In early November of last year, Broadcom submitted an unsolicited bid to purchase Qualcomm at a price of $70 per share, or roughly $130B. It would have sustained Qualcomm as the third largest chip maker in the world behind only Intel and Samsung, and would send a shockwave through the semiconductor and technology ecosystem as never before. The largest completed technology sector acquisition was Dell’s purchase of EMC for $67B; the Broadcom bid to purchase Qualcomm would double it.
However, Qualcomm’s board rejected the offer while promising shareholders value and direction for the company going forward. Fireworks ensued and Broadcom has now launched a hostile takeover that starts with a Board of Directors replacement, to be voted upon by shareholders. In an attempt to maintain its independence and direction, Qualcomm decided to go on the offensive and detail for the public its outlook and roadmap for the future, confident that the opportunities before it exceed what Broadcom has brought to the table.
There are numerous angles that have been written on how the merger of Broadcom and Qualcomm would have a negative impact on the industry. These range from the slowing of 5G progress, a lack of competing solutions in the networking space, slower introduction of new cellular technologies, a shifting R&D cycle, damaging cost reductions in product development, among others. Today I want to quickly touch on how Qualcomm has presented its future without Broadcom through a 35-minute long video and presentation this week. CEO Steve Mollenkopf and the top executives at Qualcomm have a substantial vision for where this company will be in just a few short years.
To be blunt, the position Qualcomm finds itself in today is unenviable. The licensing division remains in major dispute with its largest customer (Apple) and regulatory groups in several regions of the globe are investigating Qualcomm’s business models and licensing tactics. With licensing income being withheld by Apple and another supplier, Qualcomm may appear weak and ripe for acquisition. Though the bid from Broadcom was near the median of acquisition of offers for the technology industry (based on Bloomberg’s estimation), Qualcomm and its board believe that the next several years for Qualcomm warrant a much bigger discussion than Broadcom is willing to engage in.
The key to Qualcomm’s argument and fight against the buy-out stems from the growth it projects in the core mobile and adjacent growth markets. Even without the NXP acquisition completed, Qualcomm sees value in those adjacent markets for FY19 revenues. RF front-end development in tier-1 designs and the leading configurable front-end that will be optimized for 5G migration and continued 4G technology support, with a $2-3B revenue target, offer substantial windows for revenue. The automotive industry is growing in complexity with the advent of self-driving technology, but Qualcomm has $1B in opportunity for FY19 with its strength in telematics, Bluetooth, and infotainment systems. Though NVIDIA dominates headlines when it comes to autonomous driving and its high-performance graphics systems, and Qualcomm will need more engineering time target that segment, the surrounding systems are ripe for the performance and connectivity that the company can offer that see benefits from the power efficiency Qualcomm chips can provide.
Qualcomm is a leader in the IoT space with computing and connectivity options that others are unable to match. It currently works with more than 500 customers across voice and music, wearables, and even smart city integration. Qualcomm believes this will become a $2B revenue opportunity for them by FY19. The compute segment the recently announced Windows 10 based PCs, growing to another $1B in revenue for FY19. Qualcomm’s advantages in connectivity, 4G/5G, and the always on, always connected battery life gains provide stand out features that give it the potential to dislodge Intel in key market segments.
Finally, Qualcomm estimates the networking segment is has built for home and enterprise spaces will grow into another $1B revenue segment by FY19. Qualcomm and its partners are already the leader in home and enterprise wireless networks, and the spike in growth for mesh Wi-Fi networking will be a requirement to enable many carrier solutions and 802.11ax proliferation.
Beyond new product types are new product growth regions. China provides as much as $6B in potential product revenue in the mobile space and grew 25% YoY in FY17. That is two times the revenue that Qualcomm receives from Apple today, a statement clearly made to alleviate the concern that Qualcomm’s future is inexorably tied to the outcome of the Apple litigation and future relationship.
Because the Chinese OEMs are gaining market share globally, including the likes of Xiaomi, Vivo, and Oppo, with rapid expansion into India, Europe, and eventually the US, Qualcomm’s existing relationships with these customers will result in increased revenues. The China market is going through a transition and consumers are migrating to higher tiers of devices with more features and more capabilities. This movement favors the higher performance Snapdragon lineup when compared to compete options from MediaTek and will likely result in higher domestic share on Chinese OEMs product lines.
The migration to 5G will play a critical role in the growth of Qualcomm’s technological roadmap and the company believes it has a 12-24 month lead over its merchant competitors (those that sell to OEMs) in this space. Qualcomm is well known to be a driver and creator of new industry standards, with the push from 3G to 4G as a prime example. During that transition period of FY10 to FY13 Qualcomm revenue doubled and though the company won’t put specific estimates like that in place for the move from 4G to 5G, with that roll out starting in early 2019 it is the prime opportunity for Qualcomm connectivity advantage to be showcased.
From the licensing angle, Qualcomm believes that as much as 75% of the 4G patents it holds will be applicable to the 5G roadmap. This puts the company in a great position to leverage its previous technology R&D for future income.
These are just a handful of the emerging opportunities that Qualcomm sees before it in 2018 and through 2020. I didn’t even touch on the 6% annual growth of the Android ecosystem, which holds an has 80% share in smartphones, where Qualcomm is the chip leader. A target of $35-37B for FY2019 revenue is a daunting task and will require execution on multiple fronts for Qualcomm to meet that goal. But with the areas of growth outlined above, the offer from Broadcom stands in stark comparison to the reality of a company poised to cultivate the next generation of connected technologies.
