AH Tech Talk: Samsung & Apple Left A Lasting Impact On Qualcomm

Having a thriving billion-dollar business is a great thing when most of the profits come from selling your product to a diverse set of companies.  However, when you have to rely on just one or two companies to sustain those sales figures, bad things can happen if one or both of those companies walk away from your product.  This is the case of Qualcomm and its major buyers, Apple and Samsung - so much so, that Qualcomm announced at its earnings report that it was going to cut 15-percent of its workforce and $1.4 billion in spending in an effort to increase its financial outlook.  We are not talking about a small decline in revenue - 14-percent - or drop in profits - 40-percent - year-over-year, where Qualcomm reported $5.8 billion in revenue and $1.2 billion in profit this quarter.  The drops have not gone unnoticed by their biggest shareholder, Jana Partners, who is calling for Qualcomm to spin off its chip business from its licensing business - something that they are considering.

While there are many reasons for Qualcomm's troubles, the majority of their revenue comes from selling chips to smartphone makers, so when Apple and Samsung - who account for 85-percent of global shipments of smartphones - decide not to use Qualcomm chips, it certainly helped to cause a large part of their financial woes.  Qualcomm CEO Steven Mollenkopf said during earnings call, "The current industry environment has seen OEM share shift in the highly profitable premium tier, where the top player continues to take share and where, according to IDC, the top two manufacturers together now have more than 85% share of premium tier shipments."

The problem with Apple is that while their sales had remained very strong, they design their own processor and only purchase low-profit baseband modems from Qualcomm.  When Samsung skipped over Qualcomm's Snapdragon 810 for their own in-house processor, the Exynos 7420, it was a major blow to Qualcomm's yearly revenue and profits.  And as both Apple and Samsung increase their markets shares of high-end devices, it leaves less of the pie for Qualcomm with other low-end manufacturers.  FBR Capital analyst Christopher Rolland in a research report wrote, "Most of the shortfall was due to demand concentration at the high end, including the iPhone that only utilizes Qualcomm's baseband and Samsung's GS6/Note 5, which increasingly uses home-grown chipsets."

Even with all of the cost-cutting, reduced revenue and profits, Qualcomm still claims that their future is bright as they are committing to spend $4 billion on R&D in other high-growth areas such as, networking, autos and the Internet of Things (IoT).  The increase demand for onboard displays in autos is taking off with everybody trying to grab a piece of that action.  The amount of money manufacturers can garner from drivers' habits is probably in the billions - advertisers, insurance companies, and auto parts manufacturers, etc. - would love to know where we go in our cars and how we drive them.  The IoT will allow us to connect objects or 'things' and control them for a remote location - such as adjusting your home air conditioner from your smartphone, as well as appliances, alarms, lighting and more.  There are big futures in these up and coming devices and they will all need processors to power them - and Qualcomm is betting it will be theirs.

Will Qualcomm be able to weather the storm that is brewing?  Much of their success will depend on what Samsung decides to do with future devices.  It is already a given that the new Galaxy Note 5 will use an Exynos processor, but there is speculation that next years' Galaxy S7 may use the Qualcomm Snapdragon 820...or at least in the US and 4G LTE variants.  It seems that Qualcomm is working hard to make sure that the 820 is without flaws.  I doubt that Qualcomm is tossing all of their eggs in the Samsung basket and will concentrate in other areas of profitability, such as the auto and IoT industries.  Mollenkopf said on the call with our source, "These developments along with other product cycle issues are currently impacting our business.  We have a plan that we believe will allow us to deliver profitable growth in this challenging environment moving forward while we continue to execute on the technology and product roadmaps that position us for future success."

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Cory McNutt

Senior Staff Writer
Cory has written for Androidheadlines since 2013 and is a Senior Writer for the site. Cory has a background in Accounting and Finance and worked for the FBI in the past. From there he pursued his Masters in English Literature. Cory loves Android and Google related technology and specializes in Smartphone Comparisons on our site. Contact him at [email protected]
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