(Qualcomm, Image Source)
According to Morningstar data, Qualcomm (QCOM, Financial) shares had a total return of 24.16% year-to-date. Meanwhile, its semiconductor group returned 17.5% and the broader S&P 500 provided 5.71%. This is quite an achievement whereby, in mid-February, Qualcomm shares were trading at about $42 a share, and seven months later at $60 a share for a capital appreciation of 39.5%, excluding any dividend payouts.
In mid-February, I was contemplating if Qualcomm would sink lower to less than $40 a share because of its international endeavors, which will be discussed later. Evidently, the overly conservative approach led to a miss in what could have been a fruitful return.
(Qualcomm Market Price, Google Finance)
Valuations
According to GuruFocus data, Qualcomm shares had a price-to-earnings ratio of 17.6 times (industry median of 21), price-to-book value of 2.9 times (industry median of 1.6) and price-to-sales ratio of 4 times (1.5 times). In addition, the company also had a trailing 12 month dividend yield of 3.3% with a payout ratio of 57%. Qualcomm also had a buyback ratio of 3.7%.
Earnings Report
On July 20, Qualcomm reported its fiscal third quarter earnings. On a year-on-year comparison, the semiconductor company reported a 4% change in its sales to $6 billion and a 22% change in its profits to $1.4 billion. As a result, Qualcomm shares were up 1.23% at market close.
(Qualcomm’s Q4 FY16 Business Outlook, Quarterly Filing)
In addition, Qualcomm also provided its guidance for its next quarter business operations. As shown in the image above, the company expects to further grow its business overall (including sales and profits).
(Qualcomm 5G, Company Website)
Qualcomm
Qualcomm was incorporated originally in California in 1985. The company then reincorporated in Delaware in 1991. In its filing, Qualcomm stated that it continues to lead the development and commercialization of a digital communication technology referred to as CDMA (1), OFDMA (2) family technologies, including LTE (3) and single-carrier FDMA (4) for cellular wireless communication applications.
The company owns significant intellectual property applicable to products that implement any version of CDMA and OFDMA in mobile communications products, including patents, patent applications and trade secrets. According to Qualcomm, the mobile communications industry generally recognizes that a company seeking to develop, manufacture and/or sell products that use CDMA and/or LTE standards will require a patent license from the company.
CDMA and OFDMA are two of the main technologies currently used in digital wireless communications networks.
Based on wireless connections, CDMA, OFDMA and TDMA (5) are the primary digital technologies currently used to transmit a wireless device user’s voice or data over radio waves using a public cellular wireless network.
Qualcomm develops, commercializes and owns substantial intellectual property in key technologies used in handsets and tablets that contribute to end-user demand.
Some of the company’s technologies are being commercialized as industry standards, such as certain audio and video codecs. There are also other technologies Qualcomm developed that are not related to any industry standards, such as operating systems, user interfaces, graphics and camera processing functionality, integrated circuit packaging techniques, sensors and sensor fusion algorithms and application processor architectures.
In addition, Qualcomm also designs, manufactures and have manufactured on our behalf and market products and services based on CDMA, OFDMA and other digital communications technologies. Qualcomm’s products consist of integrated circuits (also known as chips or chipsets) and system software used in mobile devices and in wireless networks.
Other products and services that Qualcomm sells include: integrated circuits for use in wired devices, particularly broadband gateway equipment, desktop computers and streaming media players, software products and 4 content and push-to-talk enablement services.
Qualcomm appears not to have any limitations in terms of growing its business. As long as there is growth in connectivity (6), growth in smartphone sales and innovation in its business (7).
In addition to the aforementioned wireless technologies (8), Qualcomm also does businesses in non-cellular technologies, such as wireless local area networks (9), Bluetooth and location positioning strategies (10). Qualcomm also had played a leading role in developing many of the other technologies used in cellular and certain consumer electronic devices and networks (11).
Qualcomm has three operating segments (12): QCT, QTL and QSI. In fiscal year 2015, QCT contributed 68%, or $17.2 billion, in total Qualcomm sales. QTL, meanwhile, added 31%, or $7.9 billion, and QSI at $4 million.
QCT (Qualcomm CDMA Technologies)
The QCT segment is a leading developer and supplier of integrated circuits and system software based on CDMA, OFDMA and other technologies for use in voice and data communications, networking, application processing, multimedia 8 and global positioning system products.
(Qualcomm Snapdragon, Company Website)
In the segment also is the Mobile Station Modem (MSM) integrated circuits: Mobile Data Modem, Qualcomm Single Chip and Qualcomm Snapdragon processors and LTE modems. These circuits perform the core baseband modem functionality in wireless devices providing voice and data communications, as well as multimedia applications and global positioning functions. Qualcomm’s Snapdragon (13) processors also provide advanced application and graphics processing capabilities.
(Qualcomm MSM Shipments, Annual and Quarterly Filings; *sum and average including guidance figures as of recent Q3 earnings release)
In fiscal year 2015, QCT shipped approximately 932 million MSM integrated circuits for wireless devices worldwide. Nonetheless, there is an observable slowdown in MSM shipments for fiscal year 2016.
