Qualcomm (I): The Backstage "Big Shot" of Android Phones

With the sluggish sales of electronic products and the rise of industry chain inventories, the semiconductor industry has entered a "downturn cycle." Compared to NVIDIA, which saw a sharp drop in profits, Qualcomm's results still achieved positive growth. What factors allow Qualcomm to show its ability to resist the cycle? Dolphin Analyst will take a look at Qualcomm together with everyone.

This article mainly looks at Qualcomm from three aspects: 1) What does Qualcomm, which has grown against the trend, do specifically; 2) The performance of downstream sectors of Qualcomm's core QCT business; 3) Why focus on Qualcomm at this node.

In the context of the industry downturn, the company's revenue did not decline but instead rose. This also makes Qualcomm's stock price show a certain anti-fall attribute. Dolphin Analyst believes that Qualcomm is a leading semiconductor company with a "solid basic disk + growth outlook," which also makes the company have long-term value of attention.

Solid basic disk: mainly comes from the absolute leading design ability in the mobile chip field. Even in the context of a downturn, the company has still achieved an increase in market share, further consolidating its leading position in the high-end Android chip market;
Growth potential: strong chip design capabilities have also brought the company a leading position in the automotive and XR markets. Currently, many mainstream automotive and XR brands have selected the company's products, and the automotive field has received orders exceeding 30 billion US dollars;
Current node: In the semiconductor downturn stage, looking for leading companies with obvious advantages, Qualcomm is one of them. The industry has entered a difficult stage, but there will always be a day of reversal and recovery. Now it can be seen in the industry chain that some Android phone inventories have begun to be digested. Although the demand side has not yet rebounded significantly, the digestion of high inventories is expected to release positive signals for the industry/company.

Dolphin Analyst mainly focuses on the basic situation of Qualcomm's business in this article. In the next article, the company's performance will be measured and investment judgments will be given.

The following is Dolphin Analyst's specific analysis of Qualcomm:

What is Qualcomm, which has grown against the trend, doing specifically?

Qualcomm's latest quarterly report was released, and the company's revenue achieved a 22% increase again. This is the company's ninth consecutive quarter of double-digit growth since the epidemic in the second quarter of 2020.

As we all know, Qualcomm frequently appears in flagship smartphones such as Xiaomi, OV, and Samsung, and the market has always regarded it as a representative company in the mobile/Android market. Compared with the performance of companies that continue to achieve double-digit growth, the global smartphone shipments have continued to decline for five consecutive quarters.

Why is this? Is it the growth brought by Qualcomm's business other than smartphones? Let's find the answer from the business Qualcomm does. From the company's latest financial report, Qualcomm's business mainly consists of two parts: CDMA technology (QCT business) and technology licensing (QTL business), with a total proportion of about 99%.

1) CDMA technology (QCT business): Has always been Qualcomm's largest source of revenue, mainly responsible for research and development and sales of software and hardware products and solutions based on 3G/4G/5G technologies. Products can be used in mobile devices, wireless networks, the Internet of things, broadband gateway equipment, remote information processing and entertainment systems for cars, etc;

2) Technology licensing (QTL business): Mainly licenses technology patents developed by Qualcomm over the years or acquired.

It can be seen that QCT business is the focus of the company's development, which is also the direction of the company's continuous layout. This quarter, due to the year-on-year growth of 28% in QCT business, the company's revenue achieved an increase of more than 20%. The weak performance of QTL business is mainly due to the decline in shipments of low- and mid-range smartphones.

II. How does Qualcomm's core QCT business perform in various downstream areas?

Since we know that Qualcomm's growth this quarter is mainly driven by the QCT business, which is also the company's core business. So, what are the downstream areas mainly included in this business?

Qualcomm's QCT business, which is also the company's semiconductor business, mainly includes four areas: mobile phones, RF front-end, automobiles, and IoT. This quarter, Qualcomm's growth is mainly due to the high growth of the mobile phone and automobile sectors, while the RF front-end has declined somewhat.

2.1 Mobile phone business

The mobile phone part of the QCT business mainly includes chips in the smartphone field (excluding the RF front end). Qualcomm's smartphone chip business has long accounted for more than 50% of the company's revenue, and this quarter is also the largest increment of the company's growth.

In the mobile phone chips sold by Qualcomm, there are mainly two types: baseband chips and SoC chips:

①Baseband chips: Used to synthesize baseband signals to be launched, or to decode received baseband signals, mainly responsible for the signal processing function of communication terminals. Apple is still purchasing Qualcomm's baseband chips for use on its own SoC chips;

②SoC chips: It includes CPU (central processor), GPU (graphics processor), NPU (neural network unit), BBU (baseband unit), ISP (image signal processor), memory, audio processor, WiFi module, etc. In other words, the SoC chip basically handles all phone functions except power management and RF processing.

