Qualcomm Earnings: Licensing Weakness Subdues Results But New Design Wins Can Drive Future Growth

Leading wireless technology developer Qualcomm (NASDAQ: QCOM) reported weak results for Q4 fiscal 2015, weighed down by the company’s inability to conclude new license agreements in China and garner adequate income from Chinese OEMs, that have been under-reporting licensing royalties in the region. However, despite these short-term headwinds, Qualcomm is confident that its performance will be better in fiscal 2016, backed by a strong line-up of chips across different tiers, operational improvements and reduced product costs with the company’s transition to the 14 nanometer node. Even from a long term perspective, Qualcomm’s outlook remains strong, both in smartphones and adjacent areas, where its mobile technologies and capabilities can help develop next-gen solutions for automotive communications, the Internet-of-Things, mobile computing, networking, small cells and data center solutions.

Quick Snapshot of Q4 Earnings:

At $3.62 billion, the company’s QCT (Qualcomm CDMA Technologies) revenue declined 25% year over year  and 6% sequentially, inline with the company’s guidance. The operating margin for the segment stood at 8%. Although the total MSM shipments were on the higher side of company’s guidance, at 203 million, they were down 14% year over year.

In QTL (Qualcomm Technology Licensing), the company reported revenue of $1.84 billion, roughly flat with the prior year.  The total reported device sales by Qualcomm licensees were $58.3 billion, up 2% year over year, but still below the company’s expectations. This was primarily driven by the fact that it is taking Qualcomm longer than previously expected to conclude new license agreements with certain Chinese OEMs.  (Read the earnings release here)

Our price estimate of $65 for Qualcomm is approximately 20% above the current market price. We are in the process of updating our model in light of the recent earnings release.

See our complete analysis for Qualcomm stock here

Concluding New Licensing Deals In China Is Important For Qualcomm’s Licensing Business

In February this year, Qualcomm agreed on a settlement with the government of China pertaining the royalties it charges to licensees in the large market. The company paid litigation charges of $975 million to settle regulatory investigation by China’s National Development and Reforms Commission (NDRC) for alleged monopolistic practices in the region. However, Qualcomm has been struggling since to implement the NDRC licensing terms and improve compliance by Chinese OEMs. The total reported 3G/4G device sales for Qualcomm were underreported by more than $24 billion for fiscal 2015. Though the company was successful in concluding agreements with two major Chinese OEMs  (ZTE and TCL) during the year, the progress has been slower than anticipated.

Going ahead, Qualcomm plans to take action against OEMs that refuse to negotiate within a reasonable time frame. In the subsequent periods, as the company successfully concludes licensing agreements, it would gain not only from the future royalty payments but also from retrospective payments for the underreported periods.

New Designs To Boost Qualcomm’s Chipsets

Earlier this year, Qualcomm lost a socket on the Samsung Galaxy 6, as the Korean Smartphone behemoth opted to use one of its own, due to certain performance issues with the new Snapdragon processor. However, the subsequent new processors that the company unveiled may boost its near term growth. These include the Snapdragon 430 and Snapdragon 617 for mid-range mobile devices and Snapdragon 820 processor for the premium segment. Qualcomm confirmed that they are seeing strong interest in Snapdragon 820 by leading OEMs, with over 60 designs having won the key premium design slots. Also, there are reports that Samsung is looking at the possibility of integrating the Snapdragon 820 in its upcoming premium mobile, Galaxy S7, which can spur demand for Qualcomm’s chipset next year.

The company also announced LTE-U chipset support for small cells and mobile devices that would enable cellular networks to boost coverage by using unlicensed spectrum in 5GHz band. T-Mobile and Verizon plan to start deploying this service in the U.S. in calendar year 2016. Furthermore, Qualcomm plans to lead the industry in the development of 5G, which will offer support to unlicensed spectrum and enhanced mobile broadband performance. Considering the aforementioned factors, we expect Qualcomm’s chipset business to gain a competitive position in the market in fiscal year 2016, bolstered by new design wins.

Q1 2016 Outlook

– Revenue in the range of $5.2 – $6.0 billion, down approximately 21% annually at the midpoint.

– MSM shipments to decline by 9%-11% y-o-y.

– Non-GAAP EPS to be approximately $0.80 to $0.90.

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