Is Qualcomm Another Apple Casualty?

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Qualcomm's war with Apple will not end well

, Qualcomm (QCOM) reports quarterly earnings after-hours. Analysts expect revenue of 5.93 billion and eps of $0.91. The revenue estimate implies flat growth sequentially. Investors should focus on the following key items:

Stagnant Top Line Grow

Qualcomm is a tale of two cities. Equipment sales have been robust, while licensing fees have free fallen. Total FQ4 2017 revenue was down 5% Y/Y. Revenue from equipment and services was up 13%, while licensing fees were off 40%. Qualcomm increased its share of QCT revenues and MSM chipset shipments to Chinese OEMs. Meanwhile, QCT revenue outside of smartphones – auto, networking and IoT – has been growing at a double-digit clip.

QTL revenue has been negatively impacted by disputes with Apple (AAPL) and other contract manufacturers. Apple previously sued Qualcomm for excessive licensing fees. The problem is that the lion’s share of Qualcomm’s EBIT (46%) comes from QTL. QTL’s EBITDA margins were 68% last quarter, which dwarfs that of QCT (21%). QTL’s margins have fallen from 84% in the prior year period, likely reflecting a decline in the amount of fees the company can charge certain manufacturers. Every dollar decline in licensing fees has an out-sized impact on Qualcomm’s bottom line.

While revenue was off 5% Y/Y EBIT fell by 21%. Qualcomm has improved EBIT margins at QCT from 18% in the prior year period, but not enough to offset the hit to QTL. I expect this trend to continue in the near term.

War With Apple Has Been Costly

The EU recently fined Qualcomm $1.2 billion for paying Apple to use only its chips:

U.S. chipmaker Qualcomm Inc was hit with a 997 million euro ($1.23 billion) fine by European Union antitrust regulators on Wednesday for paying Apple Inc to use only its chips, blocking out rivals such as Intel Corp.  The EU decision is the latest in a series by global regulators that have amounted to billions of dollars in fines and require changes in Qualcomm business. The contract at issue with Apple is no longer in force, and Qualcomm already faces more competition from Intel and other rivals.

Qualcomm has cash and securities of $37 billion. A $1.2 billion fee is a drop in the bucket. However, if Qualcomm can no longer offer financial incentives to Apple or other smartphone manufacturers to use its chips then it could lose its competitive advantage. It could also lead to lower chipset shipments and revenue at a time when the company’s revenue and EBIT are already in decline.

Market chatter suggests Apple could give more of its chip business to Intel (INTC) or Mediatek. Qualcomm is not the market leader for chipsets to the mobile industry for no reason. The question remains, “Can chips from Intel or Mediatek perform on par with Qualcomm’s.” If Apple can squeeze Intel or other chip suppliers then it could potentially improve its own margins. Given Apple’s perch as a leading smartphone manufacturer Qualcomm’s recent quarterly results could be a high water mark.

Conclusion

I expect stagnant revenue and a continued decline in EBIT for FY18. QCOM is up over 25% Y/Y. The continued diminution in operating income could stymie QCOM. QCOM is a sell.

 

Actor Chad L. Coleman will host Trump And The Global Economy February 6, 2018 in Brooklyn.

The panel will include Christopher Townley (land baron), Reverend Conrad Tillard (activist, WHCR 90.3 FM), Wuyi Jacobs (AfrobeatRadio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead. The event will take place at South Oxford Space in Fort Greene, Brooklyn from 6PM – 8PM. Tickets are available on Eventbrite. Come early and bring friends.

Coleman is best known for his breakout role as Tyreese in The Walking Dead and Dennis ‘Cutty’ Wise in The Wire. He currently recurs on Syfy’s The Expanse and will star in Lifetime’s upcoming biopic Michael Jackson: Searching for Neverland set to premiere May 29.

According to Ralph Baker who Helped found the event, “We are excited to work with Chad to help spread the word about Trump And The Global Economy. These are trying times we live in and the community is dependent on artists like Mr. Coleman to continue to tell our stories through their music, film, plays, books, etc. Brooklyn has a Rich, vibrant, art community. We would love for the art world and the broader community come out to network and take in what the panel has to say.”

The town hall brings together a cross-section of individuals to discuss everything from President Trump’s policies on economics, immigration, and foreign affairs, to what his election says about America. Individuals on the front lines will bring you real information about the Trump administration that impacts the community.

Trump and the Global Economy hosted by actor Chad L. Coleman

The most recent Trump And The Global Economy town hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Mr. Jacobs and Mr. Baker. The event was well-received by the community. We parsed through President Trump’s proposed tax plan and high net worth individuals could potentially game the system by shifting income around. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?

The June 27 2017 event included Mr. Tillard, John McLaughin, who did the polling for President Donald Trump during his presidential election, Mr. Jacobs and Mr. Baker. Trump And The Global Economy is a quarterly event and is fast becoming the “must see” event in Brooklyn.

Live Stream Available February 6, 2018 At 6PM

Live stream for the February event is below. The live stream will be active February 6th at 6PM.

 

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