Repasted from TMF--
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Keeping Record
A record quarter. After two quarters of disappointing chipset results, “but what if's”, a cautious outlook, and mild yet somehow not totally convincing reassurances of “continued acceleration in WCDMA and 1xEVDO”, the company delivered a record quarter, by several measures, including the most important ones. Especially encouraging was the upbeat guidance, which is just what the doctor ordered in light of the recent irritating chicaneries by the Band of Six (aka. Bandix) in Europe.
The main conclusion from this quarter's results is that QCT (the chipset business) is back on track. We'll review those numbers in more detail later, but most significant for this quarterly number follower is that the margins for the chipset business are back up to a healthy 29%-- after flirting with barely 21% just two quarters ago. This is significant in several ways, because it signals strong pick up in the high end of the chipset market—WCDMA and EVDO, precisely the areas where the anticipated growth had been lagging the previous two quarters. And this does not seem to be a one-time blip, as the guidance for the next quarter (Q1 06) is especially encouraging in this regard. (QCT boss) Sanjay Jha is delivering on his promise, when he told us after the March quarter results were released that we'll start seeing results in the September quarter.
The other major positive element of the conference call is the manner in which the company leaders addressed the Bandix complaint. They dealt with it up front, almost immediately after showing the quarter's overall results—in the first five minutes, while everyone's head was still clear. They did not try to brush it aside, they addressed it head on, very professionally, and emphatically. They were not defensive, not combative, but they left no doubt as to who would prevail. They addressed each and every element of the complaint very convincingly in my opinion—and evidently in the opinion of the market, judging from the stock's price response.
I will attempt the usual review and discussion of the company's performance this past quarter, as reported in the earnings release (available, as always, at qualcomm.com ). I also listened carefully to the conference call—particularly important to get a sense of three things: (1) response to the Bandix complaint, (2) confidence expressed in tone of voice and clarity of answers with regard to guidance and projections, and (3) the kinds of concerns that analysis might have, judging from their questions and the tone in which they raise them.
Before getting into the numbers, one motivation for listening to the CC was to hear how new CEO Paul Jacobs is handling this part of the job—I was not thrilled with the “succession” process, and had some doubts that Paul could fill the shoes of a giant like the father. This CC has alleviated most of the concerns I had in this regard.
Guidance Update
Over the time I have been following this company, Qualcomm has characteristically been conservative with guidance. They rarely miss their mid-quarter updates; they rarely miss, period, and they rarely backpedal; they typically beat by a penny or two, or hit the high end of their range. Three quarters ago, I started tracking actual performance against previous-quarter company guidance, going back to Q1 03. Here are the updated tables.
First is the record for the next quarter guidance—sequential revenue growth, EPS, and MSM shipped for the quarter, against the guidance provided at earnings release time in the immediately preceding quarter. Note that the EPS results are excluding QSI (pro-forma).
While the improvement in actual performance is striking, albeit only slightly above the previously guided numbers, the company seems to be on a tear according to the new guidance for Q1 06. Let's look at tangibles—MSM chipsets shipped. The 40M just shipped this past quarter is a record, reflecting the initial effect of WCDMA demand, but the 46~48 Million chipsets guided for Q1 06 provide very tangible evidence of the traction that QCOM is gaining in WCDMA chipsets. This would be 15 to 20% increase sequentially in MSM chips shipped. It is notable that the number of quarterly chipsets shipped has more than doubled in less than two years.
In the CC, Sanjay was asked more than once about visibility into the next quarter, and whether there were any channel inventory issues. The answer was unequivocal—that he is very confident in the projections and was already close to achieving those goals.
