Can Qualcomm Maintain Its QCT Margin above 16%?



QCT business

Qualcomm’s (QCOM) strong revenue growth of 13% YoY (year-over-year) was largely driven by strong demand in its QCT (Qualcomm CDMA Technology) business. The QCT segment supplies Snapdragon’s SoCs (system-on-chips) as well as 3G and 4G modems to handset makers and OEMs (original equipment manufacturers).

But in 2015, the company’s share in the mobile application market fell as key handset makers including Samsung (SSNLF), Apple (AAPL), and Huawei switched to in-house SoCs. In the modem market, Qualcomm’s share fell as Apple decided to source a certain portion of LTE (long-term evolution) modems for iPhone 7 from Intel (INTC).

Qualcomm expanded the reach of its Snapdragon SoCs and LTE modems to include automotive and wearables.

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QCT revenue

In fiscal 4Q16, QCT revenue rose 14% YoY (year-over-year) to $4.1 billion as MSM (mobile station modem) shipments rose to 211 million units, beating the analyst estimate of 206.1 million units. This growth also beat IDC (International Data Corporation) data, which showed that global smartphone sales rose only 1% YoY in calendar 3Q16.

MSM shipments rose while the decline in Apple’s orders was more than offset by higher demand from Chinese OEMs and growth in the adjacent markets of automotive and wearables.

QCT margin hits 16% target

The QCT segment’s margin rose from 9% in fiscal 3Q16 to 16.6% in fiscal 4Q16. The last time this segment’s margin crossed the 16% mark was in fiscal 2Q15. After that, the margin fell to single digits as Snapdragon 810 faced performance and overheating issues.

In fiscal 4Q16, the QCT segment’s margin was driven by increasing adoption of Snapdragon 820 in high-end smartphones. Qualcomm stated that its Snapdragon 820 is powering over 150 smartphone and tablet designs, including the Samsung Galaxy S7 and S7 Edge, the Xiaomi Mi 5, and the LG G5. The company also launched Snapdragon 821, which is featured in Google’s (GOOG) Pixel.

Fiscal 1Q17 guidance

For fiscal 1Q17, Qualcomm expects MSM shipments to rise 2% sequentially to 205 million–225 million units. Fiscal 1Q is usually a strong quarter wherein MSM shipments report double-digit sequential growth. However, this trend is likely to break as Samsung stopped production of Galaxy Note 7 due to battery issues and Apple gave away a portion of its modem business to Intel.

These two issues will likely offset the strong seasonal revenue growth from Qualcomm’s QCT segment in fiscal 1Q17. Qualcomm expects the segment’s margin to range between 15% and 17% in fiscal 1Q17.

Now let’s explore how the loss of modem orders from Apple could impact Qualcomm’s modem business.


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