Licensing Will Continue to Push Qualcomm’s Profits in Fiscal 2Q16

Qualcomm’s licensing business remains strong amid slowdown

We’ve learned that Qualcomm’s (QCOM) revenue from mobile chipsets, which accounts for 71% of the company’s revenue, is likely to fall further in fiscal 2Q16 as overall demand for smartphones remains weak.

However, the situation is opposite for the QTL (Qualcomm technology licensing) segment, which accounts for 29% of the company’s revenue and 69% of its operating profit.

Licensing Will Continue to Push Qualcomm’s Profits in Fiscal 2Q16

The high profit margin in the licensing business has caused NVIDIA (NVDA) and Advanced Micro Devices (AMD) to monetize their IP (intellectual property). NVIDIA has a licensing deal with Intel (INTC), which is due to expire in March 2017. NVIDIA is looking to sign a deal with Samsung (SSNLF).

Let’s see how fiscal 2Q16 has been for Qualcomm’s licensing business.

New licenses

Qualcomm earns royalties from over 255 licensing deals across the globe. It has over 90 single-mode OFDMA (orthogonal frequency-division multiple access) licensees. In the past few months, the company has entered into licensing deals with the five top Chinese (FXI) handset makers Xiaomi, Huawei, ZTE, Lenovo, and Haier.

These deals are in compliance with the revised terms Qualcomm agreed to with Chinese regulators, under which the company will lower its royalty charges for handsets sold within China. This could lower its profits. Moreover, troubles loom around ZTE. The sale of any US components to the handset maker has been banned by the U.S. Department of Commerce, according to a Reuters article.

QTL performance

In fiscal 1Q16, the QTL segment’s revenue fell 10.4% YoY (year-over-year) to $1.7 billion, as most Chinese handset makers refrained from paying royalty fees. With the signing of some key licensing deals and strong growth reported by Chinese handset makers, the situation is likely to improve for the segment. Revenue falls may slow in fiscal 2Q16.

In fiscal 1Q16, the QTL segment’s operating income fell 15.2% YoY to $1.3 billion. Even this is likely to improve and drive the company’s profits.

Even though Qualcomm expects the transition to new technology to drive smartphone growth, this trend is not sustainable in the long term. After enjoying the benefits of the mobile boom, Qualcomm is now looking at alternate revenue streams to gradually reduce its dependence on smartphones. We’ll look into this in the next part of the series.