© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thanks for coming, everyone. I'm Chris Danely, semi analyst here at Citigroup. Next up is Qualcomm. Probably the comeback story of 2018.
So, the big deal with NXP falls apart and it’s probably the best thing that ever happened to them. Launched a big buyback, and you combine that with the cost cuts. Stock is, I think, approaching $70 or something like that, and they continue to maintain their iron grip on IP and the wireless end market.
So, here today, we have George Davis, the CFO, to talk about it. I think, George, you're going to make a couple of introductory comments and then we’ll move on.
Great. Okay. Thanks, Chris. Well, first off, good afternoon, everyone. It’s always good to see a good turnout. Well, it’s been quite an adventurous few weeks for the company on top of a pretty adventurous year.
If you look at our earnings call, we announced that we’ve come to the conclusion that we would not be able to close the transaction in any predictable time period and that we would be moving on to plan B.
And if you think about in the simplest ways the things that the company is focusing on really is in lieu of the NXP impact, buying back significant amount of stock. We’ve said $30 billion, largely in 2019. We said, obviously, we’re going to be very focused on resolving the disputes that are outstanding, and we can go into that more in a little bit. We have a cost reduction program that we’ve committed to take $1 billion out in 2019 relative to the 2018 run rate. And 5G is much closer than it was when we announced the NXP deal and we’re very focused on the commercial implementation of 5G in 2019.
So, a little different story than we expected quite frankly at this time four months ago or maybe even a few weeks before the earnings call. But we’re quite excited about what we can deliver. And while we would have loved to have seen the full tender completed, we’re still very much committed to getting again the large majority of the buyback done in 2019.
Thanks. So, George, just to get, I guess, one of the tougher questions out of the way, you guys have talked about is, NXP was part of the growth strategy. I guess what's the growth strategy without NXP now?
We announced, actually in 2016, when the company made the decision not to split, we said we would come out with a new strategy for the company, and a strategy really focused on taking the key technology blocks from the handset world into some markets that we saw being disruptive. We also talked about entering the RF front end.
And at the time, we were about 60% of a $23 billion SAM in the handsets and we were targeting up to $150 billion SAM by adding in the RF front end, adding in, what we saw as the market opportunity in IoT, the market opportunity in automotive, the networking opportunity, and then the really compute, what we would call, kind of the handset compute model or taking the Snapdragon device and competing in the PC market.
So, all of those things are still very much at the heart of our strategy today. so, the strategy of taking our technology into those markets and the belief that those technology blocks are going to be disruptors in those markets, we’re actually more confident of that now than we were in 2016.
And when I think about NXP, people say, well, then, do you have to change your strategy because you're no longer doing NXP, and my argument would be NXP was the largest scale M&A opportunity that fit our strategy, but it was not in and of itself our strategy.
We've continued to make progress in all of those elements organically from substantially improving our RF position through the combination with TDK where we now really have all of the elements that are necessary to compete at a modular level in the RF front end ahead of the 5G implementation which we believe is where we really will have a chance to further differentiate ourselves.
And we can go into each of the other adjacencies later, but in all of them we've seen real progress. So, in many ways, even though we were disappointed that we weren't able to execute on closing NXP for all the reasons that were talked about, we feel quite good about the strategy and we feel quite good about where we are going into that and our ability to deliver a lot of value.
Yeah. Can you just maybe talk about how the RF and connectivity businesses are doing?
Sure. So, on the RF front end, we've gone from something on the order of 5% of the market to about 15%. And today, what we’re seeing is real traction in attach of RF in 4G opportunities where we’ve significantly focused on China, but you’ve also seen, even in the premium tier with some of the OEMs adopting our technology.
The real concept behind the TDK acquisition was really, though, to make the investment that was needed to be ready for 5G because we knew we would need a runway of developing products going into 5G in the end of the 4G era. And that's really been the focus over the last year-and-a-half and we’re quite excited about where we are.
