Qualcomm's ( QCOM ) leadership in mobile chips has helped the company report continuous top line as well as bottom line growth in the last few years, albeit at a declining rate. For fiscal 2014 (ended September 2014), Qualcomm reported a 6.6% and 17.0% annual growth in revenue and non-GAAP earnings respectively. Though the company continued to see growth in the QCT segment (Qualcomm CDMA Technologies), driven by the rising penetration of 3G and 3G/4G multimode devices around the world, its QTL (Qualcomm Technology Licensing) segment faced challenges in China. China is a major source of growth for Qualcomm's 3G/4G LTE chipsets. Qualcomm's licensing business in China is suffering on account of a dispute with Qualcomm licensees; certain licensees are under reporting shipments and other entities are shipping unlicensed devices in the region. The company is facing a governmental ( NRDC ) investigation for alleged monopolistic practices in China, in addition to ongoing regulatory investigations in the U.S. and Europe. (Read: Factors That Cast Uncertainty Around Qualcomm's China Operation )
While Qualcomm believes that the QTL revenue growth many be muted to some extent in fiscal 2015, it claims that the growth in global 3G/4G device demand remains strong, which along with new emerging opportunities is expected to drive its long-term growth. Though Qualcomm forecasts the global device ASP's to decline during fiscal 2015 at a faster pace than recent years, it still expects a reasonable growth in its 3G/4G device sales driven by very strong unit growth.
Gartner estimates that more than 8 billion smartphones will be sold over the next five year period, through calendar 2018. The installed base will reach approximately 4.4 billion, representing the largest technology platform on which to innovate and drive upgrade opportunities. Being the leader in mobile chips, Qualcomm is in a strong position to leverage this growth.
Our price estimate of $74 for Qualcomm is almost in line with the current market price.
Emerging Markets To Drive Growth In 3G/4G Device Shipment
In its Q4 2014 earnings call, Qualcomm admitted that the global demand for 3G/4G devices continues to grow at a very healthy pace, particularly in the emerging regions at mid and low price tiers. The broad availability of compelling devices at these price points is driving demand for, and the migration to, 3G/4G devices. The biggest opportunity for Qualcomm in China is China Mobile, which is transitioning from its TD-SCDMA standard to TD-LTE. In addition to China, Qualcomm claims to be seeing strength in its 3G portfolio in other markets such as Latin America.
For calendar year 2014, Qualcomm estimates global 3G/4G device shipment of 1.3 billion units, up approximately 20% year over year. Global 3G/4G devices include not only those devices reported to Qualcomm, but also estimates of unreported and unlicensed device sales, but excludes TD-SCDMA devices that do not implement LTE.
Several factors primarily related to Qualcomm's challenges in China are creating a divergence between Qualcomm's estimates of the global 3G/4G device and what is being reported to the company. According to Qualcomm, some of its Chinese licensees are under reporting sales and may continue to under report a portion of their 3G/4G device sales in the future. During Q4 2014, approximately 258 million 3G/4G devices were reported to Qualcomm. For calendar year 2014, the company estimates that the reported 3G/4G devices will be in the range of 1.04 billion to 1.13 billion units, which is approximately 215 million units below the global 3G/4G device estimate of approximately 1.3 billion units at the midpoint.
For 2015, Qualcomm forecasts global 3G/4G device shipments to be approximately 1.5 billion units, up approximately 15% year over year.
Qualcomm Expects ASP Decline To Accelerate In 2015 But Moderate Beyond That
In fiscal 2014, the Average Selling Price (ASPs) of 3G/4G devices reported to Qualcomm stood at $225, approximately 6% higher than it would have been if the full global 3G/4G device demand had been reported to it. The decline in 3G/4G device ASPs in fiscal 2014 was more than what the company had expected at the onset of the year, driven by accelerated migration from GSM and TD-SCDMA devices to low and mid-priced 3G/4G smartphones in emerging regions. Increasing competition at the premium and high tiers, along with an increased mix of lower-priced handsets in emerging regions, has put a downward pressure on device ASPs.
Qualcomm estimates the global 3G/4G ASP will decline by approximately 9% to 10% in fiscal 2015. Beyond fiscal 2015, the company expects to see the declines in the 3G/4G global ASP to moderate as the weighted impact of the factors that are driving the near term declines in ASPs ease, and users in emerging regions trade up in replacing their low tier devices.
As price elasticity drives strong unit growth at lower tiers, Qualcomm estimates the total dollar amount of global 3G device sales will have grown by approximately 10% in fiscal 2014, despite the approximate 6% ASP decline. The company forecast approximately 7% to 8% year-over-year growth of such sales in fiscal 2015. However, revenue per Mobile Station Modem ( MSM ) is expected to be down approximately 5% sequentially and 10% annually, on account of continuing pricing pressure, product mix, and increasing competitive dynamics.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap