Mobile chip juggernaut Qualcomm (QCOM 2.13%) reported fiscal fourth-quarter earnings results earlier this week, with shares soaring as investors cheered the strong outlook. Revenue jumped 73% to $8.3 billion, although that figure included $1.8 billion related to a settlement with Huawei following a prior licensing dispute. On an adjusted basis, revenue was $6.5 billion.
The real cause for celebration was Qualcomm's guidance, which was buoyed by strong demand for 5G modems.
The Apple effect
Recall that Apple (AAPL 1.60%) and Qualcomm announced a surprise settlement in early 2019 after spending over two years battling in an expansive legal war related to Qualcomm's licensing practices. The settlement included a multiyear agreement to supply chips. In the latest annual report that was just filed, Qualcomm notes that it started shipping modems under that agreement in the fiscal third quarter.
Due to Intel fumbling in its efforts to develop a competitive 5G modem, Apple was effectively forced to mend its relationship with Qualcomm in order to incorporate 5G technology. The Mac maker unveiled its iPhone 12 lineup last month, which features 5G connectivity in all models.
"It's worth noting that our Q4 [chip segment] revenue, a near record, included only a partial-quarter impact from a large U.S. [original equipment manufacturer] customer," CEO Steve Mollenkopf noted on the conference call with analysts, likely referring to Apple.
2021 will be huge for 5G
More broadly, Qualcomm is forecasting revenue of $7.8 billion to $8.6 billion next quarter, significantly above the consensus estimate of $7.15 billion in sales. That better-than-expected guidance is primarily attributable to strong demand for 5G devices. The company now has over 110 licensing agreements for 5G with smartphone original equipment manufacturers (OEMs), according to Mollenkopf.
CFO Akash Palkhiwala predicted that there will be 450 million to 550 million 5G-equipped smartphones shipped in 2021, up from an estimated 175 million to 225 million in 2020. Qualcomm's business is built on both selling the necessary chips, as well as licensing technology to manufacturers and receiving royalties for every unit sold.
While 5G is arguably somewhat overhyped right now in the U.S. due to lackluster coverage, China has been aggressively deploying the next-generation cellular technology. Coverage is more readily available, and Chinese smartphone OEMs have been competing on price so 5G phone prices have been declining rapidly. That's helping boost 5G adoption in the world's largest smartphone market.
"When you think about China market, we're very happy because the price points of 5G became very aggressive, and we saw that even starting in the last quarter, and that's driving probably more than 50% of all the new activations and all of the new phone launches with 5G," said Qualcomm exec Cristiano Amon. "We like that position."