The recent buzz for giant mobile technology services provider Qualcomm (QCOM) surrounds a terribly unexciting plan: Namely, QCOM is looking to sell its U.K. L-Band spectrum, which mobile operators can use to boost the download capacities of their 4G networks.
What is exciting about the move is the fact that Qualcomm could be in for huge profits, if current spectrum prices are anything to go by.
Qualcomm bought 40MHz (1452MHz-1492MHz) of U.K. L-Band spectrum in 2008 for a license fee of just $12.7 million, mainly because 4G technology was still embryonic at the time. But it could reap many times that figure in a sale given the current high demand for 4G LTE technology in the U.K.
The move by Qualcomm was opened up last month when the European Commission (EU) gave its consent allowing mobile operators to employ the L-band spectrum in mobile broadband. Mobile operators can use this spectrum — via Supplemental Downlinks (SDL) technology — to cope with surges in 4G mobile data traffic.
And QCOM needs a pick-me-up. Qualcomm stock is down 10% year-to-date and 15% over the past 12 months.
4G Explosion
4G LTE technology in the U.K. has been lagging other developed countries by quite a wide margin mainly due to regulatory hurdles. EE — currently jointly owned by Deutsche Telecom (DTEGY) and Orange (ORAN) — launched 4G LTE in the U.K. in 2012, becoming the first mobile operator in the country to do so.
4G penetration in the country in 2013 was estimated to be just 5%, way behind the U.S. where it reached 20%. Despite lower demand back then, a 2013 auction of 4G 250MHz spectrum in the 800MHz-2.6GHz range in the U.K. fetched a cool $3.58 billion.
Since its launch barely three years ago, 4G LTE penetration in the U.K has been growing exponentially. Digital Spy estimates that 4G penetration in the country grew a blistering 350% in 2014 to reach 15 million connections, and could have hit the 20% penetration mark by January 2015.
Nearly all leading mobile operators have now launched their own 4G networks, meaning there won’t be a shortage of takers for Qualcomm’s offer — especially considering Qualcomm’s the sole owner of this important L-Band spectrum.
Broadband spectrum is sold via an auction process, with the highest bidder(s) taking it all.
Big Prize
The decision by QCOM to monetize its U.K. L-band spectrum could provide a significant cash windfall for the mobile phone technology company and provide a nice boost for Qualcomm stock.
Given that Qualcomm is the sole provider of the spectrum in the country, and coupled with the fact that the available bandwidth is quite narrow, you can bet the stakes will be high.
From GigaOM:
“The auction took in 250MHz of spectrum in the 2.6GHz band, which is high-bandwidth and good for urban deployments, and the 800MHz band, which is lower-bandwidth but longer-distance and better for rural deployments. EE (which already runs 4G on reused 2G spectrum) and Vodafone both won spectrum in both bands, while Three and O2 (Telefonica) each won spectrum in the 800MHz band. Niche Spectrum Ventures (a BT subsidiary) won 2.6GHz spectrum.”
The Qualcomm spectrum is not as wide as the 2013 4G spectrum which probably means only two operators might end with the prize, which definitely means more competition.
Qualcomm’s Outlook
It’s not likely that Qualcomm had factored in the spectrum sale when it lowballed its full-year fiscal 2015 guidance for the second time this year, citing lower demand for its high-end Snapdragon chips as well as intense competition in China. The lower guidance has held back Qualcomm stock as investors fear that the company could be losing its mojo.
Reports had emerged in January that Samsung had decided not to use Qualcomm’s Snapdragon 810 chips for its upcoming smartphone, Samsung Galaxy S, due to overheating problems. Samsung has in the past depended heavily on QCOM for its mobile chips, but has lately been focusing more on its own foundries to manufacture is own chips.
Qualcomm also has been facing intense competition from giant Taiwanese chip manufacturer MediaTek. UBS analysts intoned in a note to Barron’s that this could be due to MediaTek’s superior 4G chip technology, which could place Qualcomm’s 4G market share in China in jeopardy.
However, Qualcomm stock might not suffer in the doldrums for long. The company plans to start using monolithic 3G technology in its 4G chips starting in 2016 to deliver superior performance and lower costs. This should help it compete better in the highly competitive 4G space.
Bottom Line
My conservative estimate is that Qualcomm should be able to realize a profit of $1 billion from the L-band sale (after taxes). Holding all other things constant, that should provide a nice 13% boost to its mid-point EPS guidance of $4.80 for fiscal 2015. This should help Qualcomm stock.
That said, I’m making a conservative estimate — profits could actually be much higher.
Either way, QCOM remains a good long-term investment.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