Source: Electronic Engineering Album, Dolphin Investment Research

Qualcomm's smartphone business still achieved 40% growth this quarter, while global smartphone shipments declined by 8%. The main thing that stands out between these two changes is the competitiveness of Qualcomm's own products.

From the perspective of volume and price, Dolphin Analyst examines Qualcomm's competitiveness:

1) Dimension of AP/SoC Volume: Qualcomm's share continues to rise. The AP chip refers to an application chip (excluding the baseband), which is used to process internal phone data. The SoC chip is a collection of processors and baseband chips.

Although the overall smartphone market is declining, Qualcomm's share has shown an increasing trend. With its Snapdragon 700 and 800 series products, Qualcomm has gained more market share and the company's share of the AP/SoC chip market has risen from around 25% to around 30%. In addition, Qualcomm's mobile patent license agreement with Samsung has been extended to the end of 2030, and Snapdragon has already occupied 75% of the Galaxy S22 product;

2) Dimension of AP/SoC Price: Stabilizing the high-end Android market. Looking at the Android smartphone market, Qualcomm firmly occupies the mid-to-high-end market. In the 2021 Android smartphone market, Qualcomm had a 65% share of the Android smartphone market at $300-499. Similar to Apple, Qualcomm has obtained nearly 50% of the market revenue with only 30% of the shipping volume. In 2022, the company will introduce Snapdragon 700 and 800 series products into Samsung's high-end series. The further increase in Qualcomm's share in the high-end Android smartphone market has raised the average shipping price of the company's products.

Source: Counterpoint, Dolphin Investment Research

3) Baseband chip dimension: Form an absolute leading position. Compared with the nearly 30% share of the AP/SoC chip, Qualcomm has a more leading position in the baseband chip market. This is mainly because Apple also purchases Qualcomm's baseband chip and then makes the SoC chip by itself. Under Apple's procurement, Qualcomm occupies more than 60% of the baseband chip market share, which is far ahead of other players in the industry. From the gradual transition from 4G to 5G era, there is higher demand for baseband procurement on mobile phones, which has also brought higher value. The popularity of 5G and the signing of the Apple procurement agreement have put the company's market share back on top globally.

2.2 RF Front End Business

The RF front-end business mainly includes RF products for 4G, 5G sub-6, and 5G millimeter wave, among which a large part is still used in the mobile phone field.

Qualcomm's RF front-end business has long held a market share of about 10%, and the double-digit decline this quarter is mainly due to the impact of the overall mobile phone market and the 5G upgrade penetration rate.

Qualcomm's RF front-end business started as early as 2013. Afterwards, through the acquisition of RF360, the company achieved full coverage of the solution from the modem to the antenna end. The front-end manufacturing of Qualcomm's RF business mainly adopts IDM mode, with wafer manufacturing in Germany and Singapore, and the back-end module packaging in China and Singapore.

RF front-end products mainly include RF switches, low-noise amplifiers, power amplifiers, filters, and antenna harmonics, which ultimately realize the reception and transmission of signals.

Source: Electronic Engineering Album, Dolphin Analyst

As Qualcomm's RF business still derives a large part from mobile phones, and mobile phones have already become a mature market, this wave of growth in the RF business is mainly based on the upgrade from 4G to 5G, bringing an increase in price points. However, with the 5G penetration rate now over half, there are signs of slowing growth. Combined with this year's sluggish smartphone market, the company's RF front-end business declined this quarter.

Looking at the entire RF front-end market, Skyworks, Qorvo and Anritsu had been the main players in 2G-4G era. However, with Qualcomm's integration of RF360 and successful penetration into the 5G RF front-end market, the company is still expected to gain higher market share with the full set solution of "5G baseband + RF front end".

2.3 Automotive Business

The automotive business mainly includes remote information processor, connected car and infotainment system products. With the popularity of new energy vehicles, Qualcomm's automotive business has also seen sustained high growth.

In the introduction of intelligent concepts in new energy vehicles, Qualcomm's automotive business has good development in modules such as digital cockpit, vehicle networking, ADAS/autonomous driving. Although the current automotive business accounts for less than 5% of revenue, the business has maintained a growth rate of over 20%.

At present, new energy vehicles mainly achieve electrification, while there is still a lot of room for improvement in intelligence. The company mainly provides intelligent cockpit (including instrument panel, rear seat, HUD, and intelligent rearview mirror), autonomous driving (including ADAS chips) in terms of intelligent driving.

With the development of automotive intelligence, the company's automotive business is expected to continue to grow rapidly. Currently, most leading automakers have adopted the Snapdragon Automotive Digital Cockpit platform, and the Snapdragon Ride platform will also create high-performance, low-power consumption ADAS and autonomous driving solutions, supporting L1-L5 autonomous driving functions.

Although the company's automotive business has only achieved $400 million in revenue, the company has already received orders worth over $30 billion in the fields of connectivity, digital cockpit, and ADAS, providing a guarantee for the company's future high growth in the automotive business.

