Qualcomm’s QTL business suffering due to issues in China
Earlier in this series, we’ve been analyzing Qualcomm’s (QCOM) position in the mobile chipsets market. However, Qualcomm’s Technology Licensing business (or QTL) is also an important business for the company. Although Qualcomm derived only about 30% of its revenues from its QTL business in fiscal 2014, this business becomes more valuable for Qualcomm because of its high margins. The earnings before taxes (or EBT) margins for Qualcomm’s chipsets business (or QCT) was only 20% in fiscal 2014 compared to 87% for its QTL business.
The best part about Qualcomm’s QTL business is that it not only charges royalties from premium smartphone players such as Apple (AAPL), but also from low-cost smartphone players based on Google’s (GOOG)(GOOGL) smartphone operating system.
Despite higher margins, Qualcomm’s QTL business has been suffering in the last few quarters. The revenue from the QTL business declined slightly in fiscal 2014 compared to revenue growth of about 10% for Qualcomm’s QCT business. Earlier in this series, we discussed how a number of issues in China are affecting the company’s QTL business growth. It has been facing issues of under-reported device sales by Chinese vendors and some vendors refusing to sign licensing agreements with Qualcomm.
Qualcomm royalty rates have declined
According to Qualcomm’s estimates, it received reports of about 1.08 billion devices for licensing purposes, although the company also mentioned that about 1.3 billion devices shipped worldwide in fiscal 2014. The difference of about 220 million devices remained unreported to Qualcomm. These issues in China probably caused Qualcomm to lower its royalty rates down with mobile device companies. As the above chart shows, Qualcomm’s implied average royalty rates declined from 3.27% in fiscal 2013 to 3.11% in fiscal 2014.
Declining QTL revenues and the company’s royalty rates don’t bode well for Qualcomm itself or for exchange-traded funds such as the Technology Select Sector SPDR (XLK), the PowerShares QQQ Trust (QQQ), and the SPDR MSCI World Quality Mix (QWLD). These ETFs have considerable exposure to Qualcomm.