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Loss of $4.9 billion in fiscal year 2018 Qualcomm and Apple QA battle are still overweight

November 09, 2018 10:24

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Although patent disputes with Apple and Huawei continue to affect Qualcomm's revenue and profits, in Q4 2018, Qualcomm spent $21.1 billion on stock repurchases, raising its share price from $56 to $75. Qualcomm still holds $12.1 billion in cash flow. This move also shows that Qualcomm does not intend to compromise with the two terminal companies in the patent war.

On November 8, mobile chip giant Qualcomm released its fourth-quarter and full-year earnings for the 2018 fiscal year ending September 30, 2018.

The financial report shows that in Q4 of FY18, Qualcomm's revenue was 5.8 billion US dollars, a 2% decrease from the 5.9 billion US dollars in Q4 2017, a loss of 493 million US dollars, and a profit of 1.567 billion US dollars in the same period last year.

From the perspective of the whole year, Qualcomm also ushered in the first loss since its listing. In the 2018 fiscal year, Qualcomm's revenue was 22.732 billion US dollars, up 2% from the 22.927 billion US dollars in FY2017. However, for the entire FY18, Qualcomm lost $4.864 billion, while in FY2017, Qualcomm's profit was $2.466 billion. At the peak of 2014, Qualcomm had created a net profit of nearly $8 billion.

However, it should be pointed out that the main reason for Qualcomm's huge losses is not the business level, but mainly due to the failure of the US Employment and Tax Reduction Act and the acquisition of NXP. The Employment and Tax Reduction Act imposes a one-off tax on the 15.5% tax rate on US companies’ overseas profits. Since most of the income comes from overseas, Qualcomm has paid a huge tax of $6 billion; in addition, NXP’s The acquisition failed, and Qualcomm paid a $2 billion break-up fee. In addition, there are $1.2 billion in fines from EU antitrust penalties and $687 million in restructuring charges for corporate restructuring.

In accordance with non-GAAP, after deducting the impact of policies, acquisitions, and fines, Qualcomm's Q4 fiscal year Q4 actually earned 1.28 billion US dollars, and the annual profit was 5.443 billion US dollars. It is for this reason that Qualcomm believes that strong business performance in the quarter was higher than previously expected.

Although patent disputes with Apple and Huawei continue to affect Qualcomm's revenue and profits, in Q4 2018, Qualcomm spent $21.1 billion on stock repurchases, raising its share price from $56 to $75. Qualcomm still holds $12.1 billion in cash flow. This move also shows that Qualcomm does not intend to compromise with the two terminal companies in the patent war.

Patent battle chip

In September 2016, Apple began to introduce Intel chips in the iPhone 7 product to replace Qualcomm. Later, Apple gradually increased the proportion of Intel, and began to fully use Intel chips in the latest iPhone XS.

However, although orders from Apple have gradually decreased, Qualcomm's chip business revenue continues to grow. In fiscal 2017, Qualcomm sold 804 million chips, down 5% from 842 million in fiscal 2016. However, revenue from the chip business increased from $15.4 billion to $16.5 billion, an increase of 7%. In FY 2018, Qualcomm chip shipments reached 855 million, an increase of 6% year-on-year, and exceeded the 2016 fiscal year shipments; chip business revenue of 17.3 billion US dollars, an increase of 5%.

The main impact of breaking up with Apple is the decline in patent income. In January 2017, Apple began to sue Qualcomm for unreasonable patent fees and claimed Qualcomm for $1 billion. In April 2017, Qualcomm began to counter Apple and sued Apple for refusing to pay royalties.

Since then, the two sides have staged a fierce patent war in the world, which the industry calls "QA Wars." In May 2017, Qualcomm sued Apple's four major suppliers: Foxconn, Heshuo, Wistron, and Compal. Due to Apple's request, the four major manufacturers have stopped paying franchise fees to Qualcomm.

In July 2017, QA war escalated. Qualcomm launched a 337 investigation against Apple in the US International Trade Commission (ITC), demanding the ban on the use of Intel chips for Apple products. Later, Qualcomm sued Apple in Germany and Beijing, China, demanding comprehensive Apple products are banned.