According to Qualcomm, despite its significant position in the industry involving its QCT operations, its competitors can still develop advantages. QCT’s current competitors include, but are not limited to, companies such as Airoha Technology Corp. (ROCO:6526, Financial), Broadcom (BRCM, Financial), Ericsson, HiSilicon Technologies, Intel (INTC, Financial), Marvell Technology (MRVL, Financial), Maxim Integrated Products (MXIM, Financial), MediaTek , Microchip Technology Inc., Nvidia (NVDA, Financial), Realtek Semiconductor, Samsung Electronics (SSNLF, Financial) and Spreadtrum Communications (which is controlled by Tsinghua Group).
QTL (Qualcomm Technology Licensing)
Qualcomm’s QTL segment grants licenses or otherwise provides rights to use portions of the company’s intellectual property portfolio.
Qualcomm’s licensees manufacture wireless products, including mobile devices, other consumer devices (e.g., tablets and laptops), machine-to-machine devices (e.g., telematics devices, meter reading devices) and plug-in end user data modem cards. Royalties are generally based upon a percentage of the wholesale (i.e., licensee’s) selling price of complete licensed products.
According to Qualcomm, the vast majority of QTL revenues have been generated through its licensees’ sales of CDMA2000- and WCDMA-based products, such as feature phones and smartphones.
Since its founding, Qualcomm has focused heavily on technology development and innovation, giving it an extensive and leading intellectual property portfolio related to wireless technology. Qualcomm’s patent application is continually pursued around the world.
QSI (Qualcomm Strategic Initiatives)
Qualcomm’s QSI segment makes strategic investments that are focused on opening new or expanding opportunities for its technologies and supporting the design and introduction of new products and services, or enhancing existing products or services, for voice and data communications.
Strategic Realignment Plan
In the fourth quarter of 2015, Qualcomm announced a strategic realignment plan (14). The plan was designed to improve execution, enhance financial performance and drive profitable growth Ă‚ to create sustainable long-term value for stockholders. Qualcomm planned to reduce its annual costs by $7.3 billion and also decrease annual share-based compensation grants by approximately $300 million.
Geographical and Significant Customer Sales
In fiscal year 2015, Qualcomm had 53% or $13.4 billion of its total sales from customers and licensees based in China (including Hong Kong) and 16% and 13% from South Korea and Taiwan, respectively. In the same year, Samsung Electronics and Hon Hai Precision Industry Co. (TPE:2317) comprised more than 10% of Qualcomm’s consolidated sales.
Research and Development
(Qualcomm’s Research and Development Expenses, Tabulated from Morningstar Data)
Beginning its Strategic Realignment Plan, Qualcomm observable had reduced its fund allocation to research and development expenditures.
Legal Proceedings (15)
In February 2015, Qualcomm settled with an antitrust inquiry in China by paying $975 million. Qualcomm also agreed to modify some of its business practices. Qualcomm reached a resolution with the China National Development and Reform Commission (NDRC) regarding its investigation under the China’s Anti-Monopoly Law.
In December 2015, the European Commission, European Union antitrust authority, charged Qualcomm with illegally paying a major customer to exclusively use its chips and selling chips below cost to force a competitor, Icera Inc., out of the market.
According to the Wall Street Journal, Qualcomm could face fines of up to 10% of its global annual revenue, such as $2.5 billion for its fiscal year 2015 sales, for each charge and be forced to change its business practices.
Further, the U.S. Federal Trade Commission and South Korea’s antitrust agency also have pending investigations into Qualcomm’s patent licensing practices.
Qualcomm also received complaints from the following: Japan Fair Trade Commission (JFTC) with a hearing scheduled on Dec. 16, 2015; Korea Fair Trade Commission (KFTC), which Qualcomm stated that there had been no material developments during fiscal year 2015.
In addition, Qualcomm received investigation from the following: Korea Fair Trade Commission (KFTC) which is still ongoing,
Sales and Profits
Qualcomm’s first three quarters in 2016 revealed that the semiconductor company had -47.8% growth in its consolidated sales to $17.4 billion and -2.5% profit growth to $4.1 billion. Qualcomm suffered most in its licensing business, having -69% from the previous three quarters last year.
Despite Qualcomm’s big slump in sales, the company was able to deliver mildly negative profits secondary to its good reduction (-16.5%) in its business costs and expenses.
Cash, Debt and Book Value
As of June 26, Qualcomm had a total cash of $5.9 billion. The company also had a total debt $11.8 billion with a debt-to-equity ratio of 0.38. Qualcomm also had 18% ($5.7 billion) of its total assets in goodwill and intangibles. The semiconductor also had a book value of $30.6 billion.
Cash Flow
(Qualcomm Cash Flow Nine Months in FY 2016, FY Q3 Filing)
Qualcomm grew its cash flow operations in the first Q3 2016 compared to last year by 39%. The growth, observably, was derived from increased in Qualcomm’s working capital (such as inventories and payables).
Qualcomm also allocated $389 million in capital expenditures, a -52% year-on-year change. As a result, Qualcomm had grown its free cash flow by 63.9% to $4.9 billion. The company also reduced its debt by $5.9 billion, but took in $6.6 billion additional debt netting $748 million in debt intake.
