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Could Legal Headwinds Impact Qualcomm’s Growth Opportunities?

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Could Legal Headwinds Impact Qualcomm’s Growth Opportunities? PART 1 OF 19

Legal Challenges Plague Qualcomm’s Growth Efforts

Fiscal 2016: A good year for Qualcomm

Fiscal 2016 was all about repositioning for Qualcomm (QCOM) as it overcame the technology and regulatory headwinds it faced in 2015. The company completed its restructuring and signed licensing agreements with almost all major Chinese handset makers and took steps to improve compliance in that nation. Moreover, its Snapdragon 820 processor was a success among many handset makers and helped it overcome the failure of Snapdragon 810.

Legal Challenges Plague Qualcomm’s Growth Efforts

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Qualcomm’s efforts in adjacent markets

Qualcomm’s (QCOM) fiscal 2016 revenues fell due to declining sales of premium phones. It lost some portion of Apple’s (AAPL) LTE1 modem business to Intel (INTC).

This called for some serious efforts to expand in the rapidly-growing adjacent markets. As a result, Qualcomm announced the acquisition of NXP Semiconductors (NXPI) to allow it expand in the automotive and IoT (Internet of Things) markets.

In November 2016, Qualcomm unveiled the world’s first 10nm (nanometer) chip Snapdragon 835, which was targeted not only at smartphones but also at wearables, drones, machine learning, and virtual and augmented reality applications.

Slowing smartphone sales and Qualcomm 

Qualcomm (QCOM) is the world’s largest mobile chipset maker and earns revenues by selling chipsets and licensing its technology to handset makers in return for a royalty fee. In fiscal 2016, its licensing revenues reached $7.7 billion. Amid the slowdown in smartphone sales, analysts raised concerns whether the company would be able to meet its target of $10 billion in licensing revenues by fiscal 2020.

At the Barclays Global Technology Conference, Qualcomm’s chief financial officer, George Davis, explained that the mobile phones’ ASP (average selling price) declined significantly in 2015 as demand shifted from high-end phones to mid-range and low-end phones.

However, the ASP decline moderated in 2016 and would moderate further in 2017. Its licensing revenues would be largely driven by demand in emerging markets. All these factors would help Qualcomm reach its target of $10 billion.

Qualcomm hit by legal challenges

However, this target now looks difficult to achieve as Qualcomm is beset by lawsuits challenging its patent licensing practices. Not long ago, Qualcomm settled an antitrust lawsuit with China in February 2015. Now, the company is facing an $853 million fine from South Korea (EWY) and two separate lawsuits from the United States and Apple. This saw Qualcomm’s stock price fall 12.7% in just one day.

Analysts are divided over Qualcomm’s ability to sustain these legal headwinds and report positive growth in the long term. In this series, we will look at these new legal headwinds and their impact on Qualcomm’s future earnings.

  1. Long-Term Evolution
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