Up to now, many of the above cases are under trial. According to Qualcomm's disclosure in October 2018, Apple has defaulted on US$7 billion in royalties. Since Q3 2017, Apple has not paid patent fees for more than one and a half years. This means that Apple needs to pay Qualcomm about $1 billion in patent fees every quarter.

In Q3 2017, Qualcomm’s revenue from the patent business was only $1.172 billion, a significant decrease of 42.5% from the $2.038 billion in Q3 2016 fiscal year. Beginning in September 2017, Huawei was also refused to pay Qualcomm a patent fee due to the Qualcomm Apple patent dispute. In a speech in November 2017, Huawei’s chief legal officer Song Liuping mentioned that “Qualcomm’s patent fees are too high” and that “the US FTC investigation and the lawsuits of Apple and Qualcomm will produce a world rule, and Qualcomm’s patent fees will come down. ".

Apple and Huawei's mobile phone sales accounted for about 1/4 of global smartphones, and lost the two largest patent revenues. Throughout FY2017, Qualcomm's patent business revenue was US$6.445 billion, down 16% year-on-year; patent business profit was 5.175 billion. The US dollar fell 21% year-on-year, and the profit margin fell from 85% to 80%. In FY 2018, Qualcomm's patent revenue has fallen to 5.163 billion US dollars, down 20% year-on-year. The profit of the patent business fell to 3.525 billion US dollars, down 32% year-on-year, and the profit margin dropped from 80% to 68%.

However, Qualcomm can not significantly reduce the patent fees according to Apple's and Huawei's demands. If Qualcomm compromises too much in this quarter of the market, another 3/4 of the patent fees will inevitably be greatly affected.

Qualcomm's chips

From the current stage, Qualcomm still plans to stick to this QA war. After all, the battlefield of the QA patent war is not only a court, Qualcomm needs to wait for the chips in the technology and market to play a role.

Being able to get rid of Qualcomm's reliance on the chip is the basis for Huawei, Apple and Qualcomm to negotiate patent fees. Fortunately, Samsung, which also has its own self-developed chip, is still paying a stable royalty.

According to informed sources, "In order to stabilize Samsung, Qualcomm has handed over three consecutive generations of flagship chips to Samsung's foundry." Qualcomm's 14nm process Snapdragon 820 and 10nm Snapdragon 835 are all produced at Samsung's chip foundries. In February 2018, the two sides reached an agreement that the future Qualcomm 7nm 5G chip will also be produced in Samsung, which means that in the next few years, the patent authorization of both parties will be relatively stable.

For Xiaomi, OPPO, and vivo, which are completely dependent on Qualcomm in the flagship machine and the future 5G market, although they all expect the QA war to reduce the patent fees, the benefits of these enterprises through Qualcomm open access are still far greater than the need to pay. Patent expenditure.

And then, 5G's early commercial use will become another bargaining chip for Qualcomm.

At present, almost all the important progress on 5G terminals comes from enterprises adopting Qualcomm platform. From August to September 2018, Lenovo, OPPO, Xiaomi and vivo have successively released the research and development progress of 5G mobile phones. All four companies have adopted Qualcomm's Xiaolong. X50 baseband chip, in which OPPO and Xiaomi have already opened 5G signaling and data links. And Apple has not yet sent any news related to 5G.

But the next 5G era will inevitably become the focus of competition for global smartphones.

On the afternoon of November 8, global market research organization IDC released global smartphone shipments in the third quarter of 2018. Global smartphone shipments totaled 355.2 million units, down 6% year-on-year. This is the fourth consecutive quarter of decline in the global smartphone market. . On the eve of 5G, the smartphone market is shrinking, and the terminal company needs the replacement boom brought by 5G to boost the market.

This means that 5G is likely to change the global smartphone industry landscape again. With a long-term technology lead, Qualcomm has already stockpiled a large amount of chips for the upcoming changes.

However, this may not be a decisive factor. In the 4G era, Apple did not support 4G until the iPhone 5S in 2013, more than two years later than HTC and Samsung. Now it is not certain that Apple's strategy for the 5G market, but before all the chips work, this QA battle Still full of variables.

(Article source: 21st Century Business Herald)

                (Editor: DF372)

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