Semiconductors Drive Qualcomm’s Earnings Beat, Outlook Remains Positive

Qualcomm (NYSE:QCOM) published its Q4 results on Wednesday, November 1, beating market expectations on both earnings and revenues, driven by a stronger performance of its semiconductor business, which is gaining traction in opportunities outside of mobile. However, the company’s bread-and-butter technology licensing business continued to underperform, with revenues and operating profits declining by 36% and 48% respectively, year-over-year, on account of its ongoing litigation with its largest customer, Apple, which has been withholding royalty payments that its contract manufacturers owe Qualcomm. In this note, we take a look at some of the factors that influenced the results of Qualcomm’s semiconductor operations.

Trefis has a $64 price estimate for Qualcomm, which is about 20% ahead of the current market price.

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Revenues from the semiconductor business (the QCT segment) grew by about 13% year-over-year to $4.65 billion, as Qualcomm shipped a total of 220 million mobile station modem (MSM) chips during the quarter, marking an increase of 4.2% year-over-year. The company’s business in China also fared well, with its Chinese revenues and chip shipments growing by about 25% year-over-year, as Chinese OEMs gain a share of the global smartphone market. Qualcomm has also been focusing on diversifying its chip operations beyond the mobile space, noting that its QCT revenues beyond smartphones stood at $3 billion in fiscal 2017, marking an increase of over 25% year-over-year. The growth is being driven primarily by the automotive, networking, and IoT space. Earnings before taxes of the semiconductor division also improved by 42% to $973 million, driven by the higher top line and a more favorable product mix.

There are a couple of trends that could drive the QCT business in the near term. Firstly, Qualcomm’s acquisition of NXP Semiconductor – which could close by the end of this year or early next year – could further help to bolster non-mobile revenues, given NXP’s complementary product lines and its strong sales channels. Moreover, the near-term demand for 3G/4G smartphones is also expected to remain strong, with Qualcomm projecting that a total of 1.9 to 2 billion 3G/4G devices will be shipped next year, translating into a growth of about 8% at the mid-point. The company also expects to ship between 220 to 240 million MSM chips over the December quarter, up from about 217 million in the year-ago period. That said, there are some risks as well. There have been reports that Apple could drop Qualcomm’s chips altogether from its iPhones and iPads from next year, escalating the feud between the two companies. The smartphone behemoth will reportedly build its devices only with modem chips from Intel and possibly MediaTek, after Qualcomm reportedly withheld some software that is critical to testing its chips in Apple’s device prototypes. While we wouldn’t assign a very high probability to this materializing, given that Qualcomm is the world’s largest modem supplier with its products known for superior performance, it does represent a risk for Qualcomm.

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