Qualcomm, Inc.’s Best Moves in 2016
After facing a rough 2015, Qualcomm (NASDAQ: QCOM) had a solid 2016. Although the company's financial performance was down year over year during its fiscal year 2016, which ended back in September, that performance started picking up in the final quarters of the fiscal year. And based on the financial guidance that the chipmaker gave for the first quarter of its fiscal 2017, that momentum is set to continue.
Let's look at what moves Qualcomm made during 2016 to help get its business back on track.
Successful ramp of Snapdragon 820/821
In 2015, Qualcomm brought a chip to market known as the Snapdragon 810. The chip managed to win spots inside of many, if not most, of the industry's top smartphones, but it wasn't designed into Samsung 's(NASDAQOTH: SSNLF) Galaxy S6 or Note 5 flagship devices. Samsung's Galaxy S and Galaxy Note phones are among the highest volume runners in the world of premium Android smartphones, so this served as something of a blow to the wireless giant's financial performance throughout the life cycles of those devices.
However, Qualcomm's next-generation premium smartphone processors -- the Snapdragon 820 and the closely related Snapdragon 821 -- were more successful. They were designed into Samsung's Galaxy S7 and Galaxy Note7 flagship devices, indicating that they were much more up to Samsung's standards/needs than the prior-generation Snapdragon 810.
The Snapdragon 820/821 also found their way into many of the top Android flagship devices from players like HTC, LG, Xiaomi, ASUS, and others. When all was said and done, the Snapdragon 820/821 product cycle was generally a strong one for the wireless chip specialist.
Hitting operating margin target in chip business
In 2015, Qualcomm announced its Strategic Realignment Plan, an action that was designed to trim $1.4 billion in operating expenses. In its July 2015 press release announcing this plan, Qualcomm said that it expected to achieve that run rate "by the end of fiscal year 2016."
On Qualcomm's July 2015 earnings call, management told investors that it was aiming to lift operating margins of its chip business, known as QCT, to at least 16% by the fourth quarter of its fiscal year 2016. In the fourth quarter of fiscal 2016, not only did Qualcomm hit that 16% target, it beat it by a smidgen, reporting operating margin of 17% in that business.
If all goes well for the company, it may be able to achieve its long-term QCT operating margin goal of 20% or more within a reasonable time frame.
Getting device makers to pay up
Although Qualcomm's chip business contributes to the bulk of the company's revenue, the company's wireless patent-licensing business makes up most of its pre-tax earnings.
One challenge that the company had faced previously was that several 3G/4G device vendors (notably in China) were either under reporting their shipments to Qualcomm -- Qualcomm is entitled to a percentage of the selling prices of devices that incorporate 3G and 4G wireless technology -- or simply selling devices without licenses. This led Qualcomm's licensing business, known as QTL, to underperform the broader 3G/4G device market, hurting the company's financial performance.
Over the last year, though, Qualcomm seems to have made good progress in getting these vendors to sign licenses and/or pay up. On Qualcomm's November 2016 earnings call, management said that it had "signed license agreements with nine of the top 10 largest Chinese OEMs," and that it expects to "sign additional licenses with Chinese OEMs and increase the level of compliance throughout fiscal 2017."
Considering how important Qualcomm's licensing business is to its overall financial performance, this is clearly good news for the business going forward.
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