Why the licensing issue in China impacts Qualcomm

Market Realist

Overview: Qualcomm benefits from China's LTE adoption progress (Part 2 of 7)

(Continued from Part 1)

China’s licensing issue 

In the previous part of the series, we discussed Qualcomm’s (QCOM) better-than-expected earnings and how the faster adoption of LTE technology in China is crucial for the company. The chipsets business (or QCT) of Qualcomm definitely benefited from this trend in the last quarter. However, its other important business of technology licensing (or QTL) suffered due to some issues prevailing in China for Qualcomm.

The revenues from the QTL business declined from $1.87 billion in 3Q13 to $1.80 billion in 3Q14, compared to the revenue growth of 17% for its QCT business. Although the QTL business contributes ~26% to Qualcomm’s overall revenues, it becomes more valuable in terms of its contribution towards profitability. QTL contributes ~62% towards Qualcomm’s overall earnings before tax (or EBT) margin. However, QTL’s revenues and EBT both declined in the last quarter compared to the same quarter last year.

How the licensing issue in China impacts Qualcomm

During the conference call to announce earnings, Qualcomm’s management mentioned that it’s undergoing a dispute with a licensee. Qualcomm didn’t provide the name. As a result of the issue, the company has excluded the revenues and profits earned from that licensee in its results. Also, low cost local chipset makers such as MediaTek (MDTKF) are eating market share away from Qualcomm, which is creating more issues for Qualcomm.

According to a report from Strategy Analytics, Qualcomm leads the mobile chipset market with a share of 64%. Meanwhile, MediaTek and Intel (INTC) are distant second and third-ranked players in this market. Spreadtrum (SPRD) and Broadcom (BRCM) are some of the other smaller players in the market, according to the report. However, the situation is more competitive in China.

Continue to Part 3

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