Next Quarter
Revenues EPS MSM (mil. Chips)
(seq. % growth)
Q4 02 Guidance 15-22 0.35-0.38 25-27
Actual 27 0.42 29
Q1 03 Guidance -7 0.34-0.35 27
Actual -5 0.38 28
Q2 03 Guidance 27 (y-o-y) 0.30-0.31 23
Actual 24 0.33 23
Q3 03 Guidance 2-6(y-o-y) 0.27-0.29 19-21
Actual 4 0.29 20
Q4 03 Guidance 16-22 0.37-0.40 27-28
Actual Q1 04 39 0.51 32
Q1 04 Guidance 6-13 0.38-0.41 29-31
Actual Q2 04 6 0.53 32
Q2 04 Guidance 4-7 0.48-0.50 33-35
Actual Q3 04 9 0.57 35
Q3 04 Guidance 2-7 0.54-0.57 36-38
Actual Q4 04 2 0.58 39
Q4 04 Guidance 0 0.24-0.26 38-39
(note: split)
Actual Q1 05 1 0.28 39
Q1 05 Guidance 14-22(y-o-y) 0.25-0.27 35-37
Actual Q2 05 15 0.29 37
Q2 05 Guidance (-6)-1(y-o-y) 0.24-0.26 34-36
Actual Q3 05 2 0.28 36
Q3 05 Guidance 4-12(y-o-y) 0.29-0.31 38-40
Actual Q4 05 14 0.32 40
Q4 05 Guidance 20-27(y-o-y) 0.36-0.38 46-48
Actual Q1 06
Growth in MSM shipped, coupled with growing royalty stream from WCDMA, are expected to drive growth in revenue for the quarter by 20 to 27% year-on-year, a level we have not seen in a long string of quarters. Associated EPS is expected to grow 30~35% year-on-year, and 13~19% sequentially—
Turning to the guidance given for the fiscal year (again, EPS excluding QSI), below are the four quarterly guidance numbers given for a given fiscal year's results. Starting with the guidance given at the Q4 02 earnings release time for performance in fiscal 03 (revenues growth, EPS, handsets shipped in calendar year, and handset ASP), the sequentially updated guidance numbers for the same fiscal year are then compared to actual performance reported for the fiscal year. Note that the handset and ASP numbers are for the coming calendar year, as opposed to fiscal year (unlike the revenue and EPS numbers). The handset numbers are of course only for handsets on which the company collects royalties, i.e. CDMA and WCDMA.
Revenues EPS Handsets ASP
(seq. annual
% growth)
Q4 02 Guidance 19-23 1.15-1.20 100-105 -10%
Q1 03 Guidance 28-33 1.34-1.39 105-112 -10%
Q2 03 Guidance 30-33 1.38-1.41 103-110 -10%
Q3 03 Guidance 31-33 1.40-1.42 103-110 -5%
Actual 03 32 1.42 117 -2%
Q4 03 Guidance 5-9 1.37-1.43 131-136 -8%
Q1 04 Guidance 8-12 1.56-1.61 138-146 -7%
Q2 04 Guidance 26-29 1.93-1.98 152-160 0%
Q3 04 Guidance 33-35 2.15-2.18 161-168 5%
Actual 04 33 2.18 166 5%
Q4 04 Guidance 16-26 1.15-1.19 218-228 5%
(note: split)
Q1 05 Guidance 16-26 1.16-1.20 218-228 5%
Q2 05 Guidance 9-13 1.10-1.14 208-218 3%
Q3 05 Guidance 10-12 1.13-1.15 198-208 5%
Actual 05 13 1.16 200-205
Q4 05 Guidance 18-25 1.43-1.47 255-270 -2%
Handset numbers are those for which we had some back-pedaling in the preceding quarter (Q3 05); the year started with about 223 Million, but it looks like we're ending the year at about 203M (though these are still estimates, and will need to wait until after the holiday season for final numbers). The company had been too optimistic about take-up of WCDMA, though again we will only know this after December. Still, looking at the evolving EPS guidance from Q4 04 through Q3 05 for Fiscal 05, we find that the actual performance is within the original range, interim back-pedaling notwithstanding.
For the coming (calendar) year, the company predicts near 30% growth in handsets shipped. Predicted EPS growth for fiscal 06 is 25% (at the midpoint of the EPS guidance range). Given the strength evident on the chipset side of the business, I would consider this guidance to be conservative, and we may well see a replay of 03 and 04 where guidance kept inching up.
Non-marginal Chips
Quarterly QCT earnings and revenues are pasted below going back to the first quarter of fiscal 2000. This indeed was a record quarter for QCT revenues; the $1B quarterly mark is well in sight. However we have seen higher earnings, during the heydays of Don Shrock's tenure (early 03), when QCT margins had hit the 40% mark, before the big spending push on R&D to more effectively support WCDMA.
