Qualcomm’s Q4’14 Impacted By Licensing Issues In China, Though 3G/4G Device Sales Continue To Rise

Leading mobile chipmaker, Qualcomm (NASDAQ:QCOM) reported its Q4 2014 and fiscal 2014 earnings on November 5th. Though the company saw a  year-on-year increase in both revenue ($6.7 billion) and net earnings for Q4 2014, both parameters declined sequentially. Qualcomm’s stock price is down over 10% on the news as its Q4 2014 earnings missed Wall Street estimates. Though the company continued to see growth in the QCT segment (Qualcomm CDMA Technologies), driven by the rising penetration of 3G and 3G/4G multimode devices around the world, its QTL (Qualcomm Technology Licensing) segment faced challenges in China. China is a major source of growth for Qualcomm’s 3G/4G LTE chipset. Qualcomm’s licensing business in China is suffering on account of a dispute with Qualcomm licensees, under reporting by certain licensees, and sales of certain unlicensed devices in the region. The company is facing a governmental (NRDC) investigation for alleged monopolistic practices in China, in addition to ongoing regulatory investigations in the U.S. and Europe.

Qualcomm expects to resolve the licensing issue in China soon, but remains uncertain of the timing. Accordingly, the company believes that the QTL revenue growth many be muted to some extent in fiscal 2015. Additionally, Qualcomm forecasts the global device ASP’s to decline during fiscal 2015 at a faster pace than recent years, but still expects a reasonable growth in its 3G/4G device sales driven by very strong unit growth. It claims that the growth in global 3G/4G device demand remains strong, which along with new emerging opportunities, will drive its long-term growth.

See our complete analysis for Qualcomm stock here

Quick Snapshot of Q4 2014 & Fiscal 2014 Earnings

At $6.7 billion, Qualcomm’s Q4 2014 revenue increased 3% year on year. In QTL, the total reported device sales by licensees were $57.4 billion, above the midpoint of the guided range. As expected, QCT reported record MSM shipments in the quarter, though the demand related to mid-tier chipsets was below Qualcomm’s expectations. Reported device sales and MSM chipset shipments (up 24% year on year) set new records as Qualcomm’s multimode 3G LTE and related technologies continue to enable the global growth of wireless data and its broad range of semiconductor solutions continue to be used in leading devices across all price tiers globally. Spending discipline across all businesses helped improved operating income to $2.3 billion, up 20% year-on-year.

For fiscal 2014, Qualcomm reported a 6.6% and 17.0% annual growth in revenue and non-GAAP earnings respectively, reflecting stronger than expected QCT shipments, partially offset by the impact of QTL’s challenges in China. At 20%, operating margin was the high end of the company guidance.

Qualcomm Made Progress Against Its Strategic & Operational Objectives In Fiscal 2014

1. Competitive Lead In LTE: Qualcomm is a global leader in LTE. In fiscal 2014, the company set out to compete effectively across all tiers in LTE to maintain its dominance in the market. It claims to have made significant progress with its design activity in the premium tier. It recently launched Snapdragon 805, the first processor to offer system-level ultra HD support and 4K video capture and playback. Additionally, its fourth generation modem, the Gobi 9×35, featuring CAT6 carrier aggregation, has started shipping. The company has also started shipping its new low-cost architecture in the Snapdragon 410, in 2014. With the recently announced Snapdragon 210 processor, which will offer integrated multimode 3G/4G LTE and LTE dual sim for entry-level smartphones, Qualcomm effectively brings multimode LTE with carrier aggregation across all tiers of the roadmap

2. Investments In Alternate Opportunities: Qualcomm continues to invest in adjacent opportunities that adopt its core technologies as well as technologies that address the 1000x data challenge and drive IOE adoption. In fiscal 2014, the company extended its WiFi solutions with a comprehensive set of products that use multiuser MIMO to make 802.11 AC networks up to 3x faster and more efficient. Its WiFi handset related revenues grew more than 40% in fiscal 2014. Qualcomm also acquired Wilocity, a leader in the development of 60 GHz chipsets, which provides it with a technology to address high bandwidth use cases. It announced its second generation RF360 products and now have over 225 devices that incorporate one or more of its RF3560 components.

On the automotive front, Qualcomm claims to have very strong design traction with its LTE solutions, and is engaged with more than 15 OEMs on 40 different programs. Last quarter, the company announced an offer to acquire CSR with an aim to accelerate its presence in the fast growing internet-of-things and automotive infotainment markets. (Read: Qualcomm Acquires CSR To Accelerate Its Growth In IoT)

3. Optimizing Operating Expenses & Increasing Shareholders Return: Despite continued investment in its leading roadmap and long term supply chain initiatives, Qualcomm managed to meet its operating expense targets in fiscal 2014. The company is of the belief that it is operating at scale and exited 2014 with a 4% decline in its combined R&D and SG&A expenses (compared to fiscal 2013). In 2014, Qualcomm increased its dividend payout for the 12th consecutive year, and returned approximately $7.1 billion to stockholders in the form of buybacks and cash dividends. It finished the year well ahead of its target of returning 75% of its free cash flow to shareholders.

For fiscal 2015, Qualcomm’s key strategic priorities are:  resolving the licensing challenges in China, maintaining QCT’s technology leadership across all tiers, further expanding its business into adjacent and new growth markets, continuing to manage operating expenses prudently, and returning capital to its shareholders.

Fiscal 2015 Guidance

– Revenue in the range of $26.8 billion to $28.8 billion, up 1% to 9% year on year.

– QCT revenue between $19.3 billion to $20.3 billion, up 6% year on year at the midpoint of the guided range.

– QTL revenue between $7.3 billion to $8.3 billion, up 3% year on year at the midpoint of the range.

– Non-GAAP operating income in the range of $9.2 billion to $10 billion, up 7.5% year on year at the midpoint. QTL and QCT Operating margin of 85% to 86% and 18% to 20%, respectively.

– Combined non-GAAP R&D and SG&A expenses to grow approx. 3% to 5% year on year, driven by continued investments in the multitiered chip roadmap and increasing compliance and enforcement initiatives in QTL.

– Non-GAAP tax rate of 17%.

Q1 2015 Outlook

– Revenue between $6.6 billion to $7.2 billion, up 4% year on year at the midpoint.

– Non-GAAP EPS in the range of $1.18 to $1.30.

– Combined non-GAAP R&D and SG&A expenses to increase 5% to 6% sequentially.

– In QTL, total reported device sales in the range of $53 billion to $59 billion.

– In QCT, MSM shipments of approximately 250 million to 270 million units.

– Non-GAAP EPS in the range of $5.05 to $5.35.

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