Quick Thoughts: Facebook, Qualcomm and Google – Today Was a Good Day

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–          FB and QCOM answered critics with strong 4Q earnings. FB showed outstanding execution in a frothy digital ad market and QCOM showed a low-end mix shift won’t scuttle profitability.

–          Mobile, social and video drove big on-line ad spending growth. FB increased ad density, and added high-priced video, while growing users/engagement. Sales accelerated to 63% growth.

–          QCOM revenues were a tad below consensus, but its strong margins and guidance were a relief after poor smartphone #s from Samsung and AAPL, damping concerns of commoditization.

–          Separately, GOOG announced the sale of Motorola’s device operations to Lenovo for $2.91B, resolving conflicts in the Android ecosystem and returning focus to its core businesses.

I got to say, it was a good day. Facebook spanked the sandbagging analyst community with a stirring quarterly beat. Qualcomm didn’t thrash the sales consensus like Facebook, but delivered serious bottom line upside in response to doubters that expected margins to crater with the ongoing mix shift toward lower priced smartphone chipsets. Finally, Google rid itself of its Motorola albatross in a sale to Lenovo, which gives that company a red-carpet entrée into western handset markets while removing Google from the awkward position of competing for market share with its own licensees.

Facebook is just days away from its tenth birthday and it’s upside earnings surprise only confirms that a secular advertising shift is underway to mobile, social, and digital video. The company reported a solid topline beat of $2.59B versus $2.33 expected and EPS of $0.31 versus $0.27. Facebook’s ad sales team earned their option grants, growing revenue per user in the US & Canada by 47% to $6.03 per user and 39% across all markets to $2.17 per user.  While those Princeton economists may still expect Facebook to lose 80% of its active users by 2017, there was none of that in this quarter, with monthly active users up another 5% QoQ to 1.228B, 77% of which access the service from mobile devices, with total mobile monthly active users up 39% YoY. While I acknowledge that Facebook may hit a wall in driving users and engagement at some time in the future, this quarter’s numbers suggest that that wall may be further away than most of us thought.

Instead, Facebook is continuing to successfully woo advertisers on board while maintaining and increasing user engagement. User engagement as measured by the percent of MAUs that are DAUs increased to 62% up 300 basis points from last year. While the risk of ad saturation is very real and one of Zuckerberg & Company’s nightmares is a user exodus under such a scenario, the company seems very focused on product and the user experience. A rumored launch of more targeted Facebook apps would both help resolve the chaos of the jumbled news feed give advertisers better context for engaging users.  I expect Facebook to continue riding the trend through, at least, the rest of the year.

Qualcomm was trading up a bit in after hours on a solid EPS beat of $1.26 versus a $1.18 consensus and above the range of guidance. Revenues were so-so with a slight miss of $6.62B versus $6.66B expected, and roughly at the mid point of management’s $6.3-$6.9B 1QFY14 guidance. Expectations were tempered ahead of today’s earnings likely given the clear signs of saturation at the high end of the developed world smartphone market that has been increasingly dominated by QCT’s Snapdragon system-on-a-chip solutions. The mix shift to lower end phones was more pronounced this quarter with ASPs in the range of $219-225 versus $223-229 the previous quarter. However, as the earnings beat shows, the company is still very profitable, even in low priced chip segments.

The company has worked to offset the impact of maturing high end smartphone markets in the developed world by taking market share in the last year, not just in smartphones, but also in tablets, where its chips now power the most popular models not made by Apple. The company currently has some 1,350 snapdragon design wins in production or announced as well as over 500 designs in the pipeline. It is aggressively pursuing opportunities in the red-hot low end smartphone market with more basic Snapdragon chips and of course its bread and butter 3G/4G basebands. The company’s multiband RF solution, which allows a single device to access most of the world’s wireless frequencies and networks is more valuable to device makers than traditional RF chips given scalability. Tablets, radio, and low-end chips are high growth areas that are offsetting deceleration in traditional high-end smartphone market. The market is less than confident in Qualcomm’s ability to meet the longer term consensus forecasts given current multiples of 13x forward P/E and a 0.90 PEG ratio. There is basically no other company as well positioned for nearly everything that may happen in the wireless internet.

Finally capping the day’s news, Google decided to sell off its Motorola device business to Lenovo for $2.91B. Lenovo has been active buying low growth hardware businesses just announcing the purchase of IBM’s low end server business last week. The 2012 Motorola acquisition had several purposes – build Google’s patent portfolio as a bulwark against litigation, keep Motorola from pursuing legal action against the rest of the Android ecosystem, squelch a move by Motorola to license Microsoft Windows Phone – the least of which was to operate a smartphone business in competition with other licensees. As a Google unit, Motorola has released innovative products like the Moto X and Moto G, but bold moves were an irritant to the ecosystem. A measured approach is not conducive to either market share gains or profitability, and Google achieved neither with Motorola.

As an aside, the $2.9B sale price is not directly comparable to Google’s $12.4 purchase price. After subtracting $2.9 in cash, and the $2.35 sale of Motorola’s set top box business to Arris, the net price was $7.15B, much of which can be attributed to the presumed value of the patents remaining with Google (and for the ecosystem disruption that may have been avoided by the original deal).

For our full research notes, please visit our published research site.

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