Qualcomm also provided dividends and share repurchases in an amount of $5.9 billion, 120% of its free cash flow. In the past three years (FY 2013 to FY 2015), Qualcomm averaged 164% in net payouts (16) to its shareholders. Observably, the company paid 313% of its free cash flow as dividends and share repurchases.
Conclusion
Qualcomm demonstrates an outstanding technology company. Given its prowess in the vast amount of dealings and technology innovations, the company has been able not only to grow its business over time, but also improve human life experience through wireless connectivity, among other things.
Given its extensive intellectual and business dominance in the field of mobile technology, the semiconductor company, unfortunately, is and has been susceptible to different series of complaints and investigations worldwide.
No doubt that the company has been able to implement is recent strategic plan. This course of action resulted to impressive margin growth and profitability regardless of the difficulty the company experienced in its licensing business in recent times.
As of the moment, I would recommend for conservative investors observe how Qualcomm would be able to tackle its ongoing complaints and investigations, which can disturb its prowess in the technology field. I do hope Qualcomm would succeed in these endeavors and also once again grow its top line associated with the equipment and licensing businesses.
Notes
(1) Wikipedia: CDMA (Code Division Multiple Access) is a channel access method used by various radio communication technologies. CDMA is an example of multiple access, where several transmitters can send information simultaneously over a single communication channel.
CDMA is used as the access method in many mobile phone standards. The Qualcomm standard, IS-95, also called "cdmaOne", and its 3G evolution CDMA2000, are often simply referred to as "CDMA"', but UMTS, the 3G standard used by GSM carriers, also uses "wideband CDMA", or W-CDMA, as well as TD-CDMA and TD-SCDMA, as its radio technologies.
In addition, another Qualcomm standard, IS-2000, also known as CDMA2000, is used by several mobile phone companies, including the Globalstar satellite phone network
(2) Wikipedia: Orthogonal Frequency Division Multiple Access is a multi-user version of the popular orthogonal frequency-division multiplexing (OFDM) digital modulation scheme. Basically, OFDM allows simultaneous low data rate transmission from several users.
(3) Wikipedia: Long-Term Evolution (LTE) is a standard for high-speed wireless communication for mobile phones and data terminals.
(4) Wikipedia: Frequency division multiple access (FDMA) is a channel access method used in multiple-access protocols as a channelization protocol. FDMA gives users an individual allocation of one or several frequency bands, or channels. It is particularly commonplace in satellite communication.
(5) Wikipedia: Time division multiple access (TDMA) is a channel access method for shared medium networks. It allows several users to share the same frequency channel by dividing the signal into different time slots.
(6) Wireless connectivity.
(7) Annual filing: the proliferation of intelligently connected “things” (e.g., consumer electronics, appliances, automobiles and medical devices) is enabling new types of user experiences, as smartphones are able to interact with and control more of the things around us.
(8) Annual filing: TDMA-based, CDMA-based, OFDMA-based wireless technologies.
(9) Annual filing: Wireless local area networks (WLAN), such as Wi-Fi, link two or more nearby devices wirelessly and usually provide connectivity through an access point.
(10) Annual filing: Qualcomm was a key developer of the Assisted-GPS (A-GPS) positioning technology used in most cellular handsets today.
(11) Annual filing: graphics and display processing functionality; • video coding based on H.264 standards, which has already been deployed commercially, and its successor, H.265, or high-efficiency video codec, which will be deployed to support ultra-high definition (4K) video content; • audio coding, including for multimedia use and for voice/speech use (also known as Vocoding); • camera and camcorder functions; • system user and interface features; • security and content protection systems; • volatile (LP-DDR2, 3, 4) and non-volatile (eMMC) memory and related controllers; and • power management systems and batteries.
(12) Annual filing: QCT (Qualcomm CDMA Technologies), QTL (Qualcomm Technology Licensing), and QSI (Qualcomm Strategic Initiatives).
(13) Annual filing: each Qualcomm Snapdragon processor is a highly integrated, mobile optimized system on a chip incorporating our advanced technologies, including a Snapdragon modem for fast reliable mobile broadband connectivity, a high performance central processing unit (CPU), digital signal processor (DSP), graphics processing unit (GPU), image signal processor, multimedia subsystems, including high fidelity audio, high-definition video and advanced imaging capabilities, our hardware-based suite of Qualcomm Haven Security Solutions, and highly accurate location positioning engines.
(14) Annual filing. The core elements of Strategic Realignment Plan included (a) right-sizing cost structure; (b) reviewing alternatives to Qualcomm’s corporate and financial structure; (c) reaffirming its plan to return significant capital to stockholders; (d) adding new Directors with complementary skills while reducing the average tenure of its Board of Directors; (e) further aligning executive compensation with performance and stockholder return objectives; and (f) making disciplined investments in areas that build upon Qualcomm’s core technologies and capabilities and offer attractive growth opportunities and returns.
(15) Information as of annual filing, unless mentioned otherwise.
(16) Net payout: dividends plus share repurchases.
Disclosure: I do not have shares in any of the companies mentioned in this article.
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