Qualcomm’s chipset business
Qualcomm (QCOM) is a leader in the mobile chipset space and earns more than 75% of its revenue from its QCT (Qualcomm Code-Division Multiple Access Technology) segment. QCT sells modem chips and Snapdragon SoCs (system-on-chips) in the smartphone, automotive, IoT (Internet of Things), and server markets.
However, the mobile chipset market operates on thin margins, and so the company relies on its highly profitable licensing business to fund its chipset business.
According to a report from Strategy Analytics, the overall SoC market fell 5% YoY (year-over-year) to $9.4 billion in calendar 1H17. However, Qualcomm continued to lead the market with 42% share, followed by Apple (AAPL) and MediaTek, which both have 18% shares.
A leader in the SoC market
What makes Qualcomm a leader in the mobile chipset space is its modem technology, which has been adopted by mainstream customers. Moreover, Qualcomm’s Snapdragon SoCs provide better developer support than MediaTek’s SoCs, and it looks as if phone vendors prefer Snapdragon. Notably, Qualcomm’s 10 nm (nanometer) Snapdragon 835 has performed better than the 14 nm Snapdragon 820 and 821.
Qualcomm is bringing Snapdragon 835 not only to smartphones but also to laptops through a partnership with Microsoft (MSFT). It launched the industry’s first 1 GB (gigabit) LTE (long-term evolution) modem in fiscal 3Q17, and the higher margins from Snapdragon 835 and 1 GB LTE modem improved QCT earnings.
Fiscal 1Q and 3Q are seasonally strong quarters for Qualcomm’s QCT segment. Fiscal 1Q sees the holiday season sales, while fiscal 3Q sees the first full quarter sales of Qualcomm’s new Snapdragon SoC, which launches in fiscal 2Q. However, things are likely to be different this year as the company couldn’t enjoy the complete benefit of its Snapdragon 835 in fiscal 3Q17, given supply shortages.
Qualcomm built the 835 SoC on Samsung’s (SSNLF) 10 nm node, and the transition to a smaller node saw low initial yields, though demand was high. Some of the sales of the 835 processors have thus been pushed to fiscal 4Q17.
For fiscal 4Q17, Qualcomm expects its QCT revenues to rise 13.6% sequentially to $4.6 billion. It expects its QCT operating margin to rise from 14.2% in fiscal 3Q17 to 18% in fiscal 4Q17—its highest level in ten quarters.