QCT
Revenues Earnings margin (%)
Q100 352,395 127,690 36
Q200 279,186 89,977 32
Q300 338,132 109,573 32
Q400 268,989 64,281 24
Q101 330,632 84,180 25
Q201 364,059 84,866 23
Q301 333,115 70,582 21
Q401 336,881 65,917 20
Q102 359,144 86,941 24
Q202 343,815 77,724 23
Q302 404,253 117,524 29
Q402 483,617 158,334 33
Q103 709,681 288,282 41
Q203 652,873 223,520 34
Q303 557,240 163,114 29
Q403 504,500 121,808 24
Q104 751,818 260,661 35
Q204 711,257 257,956 36
Q304 789,978 254,160 32
Q404 845,000 271,000 32
Q105 865,000 242,000 28
Q205 746,000 158,000 21
Q305 766,000 186,000 24
Q405 912,000 266,000 29
In previous conference calls, QCT boss Sanjay had indicated he was managing the unit to reach profitability levels of about 26%. It looks like he has met and exceeded this goal, as this quarter's performance shows. This is reassuring, suggesting that the mix is shifting back to the higher end—both WCDMA and EVDO.
This is further seen in the (crudely) estimated average selling price for chipsets, obtained by taking the ratio of QCT revenues to the number of chipsets shipped in that quarter, recognizing that it does not break down the numbers by type of chipset. The numbers are shown below for the current and previous three quarters, as well as Q1 04 and FY 04. After dipping to just about $20 in Q2 05, the increase seen in the preceding quarter has continued through Q4 05, and is back to $22.8, which is just about the level it had for FY04. Coupled with reflating margins, the profit per chip is up about 50% to 6.7 ($/unit).
Q104 FY 04 Q105 Q205 Q305 Q405
Number of chipsets shipped (in M) 32 137 39 37 36 40
Revenues (in 100M) 752 3111 865 746 766 912
Earnings (in 100M) 259 1049 242 158 166 266
Price/unit ($) 23.5 22.7 22.2 20.2 21.3 22.8
Profit/unit ($) 8.1 7.7 6.2 4.3 4.6 6.7
I have pasted as usual the three-quarter moving average for QCT revenues, smoothing out somewhat quarter to quarter variation. After the small sequential drops the past two quarters, the series had turned up again, though it is still not back up at the level reached in Q2 and Q1 05. It will take another quarter of solid numbers to get there.
Q300 323,238
Q400 295,436
Q101 312,584
Q201 321,227
Q301 342,602
Q401 344,685
Q102 343,047
Q202 346,613
Q302 369,071
Q402 410,562
Q103 532,517
Q203 615,390
Q303 639,931
Q403 571,538
Q104 604,519
Q204 655,858
Q304 751,018
Q404 782,078
Q105 833,326
Q205 818,667
Q305 792,333
Q405 808,000
In the CC, Sanjay indicated that profitability for Q1 06 would remain in line with the current quarter—confirming that the results of this past quarter are reflective of a continuing improvement process. He mentioned that the WCDMA portfolio of QCT now includes more than 30 handset manufacturers with 110 models. He singled out the success of LG and Samsung with Qualcomm WCDMA chipsets. He indicated that HSDPA will not become a factor until the second half of 06.
In summary, the recovery in the critical QCT business segment, after the concerns that surfaced around Q2 05, is now well underway, and the outlook looks very bright in the next few quarters in this regard. The anticipated ramp up in EVDO chipsets to power the growing competition among network carriers in the US for broadband wireless customers, as well as the growth in QCOM's market share in WCDMA appear to both be on track. With solid positioning in HSDPA, and what seems to be greater responsiveness to WCDMA industry needs, especially carriers in Europe, QCT will likely continue to deliver on all cylinders and exceed expectations.
Record Royalties
QTL revenues this past quarter were only three million dollars shy of the half-billion mark. This is nearly 25% year on year growth in the royalty stream, as continued evidence of the value of the company's intellectual property portfolio. And it all still converts to earnings at a 91% profitability ratio— a record quarter in both revenues and earnings.
