How Qualcomm’s Earnings Look without Apple

Apple is Qualcomm’s biggest headwind

At a time when semiconductor stocks were recovering, one stock that reported no growth was that of mobile chip giant Qualcomm (QCOM), whose modems power almost all smartphones except Apple’s (AAPL) and Huawei’s.

Qualcomm earns almost all its revenue from the smartphone market, which has been facing declining demand due to a longer replacement cycle.

How Qualcomm’s Earnings Look without Apple

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Qualcomm’s earnings have been hit by its two-year legal spat with Apple, which has spread across various countries. Apple stopped paying royalties to Qualcomm in mid-2017, which took $1 billion in quarterly revenue away from Qualcomm’s licensing business. In 2018, Apple ditched Qualcomm’s modems for Intel’s, which took an order of 50 million units away from Qualcomm in the first quarter of fiscal 2019, sending its revenue down 20% YoY (year-over-year).

Qualcomm’s fiscal 2019 earnings will completely exclude revenue earned from Apple.

Qualcomm’s fiscal 2019 second-quarter guidance

In the second quarter of fiscal 2019, Qualcomm expects its revenue to fall 7.7% YoY to $4.8 billion at the midpoint. The 7.7% expected decline is better than the 13.3% YoY decline the company saw in the second quarter of fiscal 2018. The improvement in the company’s fiscal 2019 second-quarter earnings shows that the move to 5G is helping it offset weak smartphone demand.

Qualcomm is diversifying beyond Apple to the Internet of Things, 5G, and automotive spaces. In its last earnings call, Qualcomm stated that it was working with over 20 operators worldwide for the use of its radio modems. Its 7 nm (nanometer) Snapdragon 855 system-on-chip has been adopted by over 100 manufacturers, including Samsung (SSNLF). It’s also gaining market share in the enterprise Wi-Fi market as the market transitions to Wi-Fi 6. The strong adoption of Qualcomm’s products is also increasing its royalty payments from customers other than Apple.

However, 5G can’t replace Apple as far as Qualcomm’s earnings go. Several media reports have signaled that Apple might settle its licensing issue with Qualcomm and use the latter’s 5G modem in its iPhones in the future. If a settlement is reached, Qualcomm’s earnings could see a significant boost. Until then, Qualcomm will continue to report modest earnings growth through fiscal 2019.