We’re already able to – we announced, in some ways, what we think is going to be a disruptive capability in the tunable front end, where if you are an OEM and you're going into a variety of spectrum environments, if you had to design your front-end solution for the specific requirements of every single carrier with a unique device, it would be prohibitive.
And we believe that, by having both the modem asset and the RF asset, we’re able to create an exchange of information and also some technology that will allow you to tune real-time your RF front end to the specific requirements of whatever operator environment that you're in. We think that's going to be very valuable not only in terms of reducing bond costs, but also in terms of the power utilization on the phone.
So, I think the RF front end is – a lot of people have been skeptical because it's taken us a while to get the assets in place that we needed to and we’re still clearly playing below our weight in that space, but I think 5G is really a tailwind there.
On the networking side, what we’ve seen is our Mesh technology has really been the technology that's been adopted at the retail and the enterprise level and that’s been quite attractive. So, we've seen kind of a shift from a high dependence on very low-end devices to really having the leading devices in the retail and enterprise and the improved margins that go with that.
We've also seen that the carrier market is very important. We’re not a strong competitor in that space, but 11ax, it looks like that intersection point where our technology and requirements in that market are going to be better aligned. And so, we think, in addition to our building on our strengths in retail and enterprise, we think we’re going to have an opportunity in the carrier side as well as 11ax gets adopted.
And as part of the restructuring, it seems like you've pulled back on some of these growth initiatives that weren't working out, so would you agree that you're a little more focused? You guys kind of put some stuff out there and now you can hone in a little more on what's working or what's more promising these days?
I think one of the purposes, obviously, of cost reduction is not only to improve the financial performance of the company, but it’s really to make sure we’re focused – our attention is focused on the right things.
A couple of things. Coming out of what I described as going from a $23 billion to $150 billion SAM, with NXP coming out and with the changes that we've made, we view the SAM as probably being closer now to $100 billion overall. Plenty of growth opportunity within that.
And one of the areas that we’ve pulled back on, for instance, is data center where we were trying to compete very broadly in the data center space and we’ve refocused that on edge computing and supporting the JV relationship we have in China in that area, which is going to be one of the things that helps us meet our billion-dollar cost reduction.
And then, there’s been a number of other areas where we've basically stopped funding where we believe that the risk/reward trade-off over the next several years just isn't attractive enough to support it. And at the same time, we’ve significantly increased our investment in 5G and related technologies around that.
Yep. And now that you had, I think, a year-and-a-half or whatever to kind of check our NXP and what they have there – now, it’s gone – do you feel like there's anything you kind of missed out on that you’d really like to have from a product perspective?
Yeah. I think, first off, tremendous respect for the NXP team and for their capabilities. We worked together for 21 months. There was probably never a deal that was more ready to go on day one. We were ready about seven months before day one based on expecting a quicker close.
We certainly miss their channel. I think they have really a fantastic channel into the IoT markets. They actually support a lot of their automotive through the same channel. Their breadth in automotive, I think, gave us some opportunities to look at ADAS maybe a little differently than we’re going to look at it now, but we’re actually quite excited about our automotive position, but we’ll probably come at ADAS a little bit differently because of that. But, overall, nothing but really positive sentiment towards Rick and Peter and the team over there and we were all disappointed that we’re not all working together right now.
Yeah. Sorry, I got this question from several investors in the hallway today. Any chance this deal happens or is it pretty much like gone? I had to ask. I’ve had seven people meet me up today? I wouldn't make it past the door.
No. Our focus right now is really getting the repurchase done and executing on the opportunities that I talked about at the beginning. And we think that's the best use of our capital right now, all things being equal. It's hard to know what the future will hold, but that's in our – kind of in our immediate of window of planning, that's not on the table.
Yeah. Thank you for answering that. So, let’s talk about plan B. Can you just maybe run through the goals in terms of margins and EPS that you guys laid out after it was clear that this was not going to happen?