QTL
Revenues Earnings margin (%)
Q100 183,845 168,890 92
Q200 157,197 139,968 89
Q300 161,301 139,440 86
Q400 165,568 147,466 89
Q101 186,824 174,139 93
Q201 225,646 206,663 92
Q301 180,129 152,890 85
Q401 189,340 172,102 91
Q102 210,803 188,688 90
Q202 193,955 171,535 88
Q302 198,853 174,450 88
Q402 243,481 221,500 91
Q103 255,423 229,409 90
Q203 260,110 236,192 91
Q303 242,479 218,363 90
Q403 242,184 212,657 88
Q104 353,421 324,673 92
Q204 390,257 361,591 93
Q304 436,449 398,187 91
Q404 402,000 362,000 90
Q105 400,000 358,000 90
Q205 493,000 448,000 91
Q305 448,000 407,000 91
Q405 497,000 451,000 91
The WCDMA effect is now a reality, and expectations are for accelerating adoption in the coming year. Coupled with EVDO momentum in the US, the outlook is as compelling as it has ever been in recent memory. And whereas QTL had carried a heavier burden in terms of the company's revenues and earning the past couple of quarters, this quarter's numbers are more in line with the historical ranges of about 25%~30% of revenues and 50%~60% of earnings. This is seen in the table below of the percentage of total revenues and earnings, respectively, accounted for by QTL. QTL revenues are still slightly above the 30% share, but will likely drop further next week as QCT revenues continue to increase, as projected by Sanjay.
QTL R QTL E
% of % of
Total Total
Q100 23.96 51.46
Q200 24.88 50.20
Q300 23.10 47.14
Q400 26.93 58.29
Q101 28.51 61.50
Q201 31.46 64.97
Q301 27.43 63.72
Q401 29.09 73.41
Q102 30.43 65.64
Q202 29.42 68.12
Q302 27.57 58.58
Q402 29.00 57.68
Q103 23.92 43.92
Q203 25.58 51.27
Q303 27.21 54.86
Q403 27.83 60.35
Q104 29.29 53.50
Q204 32.10 57.84
Q304 32.56 59.60
Q404 29.36 54.68
Q105 28.78 53.92
Q205 36.12 67.27
Q305 32.99 62.04
Q405 31.86 57.38
For completeness, I am including the 3-quarter moving average of QTL revenues, using the mixed series of “Old Method” values up until Q402 followed by “New Method” values thereafter.
Q300 167,448
Q400 161,355
Q101 171,231
Q201 192,679
Q301 197,533
Q401 198,372
Q102 193,424
Q202 198,033
Q302 201,204
Q402 212,096
Q103 224,778
Q203 251,827
Q303 258,000
Q403 256,000
Q104 262,667
Q204 294,667
Q304 359,333
Q404 394,000
Q105 408,000
Q205 432,333
Q305 447,000
Q405 479,333
This series has continued on a solid upward trend since Q4 03; it will continue to do so.
In the CC (and in the earnings release), we were told that WCDMA royalties now account for 41% of third party royalties; 443M (out of the total 497M) are from 3rd party licensees (the rest are presumably the initial license fees, pro-rated over the lifetime of the agreement). The WCDMA contribution was approximately 26 percent in the year ago quarter and approximately 36 percent reported in the prior quarter.
Another boost in QTL revenues is expected in fiscal 2006 because of the termination of royalty sharing obligations; this should contribute approximately $290 to $310 million to fiscal 2006 revenue, all converting to earnings at better than 91% rate.
Gentle QWI Trickle
The QWI (Wireless and Internet) division is still delivering reasonable numbers, though no particular signs of acceleration in that stream (still a trickle in the big picture). While earnings went up 75% sequentially, we're still talking about small numbers ($21M in earnings, on $170M in revenues). The profitability (at only 12%, a significant sequential improvement), still trails the rest of the company's segments. BREW is still not delivering strong returns in its own right, though it is undoubtedly an important part of the mix of services that Qualcomm offers its operators.
It was interesting to hear CEO Paul Jacobs state that “QCOM no longer just a CDMA company”. He referred particularly to the acquisition of Flarion, which is expected to increase the company's IP portfolio, and augment those that QCOM already had or was developing in OFDM. The CEO made sure to stress that the combined portfolio now encompasses all forms of OFDM, including Wi-Max (and then preceded to dismiss mobile Wi-Max as a competitor to EVDO).
It is certainly premature to assert that Qualcomm is no longer just a CDMA company. The performance numbers certainly would not suggest that. Perhaps what he was trying to say is that it is no longer a niche player in wireless, but a player in all of wireless. He referred several times to multi-mode, multi-network chips, to working with European operators since 2001 to help them optimize their networks. But it will be many years before anything that does not contain the letters CDMA is contributing significantly to the company's bottom line.
Other than the excitement of the Bandix complaint in Europe, which is not likely to have much short term impact on revenues, and is likely to be handled deftly but firmly by the company's leadership, all signs are that the company is very well positioned to profit handsomely from the growth of the 3G wireless market in all its forms. Even the market appears to agree.
Insights, reactions, and additional thoughts are welcome, as always.
BR |
