My Thoughts on Qualcomm Q1 2018 Results

Yesterday’s was Qualcomm’s release of its quarter 1 2018 results. You can view its SEC filing here. It is for the quarterly period ended March 25, 2018.

A short background, Qualcomm is simply the company behind most of the smartphones that we are using – in terms of the chips or you can call it, the “brain” that is operating it. It makes a huge difference to the phone’s ability to last longer, load faster, etc. And it happens to be one of my largest stock holdings too – bought it and hold it for about a year now, receiving a neat amount of dividends and options premiums.

So just wanted to write down my thoughts on its quarterly earnings updates (as a value investor, our minimum requirements should be to analyze the facts that the companies we invested in releases every quarter and think about it).

So here are my thoughts on Qualcomm’s results in q1 2018.

As a start, the legal dispute between Apple and Qualcomm on how Qualcomm charges a huge amount of licensing fees based on iPhones selling price – is still happening. And it is still taking a toll on Qualcomm as it has accumulated $125m in the legal bill this quarter and it is expected to be more in the upcoming months.

Apple has not paid billions of dollars worth of royalty payments since the dispute started more than a year back.

In my opinion, licensing model – which has been traditionally Qualcomm’s biggest source of profit with the highest margin should persevere at all costs. But Qualcomm needs to listen and adapt to the times. As a supplier, for a long-term business viability, we cannot charge our customers exuberant prices (I know, because my family business is supplying and manufacturing fully customized paper packagings).

So I am glad when I heard that Qualcomm is taking steps to preserve its licensing model of taking a cut of the selling price of phones during the latest earnings call. Traditionally, Qualcomm simply takes a percentage of the selling price of the smartphones – and this model has been the reason for many regulatory disputes in Korea, United States, and even China. Qualcomm said that it would instead cap the price of the phone that is within the basis of licensing royalty payments at $400 – even though the phones can sell for $1000, it will be counted as $400.

This means that Qualcomm might accept less revenue but with this model, more companies might find it cheaper to use Qualcomm’s license and go with them instead. I think this is fairer and in fact, their revenue might just increase if more companies sign up with them. Think about it – superior r&d plus unbeatable price – great moat. Better for long-term stability and differentiation.

Qualcomm has good differentiation in terms of its technological prowess.

While some major mobile phones components makers in Asia such as TSMC and SK Hynix Inc warned of slower growth in their smartphones chip divisions, Qualcomm’s chip division rose 6% in the latest quarter.

I am less confident now that the NXP merger with Qualcomm will go through – China is the remaining country yet to approve the deal – while the other 8 of 9 countries has approved it. It’s alright, they should use the cash to do a share buyback first, fix their licensing division problems and focus on better execution of their business and give a better return to shareholders.

Other opportunities for acquisition is plentiful in the future.

Because the spat between U.S. and China now is simply not helping – and in fact, might be why it has not gone through.

Connected cars are bound to come. 5G technology will aid. Qualcomm is still in a good position to capture these opportunities – hopefully with the acquisition of NXP and fixing its licensing business model.

A lot of uncertainty still persists – but hey, what is comfortable is rarely profitable.

Disclosure: I own shares of QCOM and am long on QCOM.

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