2.4 IoT business

The IoT business has long been the company's second largest source of revenue. Due to the large number of downstream platforms involved, it is difficult to explain the growth of the business from changes in a single area.

Dolphin Analyst categorizes Qualcomm's IoT business mainly into three types:

①Consumer electronics: mainly including PCs, tablets, XR, wearable devices, etc.;

②Edge network: edge connection and processing based on cloud economy, including mobile broadband and wireless access points;

③Industrial class: mainly used in industrial machinery, energy, retail, robots, and other fields.

Qualcomm's IoT business achieved a growth rate of more than 20% this quarter, mainly driven by edge networks and industrial classes. As can be seen, products such as PCs and tablets in consumer electronics have performed weakly this quarter, while edge networks and industrial classes still show good demand.

1）Consumer electronics: Tablets began to be equipped with Qualcomm Snapdragon 8 Mobile Platform (Lenovo launched ThinkPad X13s Gen1, equipped with Qualcomm's latest Snapdragon 8cx Gen3 processor); wireless headphones began to be equipped with Qualcomm S3 flagship audio platform; and Qualcomm's Snapdragon XR2 platform has also fully entered the XR market. Looking at the consumer electronics market, Qualcomm has fully penetrated various products with its chip design capabilities and has achieved a good market share.

2) Industrial field:

Qualcomm has launched seven plans including QCS8250, QCS6490/QCM6490, QCS4290/QCM4290, and QCS2290/QCM2290 respectively for various industrial and commercial scenarios, including networking medical treatment, warehousing logistics, industrial handheld devices, retail, and asset tracking, etc.

3) Edge network:

Qualcomm has released the Cloud AI100 edge solution for AI processing and edge application. In June of this year, the company acquired Cellwize Wireless Technologies, an Israeli mobile network automation and management company, to further enhance its leading edge in promoting 5G RAN innovation and popularization, thus promoting digital transformation in the industry, empowering intelligent networked edge, and supporting the growth of cloud economy.

Why pay attention to Qualcomm at this node?

Dolphin Analyst believes that Qualcomm is a leading semiconductor company with the "stability of the foundation + growth potential," and has long-term value worth attention.

1) Stability of the foundation: mobile phones

As seen from the above, Qualcomm's core business is still the mobile phone business, which is the cornerstone of the company. Despite the decline in the mobile phone market, the company's revenue has not only decreased but also increased, mainly due to the competitive strength of its products. The fact that the company has gained a larger market share and a higher average shipment price in the weak mobile phone market is sufficient to demonstrate the solid foundation of the company.

2) Growth potential: automotive and XR

In addition to the foundation, the company also has growth potential, mainly based on its leading chip design capabilities.

In the automotive field: Qualcomm Snapdragon cockpit platform has supported nearly 50 models of Chinese auto brands since 2021, and the third-generation Snapdragon cockpit platform is the preferred platform for multi-manufacturer creating differentiated in-vehicle experiences. Now, with the completion of the company's fourth-generation cockpit platform research and development, it will soon meet consumers;
In the XR field: Qualcomm Snapdragon XR platform has achieved good market results after being adopted by Oculus. Currently, XR2 platform has been used by many mainstream XR manufacturers.

At present, the penetration rates of intelligent cockpit, intelligent network, and XR in the market are relatively low. As the market penetration rates increase in the future, they are expected to bring significant increment to the company. Therefore, in addition to the company's stable foundation, there are also future growth points.

3) Risks and opportunities: a sluggish market will always usher in a turning point

Opportunities: The intelligent smartphone business is the item that has the greatest impact on the company's performance. Currently, the sluggish smartphone market has to do with the downward pressure on company's downstream shipments. However, the smartphone market, as a stable and mature market, will not be in the doldrums for long and will always usher in a turning point. Combined with the margin improvement of some Android manufacturers as per "Xiaomi: The "Three Arrows" of Counterattack"(https://longbridgeapp.com/topics/3708976?channel=t3708976&invite-code=294324), it can be seen that the inventory of some Android manufacturers has begun to be digested. For Android smartphone chip supplier Qualcomm, this is undoubtedly a positive catalyst. As the Android market bottomed out and rebounded, Qualcomm's business is expected to receive further boost;

Risks: As we can see, the company currently dominates the smartphone baseband market, partly because Apple also purchases basebands from Qualcomm. However, the purchase agreement signed at the time will last until 2023, and there is a possibility that Apple may use self-developed basebands after that. If Apple fully develops its own basebands in the future, it may bring some risks to the company's baseband business. In addition, at present, the Android smartphone market has only seen inventory digestion, and there is no clear sign of a significant rebound in downstream demand. We still need to pay attention to changes in terminal demand.

In this article, Dolphin Analyst mainly focuses on the basic situation of Qualcomm's business, and will conduct performance analysis and investment judgment on the company in the next article.