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Chipset: Qualcomm’s Future Growth Driver

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Qualcomm’s chipset business

Legal troubles in Qualcomm’s (QCOM) licensing business have affected its profits as strength in QCT (Qualcomm Code-Division Multiple Access Technology) couldn’t offset those losses. QCT sells modem chips and Snapdragon processors in the Smartphone, automotive, IoT (Internet of Things), and server markets. It dominates the Smartphone chipset market with a 40% share.

Qualcomm earns over 75% of its revenue from QCT. However, the chipset business operates on thin margins and has no room to expand because of tough competition from MediaTek and Spreadtrum Communications. Hence, it relies largely on licensing to earn profits.

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QCT earnings

QCT revenue rose 10% sequentially and 5% YoY (year-over-year) to $4.1 billion in fiscal 3Q17 driven by increasing demand for its high-end Snapdragon 835 processor and strong growth in adjacent markets. Its MSM (mobile station modem) shipments rose 4% sequentially to 187 million units, lower than its guidance of 190 million units. The company’s lower MSM shipments were due to a fall in its handset shipments to China (FXI).

QCT’s operating margin improved from 12.9% in fiscal 2Q17 to 14.2% in fiscal 3Q17. The segment’s margins improved even though it lost a portion of Apple’s (AAPL) modem business to Intel (INTC). Its profit was driven by the launch of new high-margin products, the Snapdragon 835 and the industry’s first 1 Gigabit LTE (long-term evolution) modem, and a reduction in product costs.

However, QCT’s 14% operating margin can’t replace its licensing business’s 73% operating margin.

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Fiscal 4Q17 guidance

QCOM’s fiscal first and fourth quarters are seasonally strong quarters for QCT, as several handset makers launch their flagship products during these periods and holiday sales pick up. For fiscal 4Q17, Qualcomm expects its MSM shipments to rise 15% sequentially to 215 million units, resulting in QCT revenue of $4.6 billion, a rise of 13.6% sequentially. It expects its QCT operating margin to expand to 18% in fiscal 4Q17, its highest level in ten quarters.

The company expects its revenue from adjacent businesses to rise 25% YoY in fiscal 2017. Given this high amount of growth, the company is expanding its exposure in adjacent markets with its acquisition of NXP Semiconductors (NXPI). The effect of this acquisition should be visible in its earnings starting in 2018.

We’ll look at Qualcomm’s adjacent businesses in the next part of this series.

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