Highs and Lows Converge in Qualcomm Results

April 25, 2016
For every success within Qualcomm’s second quarter financial results, other questions were raised about the future of its modem chip business. The company reassured investors against rumors that it would lose business to Intel.

Qualcomm is generating far less revenue than it did last year, but the company's second quarter results showed a few bright spots, including the end of a patent dispute with LG and renewed success with licensing deals in China.

“This is a transition year, and we are making significant progress,” said Steve Mollenkopf, Qualcomm's chief executive, in a conference call with financial analysts this week.

Mollenkopf also reiterated plans to cut costs by $1.4 billion before the end of the year as well as trim 15% of the company’s workforce. Qualcomm forecast lower third quarter revenue for its modem business, which sells chips that connect smartphones and other devices to cellular networks.

Qualcomm is in the middle of a restructuring, one that mirrors the chip supplier's plans to diversify its offerings. To tighten its grip on smartphone intestines, the company is starting to build filters, which block out interfering wireless signals. It has also started selling power amplifiers, front-end modules, and Wi-Fi and Bluetooth chips.

Derek Aberle, president of Qualcomm Technologies, said that it is making progress in new fields like cars, robots, and servers. He also said that Qualcomm is working on Snapdragon processors for wearables. Qualcomm’s newest Snapdragon chip has already been used in 115 designs.

In the second quarter, Qualcomm reported $1.2 billion in profit with $0.78 earning per share. The company’s revenues were $5.6 billion, down 19% from the second quarter last year and 4% from the first quarter. The figures included $266 million penalty payment from a licensing deal broken when two customers merged.

Though the results indicate slowing smartphone sales, Qualcomm's reported renewed success in China. Qualcomm has now signed patent licensing deals with over 100 Chinese firms and it has had more success collecting royalties since the Chinese government closed an anti-monopoly investigation.

“We are making good progress on the licensing side in China, and this remains a key focus area for the company," Mollenkopf said. That includes a recent deal with Hisense, which wants to rent out the rights to Qualcomm's 3G and 4G chips. Increasingly, Chinese firms are buying chips from Qualcomm that support carrier aggregation.

“In China, the transition from LTE to carrier aggregation is actually going faster than expected,” said Christian Amon, president of Qualcomm's CDMA unit, in the conference call. “As we continue to invest and see those technologies transition ahead of us, we feel very confident that the whole nature of the market will demand the latest.”

Qualcomm predicted a sluggish third quarter. The company forecast revenues of roughly $5.6 billion in the third quarter, down from $5.8 billion a year earlier. Qualcomm expects to ship between 185 and 195 million chips over the next quarter, down from 225 million a year ago.

The reasoning is that Qualcomm expects to lose modem chip orders from a large customer, which many analysts have speculated is Apple. Qualcomm supplies all 3G and 4G modems inside iPhones. While Apple designs its own computer chips, it buys modems and other wireless parts separately.

Some analysts have speculated that Intel will supply up to 30% of all modem chips for the iPhone 7, which is expected to be released later this year. That would be a sharp blow to Qualcomm, which has already failed to sell Apple on its popular Snapdragon chips.

“It’s really a communication of a planning assumption and also confidence in us meeting our long term trajectory,” Mollenkopf said. “I think it’s important to make sure people understand that. We do feel very confident, though, in our position in the modem segment.”

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