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Qualcomm’s 4 Growth Pillars: NXP, Snapdragon, 5G, and India

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Part 3
Qualcomm’s 4 Growth Pillars: NXP, Snapdragon, 5G, and India PART 3 OF 11

What to Expect from Qualcomm’s Chipset Business in Fiscal 3Q17

Qualcomm benefits from shift in Smartphone trend

Qualcomm (QCOM) is acquiring NXP Semiconductors (NXPI) to boost its chipset business, which is being hit by an overall slowdown in the Smartphone market. According to IDC (International Data Corporation), worldwide Smartphone shipments rose 4.3% YoY (year-over-year) in 1Q17.

The data showed a shift in the trend away from premium phones toward mid- and low-end phones. While Samsung (SSNLF) and Apple (AAPL) reported flat growths, Chinese (FXI) vendors Huawei, Oppo, and Vivo reported more than 20% YoY growths in 1Q17. As Qualcomm is having trouble with Samsung and Apple, this shift in trend fared well for the chip supplier.

What to Expect from Qualcomm’s Chipset Business in Fiscal 3Q17

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QCT’s fiscal 2Q17 earnings

QCT (Qualcomm Code-Division Multiple Access Technology) revenue rose 10% YoY to $3.7 billion even though MSM (mobile station modem) shipments fell 5.3% YoY to 179 million units due to a stronger product mix. The segment’s MSM shipments fell as Qualcomm lost 50% of Apple’s modem business to Intel (INTC).

Despite this setback, the company’s QCT revenue rose because it included the one-month sales of its RF360 joint venture, which equates to ~$75 million. RF360 is Qualcomm’s Singapore-based RFFE (radio frequency front-end) joint venture with TDK Corporation.

Moreover, Qualcomm witnessed strong demand for its Snapdragon processors from the wearables, drone, connected car, and other IoT (Internet of Things) markets. All this improved QCT’s operating margin from 5% in fiscal 2Q16 to 13% in fiscal 2Q17.

Fiscal 3Q17 guidance

For fiscal 3Q17, Qualcomm expects to report revenue of $5.2 billion. The fiscal third quarter is a strong one for QCT. Assuming QCT contributes 70% to Qualcomm’s overall revenue, it’s expected to report fiscal 3Q17 revenue of $3.6 billion, a fall of 5% YoY.

The segment’s revenue is likely to fall as the company faces a supply shortage of its Snapdragon 835 processor, which is being manufactured on Samsung’s 10nm (nanometer) node. The supply constraints are mainly due to the initial yields on the 10nm node being lower and Samsung’s using the node to manufacture its own Exynos processor and Snapdragon 835 processor. Qualcomm’s chief financial officer, George Davis, expects these supply issues to be resolved by fiscal 4Q17.

Qualcomm expects its MSM shipments to be between 180 million and 200 million units in fiscal 3Q17, lower than the 201 million units it shipped in fiscal 3Q16 but close to the 179 million units it shipped in fiscal 2Q17. These shipments are likely to be lower as Chinese OEMs (original equipment manufacturer) reduce the excess inventory that was created in fiscal 2Q17.

However, things are likely to improve in fiscal 4Q17 and beyond as the Snapdragon 835 becomes available to more Smartphone manufacturers and the company accelerates its efforts in the wearables, drone, connected car, IoT, personal computer, and data center markets.

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