A lengthy legal dispute with Apple, weakening demand for 3G/4G devices, fending off Broadcom, potentially losing ZTE as a customer and regulatory blockages in China; it’s been an chaotic quarter for Qualcomm.

Jamie Davies

April 26, 2018

4 Min Read
Legal, customer, demand and acquisition issues; Qualcomm’s troublesome Q2

A lengthy legal dispute with Apple, weakening demand for 3G/4G devices, fending off Broadcom, potentially losing ZTE as a customer and regulatory blockages in China; it’s been an chaotic quarter for Qualcomm.

That said, it wasn’t exactly a bad period for the chip giant. Sequentially revenues were down 13%, though that was to be expected following seasonal demand, but at $5.3 billion the team managed to realise a 5% year-on-year increase. The management team has warned of declining revenues over the next couple of months, though this is primarily down to a weakening market ahead of the 5G bonanza and the expectations Apple and contract manufacturers will withhold payments until the legal dispute is resolved.

Even with all the issues facing the business, investors don’t seem to be put off. There has been a slight decline in the Qualcomm share price over the last couple of weeks, though it seems investors have been buoyed by a financial performance exceeding analyst expectations, with share price up 2% in overnight trading.

“Our fiscal second quarter results reflect better than expected performance in our semiconductor business and lower operating expenses,” said Steve Mollenkopf, Qualcomm CEO. “Looking forward, we remain committed to driving improved performance in fiscal 2019, consistent with our prior guidance. We are making good progress on executing our $1 billion cost plan, are focused on closing our pending acquisition of NXP and are well positioned to drive the global commercialization of 5G.”

Perhaps this is the quirt before the storm which is building excitement with investors. Qualcomm believes it is in a strong position to capitalize on the upcoming 5G frenzy, with the promise of operators hitting the green button towards the end of this year and handsets to follow a couple of months later in the early stages of 2019.

Sales are starting to take a hit, but this bit of bad news has seemingly been managed quite effectively. Sales of 3G and 4G in mature markets are stagnating owing to more customers searching for second-hand or refurbished phones, or simply holding onto their devices for longer, perhaps because new devices offer nothing exceptionally different. There is growth in the developing markets, but the introduction of 5G is what the team is waiting for. Should Qualcomm be able to replicate the success the Snapdragon 845 platform was for 4G, 5G could reap considerable profits.

“As the market transitions to 5G, the engineering challenges embedded in the 5G opportunity play directly to Qualcomm’s strengths and the focused investment we have made over the last several years,” said Mollenkopf. “We are leading the industry to 5G and we are pleased to see the strength of our roadmap helping to enable the upcoming commercial launches of 5G networks and devices, including the 18 network operators and 20 manufacturers that have selected our X50 5G modem for trials and 5G devices.”

There might be promises on the horizon, but you still have to bear in mind Qualcomm is going through a difficult period. This has been reflected in the outlook for the next quarter. Revenues are estimated to be in the range of $4.8 billion to $5.6 billion, which would represent a 11% year-on-year decline at the low-end, and 4% increase at the top. Qualcomm’s licensing business, QTL, is expected to decline between 10% to 27%, though this is to be expected once again. The team is gearing up for the 5G goldmine.

The positive feeling around the chipmaker is remarkable considering the chaotic year it has had to date. CFO George Davis confirmed a $125 million legal bill in battling Apple and various other lawsuits during the quarter, though this is likely to increase further across the next couple of months. Broadcom aggression was beaten back thanks to intervention from President Trump, and we can only imagine some commendable work from lobbyists. The NXP deal will be another headache, though the team expect Chinese authorities to greenlight the transaction before too long. Eight of the nine jurisdictions have given approval; Qualcomm believe it is just a matter of time. This is of course assuming the Chinese government isn’t trying to punish a US company for Trump’s actions against ZTE and his tariffs.

The next couple of quarters might be tricky for Qualcomm, as it waits to the 5G euphoria to become real, but after showing it could successfully navigate the last quarter it’s no wonder investors have confidence in this management team.

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