Breaking Down Qualcomm’s Revenue Streams To Understand How They Make Money

Qualcomm (NASDAQ: QCOM) is one of the largest semiconductor and telecommunications equipment companies, that designs and markets wireless telecommunications products and services. It derives most of its revenue from chipmaking and the bulk of its profit from its patent licensing businesses.

A] Business Model

1. What do they offer?
   Qualcomm’s revenue comes from its 2 major subsidiaries: Qualcomm CDMA Technologies (QCT) and Qualcomm Technology Licensing (QTL).
   • QCT derives revenue from the sale of products and services (mainly chipsets) for the wireless telecommunications industry.
   • QTL controls the patent licensing business, holding nearly all of Qualcomm’s patents.
2. Who Pays?
   • The Snapdragon ARM architecture-based chipsets produced by Qualcomm, are bought by most of the major smartphone manufacturers such as Motorola, Sony, LG, Xiaomi, and Samsung.
   • These mobile manufacturers make phones that utilize Qualcomm’s technologies and operate on networks based on these technologies.
3. What are the alternatives?
   • Qualcomm competes with the likes of Huawei, Nokia, and HTC in the mobile phone technology segment.
   • In the semiconductors segment, Qualcomm’s main competitors are MediaTek and Samsung.
4. Historical Revenue Trend
   • Qualcomm’s Revenue has largely remained flat from 2016 to 2018, with the rise in revenue from chipset sales being offset by the fall in licensing revenue, due to the dispute with Apple.
   • However, we expect the company to report revenue of $24.6 billion for the year 2019, largely due to the one-time payment by Apple, to the tune of around $4.5 billion, following the resolution of the two-year long licensing dispute between the companies.

You can view the Trefis interactive dashboard – Qualcomm Revenue: How does Qualcomm make money? – You can modify our key drivers to arrive at your own estimates for the company’s revenue.

B] Performance across Revenue Segments

1. Qualcomm CDMA Technologies(QCT) Revenue
   • Qualcomm’s QCT revenue has seen steady growth till 2018, but the dispute with Apple led to a drop in chipset sales in 2019.
   • We expect an increase in the number of IC chipsets sold through 2020, with the migration towards 5G technology and the renewed chipset deal with Apple.
2. Qualcomm Technology Licensing(QTL) Revenue
   • Qualcomm’s Licensing business has suffered over the past 2 years, largely due to the dispute with Apple.
   • However, with the resolution of these issues, Apple is expected to pay Qualcomm a one-time settlement of around $4.5 billion, and going forward the two companies have also agreed to a 6-year licensing deal, which would boost licensing revenue to above that of 2017 levels.

C] Revenue Outlook

• For FY’ 19, we expect revenue to grow 8.2% to $24.6 billion, due to the $4.5 billion one-time settlement payment by Apple.
• For FY’ 20, we expect revenue to hover around $24 billion, due to the new chipset and licensing deal with Apple, and also on account of increased migration toward 5G chipsets.

According to Qualcomm Valuation by Trefis, we have a price estimate of $86 per share for QCOM’s stock.

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