Qualcomm turned in a reasonably strong quarter to round off its fiscal 2013 year, but not one of its real barnstormers, as it missed Wall Street forecasts both on Q413 earnings and on its outlook for the current quarter. The main issue highlighted by the executives was a well-known one ‘ the falling average prices of mobile devices, especially smartphones ‘ which may have an impact on Qualcomm’s revenues and profits at a more rapid pace than expected, according to some analysts.
That just emphasizes the importance to the chip giant of expanding quickly into new revenue streams. It has made significant steps such as acquiring Atheros for an integrated Wi-Fi and home networking play, and pushed key platforms like Snapdragon into new, high growth segments like the internet of things. It is also more heavily invested than ever in software, in order to drive the future mobile experience and offer top-to-bottom stacks ‘ like Intel ‘ and forge close ties with software majors like Google and Microsoft.
Its latest moves are to intensify its focus on driving Snapdragon into the set-top box sector, and the acquisition of network-on-a-chip (NoC) specialist Arteris.
In fiscal Q413, Qualcomm beat Wall Street forecasts on revenues but not on earnings, and offered a lackluster outlook which depressed the market. The company’s net income was up 18% on the year-ago period, to $1.5bn or 86 cents per share, on revenue up 33% year-on-year to $6.48bn, while analysts had looked for $1.08 per share on $6.34bn. Operating profit was up 29% on the year-ago quarter, to $1.59bn. The company ended September with $29.4bn in cash and equivalents in the bank. For the full year, Qualcomm reported net income of $4.51 per share on revenue up 30% to $24.87bn.
CEO Paul Jacobs said in his statement: ‘I am very pleased with our record financial performance this year as we delivered revenues of $25bn, up 30% versus last year … Looking forward, we expect continued strong growth of 3G and 3G/4G multimode devices around the world, particularly in China with the anticipated launch of LTE.’
The company said it had made $60.2bn in total device sales during the quarter, up 29% year-on-year, and had shipped between 260m and 264m 3G/4G chips, with an average selling price of $227 to $233. For the full year, it estimates that it shipped between 1,017m and 1,033m 3G/4G units with an ASP range of $223 to $229. That equated to $231.2bn in device sales for the year, up 23%. As for its MSM modems, it shipped about 190m units in the quarter, up 35%, and 716m for the whole year.
Despite these strong indicators, Qualcomm was muted in its outlook for the current Q114 quarter, giving guidance of $6.3bn to $6.9bn in revenue, and an earnings drop to $1.10 to $1.20. Wall Street wanted $1.29 on $6.99bn. The chip giant expects full year revenue of $26bn to $27.5bn with earnings between $4.95 and $5.15 per share. However, Jacobs said he expects double-digit compound annual growth in revenue and earnings terms over the next five years.
Analysts are chiefly concerned about the downward trend in device prices, which could hit Qualcomm’s revenues and margins in 2014. COO Steve Mollenkopf highlighted the move to cheaper handsets, telling Bloomberg that demand for high end smartphones is still rising, but at a slower rate than that for low end models. ‘In the near term, we’re seeing a little bit of a downshift in terms of tier,’ he said. ‘In the second half we continue to see strong units and a little bit stronger mix.’
That mix needs increasingly to look beyond the smartphone. Qualcomm is eyeing set-top boxes as a key expansion area, as new generation TV services and media systems emerge. These will increasingly run operating systems designed for mobile devices and integrate closely with the kind of smartphones, tablets and home media products that run on Snapdragon and Atheros chips.
In September, the company announced a joint project with Technicolor to produce a new set-top box, known as Svelte (Stimulating Video Experience over LTE), featuring LTE technology, terrestrial broadcast and the Android OS. They refer to it as a portable media center built around the Qualcomm Snapdragon 600 processor, to drive TV services which are delivered over LTE.
However, this will be a tough battle. Qualcomm currently has virtually no presence in the STB processor segment, despite having talked about it for several years. Broadcom is the massive leader with almost 45% share, according to IHS iSuppli, followed by STMicro on 34%. All the other players have less than 7% share by revenue, which may offer the opportunity for Qualcomm to push into a fragmented and still-changing space. Intel is also looking towards this market, despite having only 1% current share, and it may even go as far as to launch its own TV services to support its long cherished ambition of controlling the whole home and multiscreen media experience. That battle is only just seeing the opening shots, but Qualcomm cannot afford to stay out of it, as its heartland mobile devices become an essential element of the overall multiscreen platform.
Jordan Selburn, senior principal analyst at IHS, told EETimes: “For several years now, the lucrative market for STB audiovisual processors has been dominated by Broadcom and STM. While a handful of vendors also competed, mostly with chips targeted at lower performance systems, the two powerhouses virtually owned the high end market. Now Qualcomm has entered the STB market, and the incumbent leaders will face a serious challenger that has its sights set on domination.”
That challenge revolves around the quad-core Snapdragon 600 MPQ8064, which supports HEVC coding of 1080p HD signals (though not yet the next generation Ultra-HD technology, which is only supported by Broadcom).
Another important priority for Qualcomm is to ensure it has full control of key technologies, especially those which could boost its main differentiator from its rivals, its massive IPR business. Since its other stand-out quality is its deep level of chip integration, it also needs to ensure it keeps ahead in the SoC field, packing more and more capabilities onto a single chip. The ‘network-on-chip’ interconnects on those chips are, therefore, increasingly significant to the ease of developing one-chip solutions, and keeping their cost and power low.
In this area, Qualcomm has acquired FlexNoc, a network-on-chip developed by Arteris, as well as the team of 43 France-based engineers which developed it. The rump of the start-up will still receive FlexNoc licences and updates from Qualcomm ‘ and the right to use and modify sourcecode – and will retain 23 staff to support existing customers, though it is unclear how it will take its own business forward now it has sold off its crown jewels.
Qualcomm gains full control of an important technology, and inject greater resources to compete with main rival Sonics. This will be important since Sonics recently sold a licence to ARM and forged a patent alliance with the company whose platforms and IPR dominate the mobile landscape even more than Qualcomm’s do (and of course, underpin Qualcomm’s). However, it is not clear why it did not acquire the whole firm, even though Arteris president Charles Janac insists the business is still viable. The larger company has already used FlexNoc in many of its chips for about three years, but Arteris has about 50 other customers.
The Arteris technology originated in a network processor architecture designed by a Paris team within Conexant, and when that group was laid off in 2001, the employees bought the rights to the technology and created their own company. It gained significant profile when Texas Instruments adopted its interconnects for OMAP4 and OMAP5, but TI’s decision to defocus on the mobile processor business may have helped push Arteris to seek new investment.