17 Jan Qualcomm Zeroes Out Apple, Counts On China To Hit its Upward Guidance

There’s been lots of talk about Qualcomm lately, especially with their licensing disputes with Apple and the impending acquisition of NXP as well as the hostile bid from Broadcom. I covered yesterday how Qualcomm is growing their business to attack the $150 billion serviceable addressable market by 2020 and how their non-mobile investments generated $3B last year at a 75% growth clip over two years.  Qualcomm’s diversification strategy and the fruits of that strategy are showing promise for the company to diversify beyond their core mobile business. Qualcomm’s core mobile business of applications processors, modems and licensing are partly what has made the company dependent on customers like Apple. The dynamic between Apple and Qualcomm is a complicated one and has resulted in one of the nastiest legal battles in the tech industry in recent memory. Qualcomm has diversified itself to the point they have zeroed out new Apple designs, a miraculous feat, and are leaning into China instead.

The idea that Qualcomm’s dependence on Apple is waning is due to the progress Qualcomm has created with Chinese OEMs. Not only that, but that Qualcomm is strategically placed to not only take advantage of their relationships with Chinese OEMs but that those Chinese OEMs are growing at a rapid pace, more than Apple. Qualcomm cited that they expect Chinese OEMs to ship the majority of global 3G/4G/5G units by FY 2022, which makes sense because Qualcomm will have quite the foothold in China for 5G and the OEMs will continue to expand outside China. Sure, OEMs like Huawei are not dependent on Qualcomm’s chipsets or modems, but they are not the only rapidly growing Chinese OEM. OEMs in Vivo, Oppo and Xiaomi, are growing rapidly and are uniquely positioned for growth in Asia and beyond.

Furthermore, the China opportunity will transform in Qualcomm’s favor as more of the market transitions towards mid-tier and high-end devices from low-end and mid-tier. This means that an already enormous smartphone market will start to adopt more of Qualcomm’s processors as they currently own that segment of the market with their higher 600 series and lower 800 series chips. This translates to OEMs like Oppo, Vivo and Xiaomi seeing even more volume in their high-end devices which tend to feature Qualcomm’s top-tier processors. That translates into better revenue for Qualcomm as well as better margins. Qualcomm also even mentioned that their QCT FY17 China OEM product revenues were twice what QCT saw from Apple and is growing at a healthy 17% CAGR.

Qualcomm’s leadership in 5G and China’s ambitions in 5G will help to propel the company even further in its goals of becoming a leader in China. The 17% CAGR is based on projected China OEM product revenues of $8 billion by FY19 which only the beginning of the rollout of 5G and can be expected to continue to grow as the country shifts towards high-end devices. The first 5G devices will admittedly be premium tier devices, but it would not be unreasonable to expect 5G to become available in high-end devices as soon as 2020 or 2021. China is Qualcomm’s hedge against Apple, and it makes total sense that they can continue to be successful in the future, especially as Apple’s iPhone unit shipments flatten.

Qualcomm’s diversification among RFFE, automotive, IoT, connected PCs and networking have allowed the company to focus on enabling connectivity in every possible way. By doing so, the company is ensuring that slowness in one industry does not adversely affect the company’s growth. These non-core businesses, or adjacent businesses, are expected to contribute $7-8 billion to fiscal 2019 revenues and grow a healthy 25% annually between fiscal 2017 and 2019. Sure, resolving their licensing disputes will help to recapture some of the company’s revenues and profits, but the company is confident that they will be able to capture some of the unpaid royalties and defend their business model.

A few months ago, all eyes were on what Qualcomm would do with Apple. This made sense since Apple was Qualcomm’s largest customer and we have all seen the impact of Apple not paying Qualcomm for its wireless IP. What I do not think Apple had thought through completely was that if Qualcomm, in one year, could disconnect its reliance on Apple, Qualcomm gets the upper hand and can then leverage its 5G lead. I do not blame Apple- who would have thought Qualcomm would have generated so much non-mobile business in IoT, WiFi and automotive. Qualcomm made bets five years ago to put all this in motion and is fascinating to watch.

Disconnecting reliance on Apple and attaching to China Oppo, Vivo and Xiaomi are not without risks in this politically-charged relationship between China and the US. What we all need to factor in is that Qualcomm already paid it is $1B “penance” to China regulators, prices have been agreed-on, all antitrust investigations have closed, and Qualcomm is finally investing in China which they were not prior. We also need to factor in that China wants to lead in 5G and which company has the lead in 5G? Qualcomm. The China game is a tricky one, and Qualcomm learned how to play it at the right time.

So who will get the last laugh, Qualcomm, and China or Apple? I believe we will start to see some answers around the 5G deployment timeframe. I am breaking out the popcorn getting ready for it.

Note: Analyst Anshel Sag contributed heavily to this article.