CC Summary - As usual, my disclaimers: I am not a stenographer so there may be some mistakes; hopefully they are small. Also, I did not include anything that is old knowledge (e.g. things in the press release, or discussed in previous CC and that would not be expected to change.)
1) Component shortages: Component shortages are occurring sporadically in many different components and are not limited to Qualcomm. Sulpizio, who was on the CC from Japan, said that he was asked by some ASIC customers if he could help with some of their shortages. As for next quarter, they expect the component shortages to perhaps limit the upside, but they still expect to meet the nominal plans for growth (they are now at 850K phones per month which is sizable growth from this last Q.) Component shortages are expected to continue possibly for the next 3 to 6 months. Finally note that one analyst commented on known shortages of SAW Filters and displays, but Qualcomm reiterated that the shortage problem was not limited to any particular components. (Note that an analyst asked an astute question - why did component shortages limit your phone production this Q, but not limit your ASIC customers. Is this an indication that your customers are building ASIC inventory or is your component supply not as good. The answer was that although Q! has limited visibility, they see no evidence of ASIC inventory buildup.)
2) Royalty growth next Q: Thornley said that although he doesn't yet have all the info in for Q3 royalties, he has no reason not to expect growth to continue sequentially as it did Q3/Q2.
3) Margins - Expect margins on handsets to continue to climb next quarter, even with component shortages. However, they may not make their plan of 10% operating margin on handsets due to the shortages. Expect ASIC margins to plateau. Finally, when asked whether phones would make a profit if Q! bought their own ASICs, they said they did not know. (This is Maurice's question, and it is a good one IMO. I always assumed that they had higher operating margins than they apparently do (I assumed perhaps 13%). Although handset sales are improving significantly and there are strategic reasons for manufacturing handsets, it really should be known what their real net margins are.) Finally, one reason for the recent improvement in margin is that sales to Sony (via QPE I presume) had lower margins, and as that draws to a close, handset margins improve.
4) Run rate earnings: As they answered repeatedly, 0.86 is the run rate that should be assumed as a baseline for next year's earnings. However, they gave no estimate of expected growth. (They did laugh at one point when they said this, but only because it was the third or fourth time an analyst had asked in 3 or 4 questions. It was humorous that the analysts just couldn't seem to believe that they had heard correctly.)
5) Book to bill: ASIC BtB was 1.2, and the impression was that that was in units. Thornley commented that the expected delivery of these bookings is 1Q, (i.e. expect 13M ASICs to ship next Q), but that there will be price erosion at least in part because of volume discounts. But the overall price erosion vs increased units should be no different that it was for Q3 vs Q2.
6) Phone ASP - A little over $200.
7) New chips - Expect that with the introduction of data in Japan by the end of the year that Qualcomm has an opportunity to take the one or two non-Q Japanese ASIC users. The competitors are behind on data capability (I'm not sure I heard this correctly). Qualcomm is also working on CDMA data ASICs for use in cars and other applicances ( Speculation - for maps, emergency help, ...)
8) Tax rate: Was 35% this year, may increase next year.
9) Revenue growth: For combination of ASICs, phones and Omnitracs the revenue growth of Q/Q-Y was 49%!
10) Contract services: Was $86M this Q. Should decline as G* comes on line.
11) Globalstar: Qualcomm turned converted some G* receivables into a finance receivables (i.e. a loan).
All in all, a pretty good quarter. Certainly the margin improvements were better than I expected. Of course there are always things to work on (component shortages, true handset margins, ...), but overall better than I had expected both now and looking forward.
Clark |
