyst meeting. While the speculation above seems sound, it will still be very interesting to see what Qualcomm actually reveals and how Wall Street digests it.