Royalties Trouble Ahead for Qualcomm?

As smartphones become more ubiquitous around the world, their average selling prices, or ASPs, are likely to fall.This will mean lower royalties for Qualcomm for every smartphone sold, since it collects a certain percentage of royalty for every smartphone that uses its chips.But the higher volume of smartphones sold, and the transition of China to LTE, will help offset the lower prices.

Mar 8, 2014 at 4:00PM

Lower prices, higher volumes
Smartphone chip royalties are a huge gravy train for Qualcomm, and one that it would like to keep intact. Although the smartphone market has been growing at a blistering pace, it's still at its infancy and there are still many more years of growth ahead. As the value proposition of higher-end smartphones improves with falling smartphone prices, many lower-income demographics, especially in the emerging economies, will eventually trade up their low-priced feature phones for low-end smartphones. This phenomenon is already taking place.

Gartner estimates that smartphone shipments will grow at 17.6% per year through 2018. At that rate, roughly 45% of the world's population will own a smartphone by 2018, up from just 22% currently. Low-end smartphones have a higher ASP than the average feature phone. This, together with the higher smartphone penetration rate, will very likely offset the falling ASPs of smartphones for Qualcomm.

Can Qualcomm maintain baseband chipset lead?
Qualcomm has a 95% global revenue share of the LTE market. The firm's huge lead in the this market has enabled it to command premium pricing.  Qualcomm's chipset ASP's shot up from $17 to $24 last year.

Firms such as Nvidia and Intel have achieved significant LTE compatibility with their app processors. MediaTek also recently announced their first 64-bit LTE chipset to compete with Qualcomm's 64-bit Snapdragon 410 chips in the mid-range market. It will, therefore, be difficult for the firm to maintain the extremely high LTE market share going forward. It's latest results have proved, beyond a shadow of doubt, that its revenue growth is slowing down—10% last quarter vs. 30%+ in the previous three years or so.

Therefore, going forward, Qualcomm will see slower top and bottom-line growth, primarily because it's up against so much competition from top chip manufacturers. Its chipset ASPs are also likely to come down since it will no longer enjoy the near-monopoly status it has commanded in this market for the last few years.

Huge Chinese market
The transition of China's largest wireless carrier China Mobile (NYSE:CHL), from the non-industry TD-SCDMA to LTE is likely to have both positive and negative impacts on Qualcomm. For one, more handset manufacturers are highly likely to start building 4G chipsets that support lower-end smartphones targeted at the Chinese market.This might mean lower market share for Qualcomm.

Qualcomm is currently facing regulatory troubles in China over allegations that it charges higher royalties there than in other countries. This can potentially be problematic for the company since it earns close to half of its revenues there -- 12 billion in fiscal year 2013, mostly from licensing and selling chipsets to players such as Apple. If the Chinese Government rules that Qualcomm is guilty of the malpractice, then it could be looking at a fine of 1% to 10% of its revenue in China.

Despite these headwinds, the transition to LTE by the Chinese is also one of Qualcomm's largest opportunities. The Chinese market is simply massive-- China Mobile has about seven times more customers than Verizon. The LTE market will significantly increase Qualcomm's addressable royalty base, which will mean higher revenue.

Returns to shareholders
It's worth mentioning that Qualcomm sports one of the best returns to shareholders among the tech sector. In fiscal 2013, the company paid out 86% of its free cash flow as dividends, equal to $2.1 billion, and a further $4.6 billion in share buy backs.

Qualcomm's former CEO Paul Jacobs vowed last September to return 75% of the company's free cash flow in fiscal 2014 to shareholders via dividend payouts and share buybacks. The current CEO Steve Mollenkopf has not offered any changes to those guidelines since his inauguration.

Bottom line
Although the ASPs of smartphones is expected to gradually fall from around $220 to $150 in the next five years, the higher smartphone penetration in China and the emerging economies is more than likely to offset the lower prices, hence Qualcomm overall royalties should not be negatively affected to any large degree.

More compelling ideas from The Motley Fool
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion=-dollar industry. Our analysts have done it before with the likes of Amazon and Netflix. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.



Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Apple and Nvidia. The Motley Fool owns shares of Apple, China Mobile, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers