While the biggest news of yesterday was that Qualcomm walked away from its NXP acquisition based on China inaction, I wanted to cover more broadly the totality of what was covered and more importantly, what it really means. I believe that most of the Qualcomm future shareholder unknowns were cleared up and that is important in that many investors over the past 18 months have been concerned with unknowns over NXP, future growth opportunities, and its licensing business.
Growth outside of digital modems and smartphone SoCs
While I really liked the idea of a giant Qualcomm-NXP combination, the company showed just how much growth it has outside of its core digital modem and SoC platform. The company disclosed two important growth points during Q3 earnings. It disclosed that since the first NXP offer, it expects its FY18 business outside of core digital mobile, including IoT (Internet of Things), WiFi, auto, RF (radio frequency) and ACPC (Always Connected PC), was up 70% from FY16 to $5B.
Let me break that down where that revenue increase is coming from:
- Automotive: Qualcomm’s auto backlog is up to $5B, up from $4B a few months back. Even back in Q4 of 2016, Qualcomm was #1 in connected telematics. Fast forward then until now, Qualcomm announced that infotainment solutions account for over half of the top 25 $5B revenue pipeline.
- IoT: In IoT, before the NXP offer, Qualcomm was reporting over 25 platforms with over a billion cumulative devices shipped. Today, Qualcomm is reporting over 30 platforms pulling over 1.5B cumulative devices shipped (over 1M chips per day) delivering over $1B in 2017.
- WiFi: In Wi-Fi, Qualcomm is reporting the #1 share in home and enterprise wireless networks, is #1 mesh Wi-Fi and I believe is one of the leaders in the next generation 802.11ax.
- RF: In RF, at the start of the NXP bid, Qualcomm closed its JV and announced a comprehensive Front-End mobile platform. It then announced flagship design wind with companies like Google and HTC and then committed to $2B in China RF MOUs. Most recently, Qualcomm announced its modem-to-antenna solution (including power amplifiers, envelope trackers, antenna tuners, antenna switches and discrete and integrated filter modules) wins with LG, HTC, Sony, OnePlus flagship smartphones.
- ACPC: Around the time of the NXP bid, Qualcomm and Microsoft announced its partnership. Fast forward today, and we have four OEMs committed to ACPC (ASUS, HP, Lenovo, Samsung), shipping the Snapdragon 835 platform and announced the 850 platforms with significantly higher performance. I believe Dell and Microsoft will follow.
Net-net, Qualcomm, on its own and without NXP, is driving growth. Based on NXP falling though, I do expect the company to make some small acquisitions, but nothing close to what it attempted to with NXP. I also believe that Qualcomm, if it wants to move from large wins to those enabled mostly by the distribution channel, will need to buttress those investments.
Qualcomm also shed light on its licensing business which demonstrates to me that aside from Apple, Qualcomm’s licensing business is on solid footing. One major announcement was that a major OEM (likely Huawei) who is in a dispute made a partial $500M payment while negotiations continue for a resolution and that it had signed up over 10, multi-year 5G agreements, including Xiaomi and Sharp. Based on the January amended long-term cross-license agreement with Samsung. I believe Samsung has signed up, too. Apple is now the outlier and risks being late to market with smartphone 5G.
Qualcomm gave some insights into 5G products as well as licensing. Qualcomm President Cristiano Amon had the most interesting statement.
“We’re very happy what we’ve seen in 5G right now. 5G is accelerating. I think we said there are a large number of operators, and I can say that all of our Snapdragon 800 OEMs today are claiming to launch a 5G device smartphone in 2019. I think that position us well.”
Read that again. Qualcomm expects every Snapdragon 800 customer to have a 5G phone in 2019. That’s Samsung, Xiaomi, LG, Sony, HTC, OnePlus, Oppo, Motorola, Google, ZTE and more. Given the expected 5G carrier promotion and my belief that Apple will not have a 5G iPhone in 2019 makes this very, very interesting indeed.
While I believe Qualcomm would have been better together with NXP, I believe that Qualcomm has the right strategy. Sure, it will need to make some tweaks here and there and don’t think for a second that buybacks are its long-term investment plan. Qualcomm’s biggest challenge will be execution which will be the determining factor on the degree of future success. With clarity on NXP, signs of stabilization in licensing, added to growth outside digital mobile, Qualcomm looks to be back.