Yeah. So, the concept was – again, the original – I guess you could call it fight deck, came out in January of this year and it looked at two paths. One, the NXP path which carried with it a $1.50 accretion including their synergies. And then, we said we can get to similar levels of accretion with share repurchase. So, either way, you can see a world where you get to the $6.75 plus earnings per share.
Obviously, the biggest difference today from then is time. And so, if you look at the ability to impact 2019 earnings with share repurchase, like I said, we’re committed to largely getting the share repurchase in 2019. And so, on a pro forma basis, it's going to be quite attractive. Whether you can get it – you're not going to – being able to get to the $1.50 in 2019 based on just the sheer fact of time is going to be problematic.
The other piece is – it’s important that we get the dispute resolution. And we’re very focused in on that.
Which one?
The Apple dispute. Obviously, Apple. And then, the other licensee as well. But we’re also seven to eight months closer to the legal milestones that are the types of things that drive people to solutions, not only the IP reviews in China, Germany and the US, but getting closer to the contract manufacturers case in court in San Diego that everybody is taking their depositions, everybody understands the lay of the land. These are the sorts of things that allow companies to come together. And so, we’re working to make that happen, but there is uncertainty.
But, in general, when I look at the dynamics of the company and how we’re positioned, how we feel about our product portfolio, which has probably never been stronger, how we feel about our leadership in 5G which is clear and undisputed, how we feel about our ability to deliver on the costs and our ability to continue to add value in the adjacent businesses, all those things are in place today. And we feel very good about the implications for the earnings of the company.
Now, we haven't updated anything from the fight deck, but the basic elements are all in place and we’re actually quite excited about what the next year has to offer.
Great. Let’s talk about the tender offer. I think it closed August 24 or something like that. It seems like some people did not want to tender their shares. So, maybe just discuss what the feedback you got and then where do we go from here.
Well, it's a good news/bad news story. The good news is, it was clear at the end of the tender that there was a very large group of long-onlys that said we’re not going to participate in a tender at $67.50. We think that there is more upside than downside.
What was the hit rate again?
Well, we were at – more than half were hedge-related buyers that kind of came in and came out and then the rest was kind of spread around. And it was priced – if you look at the way it was priced, it was priced in a way that should have cleared. Obviously, we had a rally at the end of August too that probably contributed to people’s thinking. But it's a very positive sign in terms of people's expectations for the performance of the company.
And again, I think the fact that we’ve moved along the continuum of where we said we’re taking the company and we’ve got a lot of proof points in terms of the execution along those. An automotive backlog that is many multiples of the current revenue run rate just on connectivity, where we've always had a strong position, but also infotainment where it wasn't clear whether or not we were going to be able to compete with, say, a different framework, kind of GPU-led framework in the past. And now, we’re seeing very wide adoption of our Snapdragon devices for infotainment going forward. That's a real positive. And so, I think, overall, the tender was a reflection of kind of a growing awareness that some of these trends that are key to us being able to deliver the kinds of performance that we talked about are all in place.
Yeah. So, just go through, if you could, how much is remaining on the buyback?
$25 billion.
And then, what is – does this change your accretion statistics given the stock has gone up?
It’s going to change it from a in-year just – but the stock assumptions – you have to make assumptions about how prices can react anyway. I think I feel very good about the accretion opportunity that's going to come out of the share purchase. We’re buying back between 25% and 30% of the shares of the company. It will take more than a year, but we can get most – a large majority of it done in the year. And we think that's coupled with progress on our performance in the markets and resolution of some of these items. It's an attractive set of facts to think about.
Yeah. I guess the best problem to have would be, is there a price where the stock goes high enough to where you would slow down or change the buyback?
I would love to be having an active debate on that question.
I think we’re right now. [indiscernible].
No, we’re not there.
Okay. So, let's get back to basics, I guess. Give us the latest and greatest on the cellphone industry, sort of core business. How are things out there?
