Qualcomm’s toughest call yet
Chipmaker can survive without NXP, but path to diversification gets harder
Whether Qualcomm walks away with—or from—NXP Semiconductors, the company has a lot of work ahead.
That will be most evident in Qualcomm’s fiscal third-quarter results, which come Wednesday afternoon, just hours before the company’s self-imposed deadline to win final approval from Chinese regulators for its $44 billion offer to buy NXP. That deal—in the works for nearly two years—has been caught up in the burgeoning trade fight between the U.S. and China. Qualcomm says it will walk away from the deal if final approval from China isn’t in hand by the end of the day. Walking away would cost Qualcomm a $2 billion termination fee, as well as the company’s biggest attempt yet to diversify its business. Qualcomm still generates the bulk of its revenue from the sale of modem chips and processors used in smartphones. The maturation of that market has slowed device sales globally and—not coincidentally—caused large handset makers such as Apple and Huawei to take a closer look at their bills. Both companies are now disputing Qualcomm’s royalty rates, and the conflict with Apple has erupted into a full-scale legal war.
Wednesday’s results will show some of the significant costs of that fight. Qualcomm already projected licensing revenue of about $950 million for the June quarter, which would be an eight-year low and a 19% drop year over year. The company also projected pretax operating margins of between 50% and 54% for the licensing arm, due in large part to litigation expenses from the Apple fight. That’s another low for a business that once reliably earned more than 85 cents in profit for every dollar of revenue.
Repairing the licensing business while preserving as much profitability as possible is crucial to Qualcomm’s long-term future—with or without NXP. That will require settling with Apple and Huawei, and changes to make the company a lessfrequent target of lawsuits. Qualcomm is in the early stages of doing the latter, and it is also reportedly in discussions with Huawei. But a deal with Apple seems a long way off, as most of those lawsuits are still in their early phases.
Meanwhile, Qualcomm will also need to keep adding diversity to its chip business. Chipset revenue from nonmobile sources jumped 75% to $3 billion in the company’s last fiscal year.
But smartphones still drive the vast majority of that segment, which faces some nearterm challenges. Apple is believed to be deploying modem chips from Intel into more of its new iPhone models coming this fall.
Deployment of new 5G networks will create more nonmobile opportunities for Qualcomm. But NXP would have accelerated the company’s path to diversification. Going it alone is possible, but that will take Qualcomm more time. Investors by this point may not have the patience.