Qualcomm Posts Strong Q4’16 Results Despite The Samsung Note 7 Loss

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Leading semiconductor maker  Qualcomm (NYSE:QCOM) announced its Q4’16 earnings on November 2nd. (Fiscal years end with September.) A healthy revenue growth of 13% and an improved cost structure together led to a 45% increase in the company’s net income in Q4. Qualcomm’s QCT chipset business increased revenue by 14% during the quarter, which was led by a 4% increase in the unit shipments. With the strong adoption of Qualcomm’s Snapdragon 820 chipset in more than 150 smartphone designs, the Samsung Note 7 disaster impact remained minimal for the company. Furthermore, the company claims that its modem shipments growth was also fuelled by its adjacent businesses. Going ahead, the company will power Google’s Pixel phones with the Snapdragon 821 chipset, which should potentially boost its top-line. Qualcomm also registered a 6% increase in its QTL licensing revenues, primarily due to a decrease in the under-reporting of sales in China and catch-up payments resulting from new licensees.

In addition, Qualcomm recently announced the acquisition of NXP Semiconductor for $110 per share, or $43.9 billion. Including debt the trasnaction has an enterprise value of $47 billion. This is one of the largest acquisitions in Qualcomm’s history. On first look, this acquisition seems to be a strategic fit, as it would significantly diversify Qualcomm’s offering and provide it an entry into multiple markets outside its core mobile chipset business. The company expects to complete the transaction by the end of calendar year 2017.

In the table below we note the key metrics as reported by the company in Q4:

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Source: Sec filings

QTL Revenue Fluctuation To Continue In FY 2017

To date, Qualcomm has signed deals with nine out of the 10 largest OEMs in China and is in negotiation with another major player in the region. The latest of these deals are with Chinese smartphone giants Vivo and Oppo. Going ahead, the company also expects to reach an agreement with the Alibaba-backed Chinese smartphone maker, Miezu Technology, after the settlement of the lawsuit against it. However, Qualcomm expects the catch-up payments that result from these agreements to cause fluctuations in its licensing revenues in fiscal 2017. Due to this reason, the company has guided total reported device sales for Q1’17 in a broad range of $58 billion to $66 billion, which in percentage terms implies a decline of 4% to an increase of 9%.

It should be noted that Qualcomm was accused of monopolistic practices by the NDRC of China and had to pay $975 million and lower its royalty rates in the region as a result of the settlement in 2015. However, slow progress by Qualcomm in implementing the NDRC licensing terms, and non-compliance by Chinese OEMs of these terms, have been affecting the company’s licensing profits since then.

Qualcomm Successfully Executes Its FY’16 Targets

The company concluded FY 2016 by meeting its three ambitious targets for the year:

1) Making significant progress on signing new licenses under the approved terms in China. By signing deals with nine out of the 10 largest OEMs in China, Qualcomm has made significant progress on this front.

2) Reducing costs by $1.4 billion in the year. The company claims to have fully realized this target by now.

3) Exiting FY’16 with a 16% or better operating margin in the QCT segment. The company reported a 16.6% operating margin for Q4.

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