Sure. It’s been a very solid year there. A little different year than we expected. If we go back to the beginning of the year, there was a widespread sense that this was going to be another super cycle year. And, actually, if you look at the buying that took place in the fourth calendar quarter of last year from our customers, you saw expectations of very high volumes that pretty quickly were reset. And so, I would say units were a little softer than expected or going to be a little softer than expected in 2018 than at the start of the year, but still a solid year overall. ASPs, on the other side, have continued to be a positive for the overall size of the markets, which is basically a units and price question. And ASPs have been quite strong again, led by China, which was probably counterintuitive because they were a little bit of the deflationary force for a couple of years, but we’re seeing very healthy tiering up, from the low tiers and the mid tiers, into the mid-high and premium tiers. As customers who really see the phone as their access to the Internet after the initial use cases of the entry level, they very quickly see the value and are willing to spend more money to move up. And that really supports – it supports our competitiveness in the marketplace because much of our competition really plays the low and mid tiers. And as people move into the mid and high tiers, the brand of having a Snapdragon in the devices is quite attractive.
Yeah. And then, just talking about the chipset business, so in terms of share, you guys lost some at your big customer, but then you also gained some in China. I guess, what would be the goals going forward? Are you focused on getting back share at the big customer? Do you think that’s going to naturally happen? And why do you think you're able to gain share in China?
So, I think the share story pretty much played out the way we said we thought it would. We said, while the dispute is going on, it’s going to be difficult for Apple to emphasize us in their product roadmap. And we said on the call, for instance, that we think we will have no share in the devices launching here later this year. And we also said China has continued to be a great share story for us and a great mix story. So, it's a double benefit. Not only are we seeing strong share, we’re seeing strong share at the high and premium tiers as people move up into those tiers, which has been a positive.
What we think about on share going forward is we think 5G is a very powerful force. We are well ahead of our merchant competition in 5G. We’re actually well ahead of our merchant competition in 4G. And remember, to be good in 5G, you've got to be really good in 4G. About 75% of our 4G patents read on 5G. so, it’s very much a multimode world and will be for a number of years.
And if OEMs want to have a high confidence entry into 5G, then they have to be talking to Qualcomm. The other piece of that is probably the strongest next tier of players are really the vertical players – the Huaweis and the Samsungs who have infrastructure capability, much more IP in the space, much further along, but still we feel very good about our positioning even relative to the more established vertical players.
And so, I think there's a natural tendency for people who aren't working with us now to have to seriously look at how do I get my 5G roadmap to the point where I have high confidence in it. And we think those are the sorts of things that help bring back customers that you don't have today.
Do you think there is more room to go in terms of share gains in China? And then, also, we saw this instance at Samsung where they went with an inferior solution and that didn't exactly work out and they came back to you guys. Do you think the same situation could occur at Apple?
Yeah, we’ll have to see. Again, we would welcome the engagement with Apple on 5G. And just as we’ve – we’re still very actively engaged with them. We’re in all of their devices except for the new device. And we’d continue to actively engage with their engineers. And we’ve had a very key focus in the company of trying to keep the engineering organizations separate from the day-to-day battles that we have to go through because it’s really important for those teams to have kind of a positive engagement, mutual respect. And so, that's still there. And we’ll see how it plays out.
But we feel we've done everything we can in terms of positioning the company to be the partner of choice as you enter the 5G era. And so, we’ll see how that plays out. But we feel positive about it.
One quick [indiscernible]. So, the margins on your chipset business have bounced up quite nicely since the restructuring was announced. Can you talk about – is there more room to go on the margins there and what would be the driver?
Yeah. I think, certainly, I think 5G is a real positive there. Obviously, 5G in 2019 is a pretty small piece. You're going to see broad deployment of 5G, but the number of units really becomes significant in – 2021 will look like a 5G market. 2020 will look like a much stronger 5G market than 2019. And 2019 is when everybody establishes their first device in the marketplace.
That will be helpful. The headwind that we, obviously, have in 2019 for product margins is going to zero share at Apple, will have an impact on margins in 2019. But if you look through that to where we think margins are going, we feel good about the progress we’re making there.
So, I guess, that's a nice segue to 5G.
We always like cellphones.
It’s kind of Qualcomm, isn’t it? [ph]. Don't worry about it.
Healthy modem at work.
So, you said it will start to ramp in 2019, but you said – will it be material for you in 2020? Do you think more a 2021 type of inference?
Well, I think 2021 will be – I think it will look more like everybody's rolled over to 5G. I think 2019 and 2020 will be building years. The fact is you have a very large OEM who is not – who doesn't have a 2019 phone launch in 5G. So, you're going to see the impact of that not only in 2019, but then that will be their first launch in 2020. And I think then, from our standpoint too, I think the market will be ready for scale because, for the first couple of launches, we don't even have integrated 5G devices. Today, our 4G device has an integrated modem. Everything is very efficient and uber effective use of the die and everything. So, you have a great value proposition for the supply chain. And you’ll have all that. We’ll have all that in 2021. We’ll have had really a year-and-a-half of debugging of everything, which, by the way, is a real advantage if you're in the early into the market. You’re going to learn all the pain points that come with any generation change. And we think that's just going to perpetuate the lead that we have over our competition.
Great. And if you could compare, I guess, the 4G versus the 5G ramp? How much more material would it be for Qualcomm? And then, maybe compare the years with the 2019 5G with like 2012 or something like that in 4G or draw some kind of rough comparison?
Yeah. I think it's different. I think the handset market was just growing phenomenally at the same time that you're making the transition. So, you have slower unit growth now than you had back then. I don't know if I can compare 2012 to 2019 or is it really – is 2019 like 2010? Is 2012 more like 2021? I think is – again, I won’t try and forecast that.
I think what it does for us is, we think, again, it just – as the start of any new generation, it plays to the strength of the technology leader. And so, that means, even if you're just dealing with a 4G device now, if your next device is 5G, you're probably going to be directing your engineers to spend more time with us than maybe with our competitors. So, that gives you – even in the early phases, we’re at still largely the 4G world. We’ll actually share pickup both in 4G and 5G as a result of that.
You're going to see ASPs go up because the devices are more complex. They're bigger. They provide more functionality. So, that's a positive. The difference will be, probably, you won't have the same degree of unit growth behind it just because of the sheer growth of the market. But from our standpoint, it's a very important time for improving share and improving ASPs and I think that's really what plays out over the over the next few years.
It’s something that’s popped into my head. So, NXP, before they couldn't say anything, they always talked about 5G being critically important to their auto business. Now that you've had so much time spent with them, could we potentially see a lot of tie-ups or JVs with them for 5G in their auto business? Is that a possibility?
I won’t talk to any specific opportunity, but we would – certainly, as we worked together, everybody saw – there's nothing that changed in terms of our understanding of the industrial logic of the two companies coming together. And so, we don't have any JV on the horizon, but there’s going to – certainly, there would be logic in some areas to working together and that may well happen, but there's nothing to speak to now.
Sure. So, to touch on the Apple issue, you said that’s a part of the eventual accretion. Maybe give us an update on what the latest is, when you expect this to close or be solved?
Well, I wish I had the exact answer to that. And these things have a little bit of a life of their own. We do feel like the things that really force both parties to come together from a litigation standpoint are reaching the points where decisions are going to get made, people are either going to gain or lose leverage as a result of that. And, generally, what happens is, everybody gets a little bit of good and a little bit of bad and they finally decide let’s just get this thing done. So, we think that world is out there. I'm hoping it's sooner rather than later, but these things may play out for a significant amount of time. But we’re certainly focused on trying to resolve it. And not only with Apple, but also the other licensee. And you certainly saw some progress with the other licensee with the interim payment that took place. And we've been signing up licensees to the new 5G rate, and so that continues to establish, along with our Samsung deal, a strong precedent for our licensing framework. And that's helpful as you go into these types of resolutions.
