Why Is Qualcomm Expecting Higher Operating Margins For Its Chipset Business In Q4’16?

Qualcomm’s (NYSE:QCOM) chipset business had an operating margin of 8% in Q3’16. The company expects this figure to double in the fourth quarter. We can attribute the increase in QCT operating margins in Q4 to the following reasons:

1. Decline in Operating Expenditures: The company expects its operating expenditures to decline by 2% to 4% on a year over year basis in Q4’16. Right sizing the cost structure was a part of Qualcomm’s strategic realignment plan, which it initiated in 2015. With the successful execution of this plan, the company expected to drive down its cost by approximately $1.1 billion from its 2015 levels, by the end of FY 2016. Much of the improvements in Qualcomm’s operating margins is coming from the company’s cost cutting measures, as a part of this plan.
2. Strong adoption of Snapdragon 820: Qualcomm suffered a major setback in 2015 when performance issues with its premium chipset, Snapdragon 810, inducing some of its key customers to use their own SOC. Things improved for the company after the launch of Snapdragon 820 chipset, which had better performance than its predecessor. With more than 150 design wins, Qualcomm’s Snapdragon 820 is seeing strong adoption in premium smartphones. In a previous earnings call, the company said that it is likely to see demand for Snapdragon 820 to pick up in the second half of fiscal year. This is likely to have positive impact on the revenue per MSM chipset for Qualcomm, which is one of the major reasons that can drive the company’s QCT operating margins higher in Q4’16.
3. Launch of iPhone 7: Qualcomm’s revenues will be impacted to an uncertain degree, as the company is displaced in certain iPhone modem chipset sockets by an Intel device. However, the impact is likely to be small, and we can still expect higher revenues for Qualcomm’s chipset business with the success of iPhone 7. For now, it has been rumored that iPhone 7 can hit the market around September this year. 
4. Launch of Snapdragon 821: Snapdragon 821 offers further performance improvements over Snapdragon 820 and is likely to be the new high performance benchmark in the flagship smartphones. Further, the company aims to capture newer markets such as virtual reality, with its Snapdragon 821 processor. Strong adoption of Snapdragon 821 can again drive the revenue per MSM chipset higher.

In the table below, we show how Qualcomm’s operating margins have remained in FY 2016 and how the company expects it to significantly increase in Q4’16:

Notes: