Qualcomm Q3 Earnings Preview: Licensing Business In Focus

Qualcomm (NYSE:QCOM) is scheduled to publish its Q3 FY’17 earnings on July 19, reporting on a quarter that is likely to see significant uncertainty relating to its technology licensing business amid the current litigation with Apple. Below, we take a look at some of the key factors to watch when Qualcomm publishes earnings.

Trefis has a $65 price estimate for Qualcomm, which is about 20% ahead of the current market price.

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Technology Licencing Business In Focus

Qualcomm has been growing more dependent on the technology licensing business, which now accounts for over three-quarters of its operating profits. The unit has been embroiled in multiple legal disputes, and its current litigation with Apple will be a key factor to watch this quarter (related: What’s At Stake For Qualcomm As Apple Expands Its Lawsuit?). Apple said in late April that it would withhold payments to its contract manufacturers for the royalties that they owe Qualcomm, and indicated that it will not resume payments until the legal issues are sorted out. The litigation will prove tricky for Qualcomm, as Apple is the firm’s largest customer. Margins from its sales to Apple could be higher, on average, compared to Qualcomm’s broader QCT business, given that Qualcomm bills patent licensees based on device ASPs, and Apple has the highest ASPs in the industry. Following Apple’s decision to withhold payments, Qualcomm slashed its revenue guidance for the quarter ended June by $500 million to between $4.8 billion and $5.6 billion (a 10% decline over prior guidance). The impact on EPS was more pronounced, with the firm indicating that adjusted EPS could fall by as much as 35% or $0.30 per share (see updated guidance below).

QCT Business Likely To See Year-Over-Year Declines

Qualcomm’s semiconductor business has been witnessing declining shipments, with the firm guiding for MSM chip shipments in the range of 180 to 200 million units, marking a decline from the 201 million units shipped during the same quarter last year. The declines come as high-end smartphone manufacturers increasingly rely on their own application processors (Samsung uses its own Exynos processors on some version of its flagship devices), while Apple has been turning to Intel for modem chips for some versions of its iPhone 7. During the March quarter, the firm shipped about 179 million units, marking a decline of about 5% year-over-year. That said, Qualcomm is betting on new areas, ranging from servers and PC chips to automotive and IoT to drive sales. In the server space, for instance, Qualcomm is looking to compete with Intel, with its first ARM-based server processor, Centriq 2400. As, Intel commands more than 90% of this market, data center companies are looking for alternative suppliers to increase their bargaining leverage. Qualcomm also recently announced plans to support Microsoft’s Windows software on its ARM-based chipsets, allowing it to play a larger role in the PC market. We will be looking for updates on this during the conference call.

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