We’ll talk about the other licensee dispute, but with Apple, do you feel like you're continuing to progress towards an eventual solution or are there – is it just kind of a brick wall or what…?
We've always said we expect, ultimately, to get to a negotiated solution. You just don't know whether it means you have to be on the courtroom steps to get to that point.
Yeah. I believe you said that’s happened before on a couple of calls.
Yeah, it’s happened before, I believe, with Nokia. And so, we’ll have to see. I can't give you a date to it, but, certainly, it's top of mind. And so, we’ll just have to see how it plays out.
And so, you mentioned with the other licensee, there was a nice royalty payment catchup. Can you give us a sense of how much catchup is left in the kitty? Was that most of it? Was that a little bit of it? And I believe you said you expect that to get settled by the end of the year. I could be totally wrong there.
There may be a – I think it's going to come to a head by the end of the year one way or the other. And one of the things that we've done by not naming the licensee is, we’ve kept this thing in the framework of, as long as we’re meeting regularly, working through issues, we’re not going to make this more than it is because the idea – we’ll get paid for the past and we’ll have the right outcome going forward. And so, it's worth taking the time because of the importance of getting it right. The $700 million is not a payment in full by any means for the past. It will be larger than that. But it is again a sign of good faith that both parties realize that negotiated outcome is the best way and it was a good faith payment on a party that hadn't been paying for a long period of time, and there was probably a little bit of a disproportionate impact of the two parties working together on us, and I think it was a good faith statement.
Great. We have a few minutes left. I’d like to open up to the audience for any Q&A. Gentlemen in the back. Or in the front.
Just kind of building off of what you're talking about there with eventual resolutions to the license disputes, obviously, this is several billion dollars we’re talking about. If and when that's resolved, both with Apple and the other licensee, how would you intend to use those proceeds?
I think, clearly, we have a $30 billion program for share repurchase right in front of us. We’re committed to having the kind of balance sheet that provides us flexibility to do other things in the future. So, we’ll look at whatever cash comes in in that context.
And then, just kind of building off of that, when you mention the balance sheet, obviously, you’re going from a net cash position to a significant net debt position. I think your leverage is going to be north of 2 times. What is a comfortable flexible balance sheet for you all? Kind of how can you…?
Cash on the balance sheet is nice, but we think about things in terms of cash flow. And we think being a strong investment-grade company given the folks that we compete with and the resources that they have and the flexibility that we need if we want to make investments, we need to have the balance sheet that supports that. And you can be net debt and have that kind of balance sheet. You've got to be very focused on cash flow generation, and we will be.
Other questions?
Just on the remaining buyback, is the plan to stick with tender offer structure that you've done already or in the market, are there any thoughts about doing something different?
So, we’re looking at all elements of – so, there’s not a lot of creativity in the space. You have ASRs. You have some tenders. You have private transactions that you can do. You don't generally see those of a certain size. And you also have – at the same time, you can do open market. So, we’ll look at all of those with the idea of delivering on the – getting that large majority in in 2019. As you know with these things – because it tends to set up a bunch of arb activity the minute people know it was for certain what you’re doing. It's better to wait until you announce where you are rather than to forecast where you might be.
One on the back.
So, George, given what you lived through with NXP, right now, what’s your assessment on the climate for sector M&A and do you think that the NXP deal was just particular or do you think it's – or at least for the time being kind of similar for all international semi companies thinking about that?
I think NXP in the last two months or last month is more unique to the facts and circumstances of where the transaction fit in the overall dialogue between China and the U.S. and trade issues in general. Also, technology issues from leading companies in both countries. So, I think it's – in my mind, it doesn't discourage us in any way to think about what's possible. It's discouraging that we weren't able to get an attractive deal done, but we were fortunate to have a plan B that we also feel is attractive. But we think the environment that we’re in right now is unique to this environments. It’s not clear exactly when it returns to a more normal situation, but we don't think the sector is precluded from doing deals.
Great. I think we’re out of time. Thanks, everyone. Thanks, George.
Thanks, everybody.