Qualcomm Earnings Preview: Licensing Agreements With Chinese OEMs Likely Boosted Revenues In Q1’16

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Leading chipset maker Qualcomm  (NYSE:QCOM) is set to announce its Q1’16 earnings on January 27th. Although the company’s licensing agreements with Chinese OEMs in Q1’16  can boost its revenues for the quarter, the investor concerns surrounding the litigation charges will remain. Inability to conclude new licensing terms in China, underreporting of sales and litigation issues weighed heavily on Qualcomm’s stock price in 2015. Furthermore, the reduced outlook for device spending in 2016 forecast by Gartner suggests there will be lower revenues from chipset sales for the company in the coming quarters. [1]  However, we believe that Qualcomm’s expansion into other potential high growth areas will gradually offset the decline in licensing revenues and smartphone sales, as Qualcomm’s investment in these areas start to pay-off.

Our price estimate of $60 for Qualcomm is approximately 27% above the current market price.

See our complete analysis for Qualcomm stock here

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Licensing Agreements With Chinese OEM To Benefit Qualcomm’s Profitability In The Coming Quarters

Qualcomm seems to be over the hump in the large smartphone market in China, where it was struggling to decrease the under-reporting of sales and conclude new licensing agreements with Chinese OEMs. Some of the deals bagged by Qualcomm in the current quarter are with Xiaomi, Haier, QiKu and Tianyu Sign. [2]  By concluding these agreements, Qualcomm should be able to improve its profitability in the coming quarters by collecting more royalties and licensing fees from these smartphone makers for using its 3G and 4G technology.

The most significant of these agreements is with Xiaomi, as the smartphone maker holds a top spot in the Chinese market and has plans to expand its presence to more international markets. [3]  Furthermore, Qualcomm can see more gains in Q1 if these smartphone makers have agreed to pay royalties retrospectively, as was the case with other Chinese OEMs in fiscal 2015.

Qualcomm Can Have Gains From Its Upcoming Premium Chipset Snapdragon 820

Qualcomm faced a huge setback in 2015 as its flagship processor Snapdragon 810 was dropped from the Samsung’s premium smartphone, the Galaxy S6, due to overheating issues. However, Qualcomm’s Snapdragon 820 Chipset, which is set to be launched in early 2016, can change the company’s fortunes. According to GSMArena, Snapdragon 820 chipset fares much better in terms of performance and other specifications compared to its predecessor.

Although Samsung is said to have started the production of Snapdragon 820 chipset, the company has not officially said if it would use Qualcomm’s Snapdragon 820 in its upcoming premium smartphone Galaxy S7. However, there have been rumours that Qualcomm can find its way into the Galaxy S7. Given that Samsung has the largest market share in smartphones and Galaxy S7, Qualcomm will be a clear beneficiary if these rumors prove to be true. And given the high selling price of the phone, it could be an even bigger win, as the company charges royalties as a percentage of device sales price. This will also help rebuild confidence in Qualcomm’s Snapdragon chipsets, after the failure of Snapdragon 810 due to overheating issues. Moreover, Qualcomm has already announced the commercial debut of Snapdragon 820 in Chinese company – Letv’s smartphone in the Consumer Electronics Show (CES) at Las Vegas.

Qualcomm’s Investments Into Other Segments Of High Growth Can Change Its Fortunes

Qualcomm showcased its focus on expanding its business reach to other potentially high growth in the recent Consumer Electronics Show (CES) at Las Vegas. The key developments featured by the company were in the areas of drones, automotive communications and Internet of Things. Furthermore, the company unveiled a prototype of a quadcopter based on snapdragon 801 chip that garnered significant attention. We believe that Qualcomm’s foray into these areas makes ample sense as its core business is threatened by litigation issues and facing tough competition in an increasingly crowded market. (For more details read our article as to Why Is Qualcomm Banking On Drones And Automotive Communications?)

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Notes:
  1. Device Spend To Decline For First Time, TechCrunch, January 2016 []
  2. Press release, Qualcomm, December 2015 []
  3. Apple’s biggest rival in China says it plans to start selling phones in the US, BusinessInsider, July 2015 []