Qualcomm looks for new revenue source

Qualcomm Inc. reduced its full-year revenue and profit forecast for the second time even after posting record quarterly licensing revenues and earnings for the second quarter of fiscal 2015 ending on March 29.

Making Qualcomm's future uncertain is the lower sales of the company's Snapdragon chip due to a loss of design sockets in Samsung's Galaxy S6 and Note. While Qualcomm leads in the modem market and generates most of its revenue from selling base band chips, a majority of its profit comes from licensing patents for its CDMA cell phone technology.

While Qualcomm remains the world's most formidable mobile chip vendor, its recent earnings reports suggest significant vulnerabilities. Qualcomm is heavily dependent on a single market segment (smartphones), while its revenues are susceptible to the whims of the two top-tier smartphone vendors—Apple and Samsung.

With margins for the company's cellular modem chips trending downward, financial analysts are asking if Qualcomm is ready to increase revenue from non-smartphone segments such as the Internet of Things and automotive—enough to make up for the losses.

Blame Apple, blame Samsung

CEO Steve Mollenkopf said Qualcomm is reducing its chip division outlook for fiscal 2015 "primarily due to the increased impact of customer share shifts within the premium tier and a decline in our share at a large customer."

Translation: By "customer shifts within the premium tier," Mollenkoph meant Apple, who uses Qualcomm's base band modems but not Qualcomm's Snapdragon base band/app processor.

When he mentioned "a decline in our share at a large customer," Mollenkoph was talking about Samsung Electronics Co. The Korean giant, Qualcomm's long-time customer, has reportedly shifted to use an internally developed processor for its new Galaxy S6 smartphones and Note, instead of Qualcomm's latest Snapdragon chip. Although Qualcomm apparently remains the S6's modem supplier "for a meaningful share," the exact breakdown isn't known.

Mollenkopf acknowledged during the financial call, "the product life cycle issues [of our customers] are compounded by the fact that the premium tier is really concentrated on those two players [Apple and Samsung] right now."

While it can't control smartphone market dynamics, Qualcomm is keenly aware of changes it must make to its cost structure. "We want to make sure we put ourselves in a position a little less sensitive to these market dynamics so that we can ride them out easier," said Mollenkoph.

He added that adjacent markets have started to contribute more. "They are about 10 per cent of QCT [Qualcomm's chip division]'s revenue this year. They tend to help us as well." He added that these are "highly leveraged from the same investment in the phone space."

Asked specifically if Qualcomm has enough non-smartphone revenue to make up for its apps processor decline in the premium tier, the CEO vehemently disagreed with the premise. He said that he believes that the company's roadmap is very compelling, "getting interest" from a broader set of OEMs. Qualcomm's modem leadership is also helping [to generate] support, he added.

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