Impact on Qualcomm’s Business if Apple Wins
Qualcomm cuts its fiscal 3Q17 guidance
In the previous part of the series, we learned that Apple (AAPL) has been fighting with Qualcomm (QCOM) to force the chip supplier to change its age-old licensing model. The handset maker has also suspended royalty payments to Qualcomm until the court’s decision is made.
In response to Apple’s action, Qualcomm cut its fiscal 3Q17 revenue guidance by $500 million, from $5.7 billion at the midpoint to $5.2 billion, representing a YoY (year-over-year) fall of 13%. It’s also reduced its non-GAAP EPS (earnings per share) guidance from $1.03 at the midpoint to $0.80, representing a YoY fall of 31%. If the dispute continues into fiscal 4Q17, Qualcomm’s licensing revenue could fall by as much as 33%.
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What if Apple wins?
Qualcomm can withstand the losses arising from the Apple case. Analysts are more concerned about the ripple effect this case could create not only for Qualcomm but also for Nokia and Ericsson, which both see huge profits from patent licensing.
If Apple wins the case, Qualcomm will be forced to charge a royalty on the price of the component rather than on the price of the end device. This would significantly reduce Qualcomm’s licensing revenue. The case could encourage other Smartphone makers to renegotiate their terms with Qualcomm, significantly reducing its licensing profits, which account for more than 80% of its profits.
Impact on Qualcomm’s chipset business
Not only would the Apple case reduce Qualcomm’s licensing revenue, it would also risk losing the company its key customer, impacting its chipset revenue. Apple may decide to switch completely to Intel (INTC) for its modem requirements.
If the court also approves Samsung’s (SSNLF) arguments, the company will be allowed to release its Exynos chipsets in the market. This move would pose tough competition to Qualcomm’s Snapdragon chipsets.
Qualcomm may look to reduce this impact by threatening a ban on iPhone imports to the United States. Next, we’ll look at the possibility of Qualcomm’s succeeding in imposing the ban.