When QUALCOMM reported first-quarter results recently, the semiconductor giant beat analyst targets but offered a glum full-year outlook. Following the weak guidance, shares in the tech giant plunged 13% lower over the following couple of days.
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The stock has largely bounced back from that temporary abyss, as investors started taking a longer-term view of Qualcomm's business prospects. In fact, one of the major drivers behind Qualcomm's recovery was discussed at length in the first-quarter earnings call, but still treated as news several weeks later.
Below, I'll walk you through the five most important revelations of that call, both positive and negative. I think you'll walk away with a better understanding of Qualcomm's place in the world.
The big, bad downer
This is the tidbit that hamstrung Qualcomm's shares when the news was fresh. Or, seen from a more constructive angle, gave patient investors a chance to pounce on a temporary discount.
The mystery device is widely assumed to be the Samsung Galaxy S6. This is a high-profile, high-volume smartphone from a hit series that tends to crush even Apple iPhones in terms of raw sales volumes. So, it's understandable that investors might get nervous about losing this important device win.
However, there's more to this story. For one, Samsung already uses its in-house Exynos chips instead of Snapdragons in many versions of its Galaxy smartphones. In fact, the fact that Galaxy phones made for the American market come with Snapdragon chips inside actually makes the U.S. stick out like a sore thumb in Samsung's chip adoption strategy.
And that's still not all. Let's get back to the earnings call.
Some Samsung Galaxy S5 handsets come with Qualcomm Snapdragon chips inside. But, most of them just don't. Source: Samsung.
More detail on that missing design win
Right. The mobile market is much larger than a single device, even if you're talking about a leader in the space.
A plethora of device designers are expected to build new phones and tablets around Qualcomm's Snapdragon 810. Leading players such as LG, Sony , Xiaomi, and Motorola have even issued a joint press release detailing their commitment to this chip.
So, don't cry for Qualcomm. Not even Babe Ruth hit a home run every time at bat. The mobile market is still growing overall, and so is Qualcomm's opportunity for design wins. An occasional strikeout isn't the end of the world.
Why Apple marches to a different chip-design drummer
Speaking of Apple, Mollenkopf also provided this bird's-eye view of how Cupertino can get away with a different overall design strategy from everyone else.
In plain English, Mollenkopf argues that Apple doesn't need all-in-one "system on a chip" designs thanks to its unique position in the high-end phone market. If you're not winning with authority in that very specific market segment, then you'll have to settle for commodity solutions to most of your design problems. Qualcomm will be happy to help you do exactly that.
And that describes pretty much everyone in the modern smartphone market, except Apple. In other words, Qualcomm's Snapdragon processors cater to a very large market opportunity.
Qualcomm CEO Steve Mollenkopf had a lot to say about this quarter. Source: Qualcomm.
Good news out of China
Here, Mollenkopf is referring to a licensing dispute with a large but unnamed Chinese device builder. It could be ZTE or Xiaomi, Huawei or Lenovo, just to name a few possibilities. It really doesn't matter, but investors should pay attention to the way Qualcomm defused this licensing dispute before the authorities had to put their foot down.
The National Development and Reform Commission, a huge and powerful agency near the top of China's power pyramid, is not a pleasant enemy to keep. In this dispute, Qualcomm was accused of overcharging its anonymous Chinese client and overplaying its dominant market position. The NDRC raided Qualcomm's Beijing and Shanghai offices in search of clues.
So, Qualcomm shareholders really should have drawn a deep sigh of relief over Mollenkopf's positive discussion of that conflict. The NDRC investigation was officially canceled two weeks later, lifting a weight from Qualcomm's shoulders and shares. But again, that outcome seemed obvious if you had paid attention to this earnings call.
The settlement involves a hefty $975 million fine and a laundry list of concessions that Qualcomm will have to make in its Chinese operations. Still, there was enough wiggle room under this dispute to let Mollenkopf focus on the client under-reporting its device sales. Chalk one up for the department of positive spin.
Either way, a dark cloud has been lifted from Qualcomm's Chinese business ambitions. The end of this dispute opens up China for a whole new level of market-building, and I expect Qualcomm's Chinese revenues to skyrocket from this point.
China already accounts for a staggering 50% of Qualcomm's total revenues, though that figure also includes Qualcomm chips going into devices built in China, but then sold in other markets like Europe or North America. The NDRC settlement simply opens a bigger opportunity to sell Qualcomm-powered devices in China.
On shifting product mixes
This is a textbook example of elastic pricing.
Qualcomm saw market prices shrinking in 2014, fully expecting to make up for this pain by a matching rise in sales volumes. That's exactly what happened, except that both of these sliding scales moved a little bit further than management had predicted.
As long as margins stay positive, that's all perfectly fine from Qualcomm's point of view. The changing pricing environment may lower the company's profit margins to some extent, but the final tally on the bottom line should be roughly comparable either way.
Sales forecasting is an imprecise science at best, and blindfolded dart-throwing at worst. Aberle is basically owning up to that unpleasant reality here, and asking investors for forgiveness when the guesswork comes out just a little bit wrong. Given the small effect this mistake ended up having on Qualcomm's earnings, there's no reason to hold Qualcomm's feet to the fire over it.
The article 5 Things QUALCOMM Inc.'s Management Wants You to Know originally appeared on Fool.com.
Anders Bylund has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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