It's been a rough year for Qualcomm (QCOM 4.88%), the biggest mobile chipmaker in the world. The year started with Samsung (NASDAQOTH: SSNLF), Qualcomm's second largest customer, replacing its flagship devices' application processors and modems with its own comparable chips.
Qualcomm had previously expected to generate between up to $28.8 billion in revenues in fiscal 2015, which would have represented 9% growth. After Samsung's decision, Qualcomm reduced its guidance repeatedly, and full-year sales eventually fell 5% annually to $25.3 billion.
Recent rumors suggest that Samsung might offer Qualcomm a second chance by installing its newest chipset, the Snapdragon 820, in some of its Galaxy S7 devices. While that could certainly boost Qualcomm's top line again, Samsung's recent introduction of its own top-tier chipset, the Exynos 8 Octa 8890, strongly suggests otherwise.
Source: Samsung.
What Samsung wants
Samsung presumably installed its own silicon in its top-tier handsets for three reasons. First, Qualcomm's Snapdragon 810 suffered from overheating issues. Second, using its own silicon can cut manufacturing costs and boost margins of its top-tier handsets. Lastly, it can potentially expand its chipmaking business and sell its Exynos processors and Shannon modems to other handset makers. That move would complement its sales of other components like memory chips and displays.
Samsung controls nearly 24% of the global smartphone market, according to IDC. However, competing against low-end rivals like Xiaomi and cramming expensive hardware into high-end devices to counter Apple's (AAPL 1.19%) iPhone have taken a toll on the mobile unit's bottom line. Last quarter, the unit accounted for just 32% of Samsung's operating profits -- a five-year low for the once-dominant division. Samsung doesn't disclose how much money it saves by using its own silicon, but after dropping Qualcomm, the mobile unit's profit margin notably rose from 7% to 9% between the third quarters of 2014 and 2015.
Because of the shrinking importance of its mobile unit, Samsung started beefing up its chipmaking operations to diversify its top line and generate additional revenue. Samsung also has one of the few foundries in the world that can produce application processors for next-gen smartphones. That foundry notably produced A9 chips for its smartphone nemesis, Apple. Last quarter, Samsung's semiconductor revenue rose 14% annually and accounted for 25% of its top line. Operating profit rose 8% and accounted for nearly half of its bottom line. Most of that growth was fueled by memory chip sales, but other OEMs, like Chinese smartphone maker Meizu, might install Exynos processors in their smartphones in the future.
Meizu's Exynos-powered MX4. Source: Meizu.
What Qualcomm fears
Both Qualcomm's Snapdragon 820 and Samsung's Exynos 8 Octa have custom 64-bit CPU cores that weren't designed by ARM Holdings (ARMH +0.00%). Qualcomm states that the 820 chipset boosts performance and power efficiency by 30% to 40% against previous chipsets. Samsung claims that the Exynos 8 Octa provides a 30% boost in performance over its predecessor, the Exynos 7420, and 10% better power efficiency.
The Snapdragon 820 pairs the Kryo CPU with the Adreno 530 mobile GPU and X12 LTE modem. Samsung pairs its CPU with ARM's new Mali-T880MP12 mobile GPU and its new LTE modem. Early GeekBench 3 benchmarks suggest that the two chipsets will are almost evenly matched in single-core performance, although Apple's A9 still easily overpowers both. In terms of multi-core performance, though, the eight-core Exynos 8 Octa is expected to handily outperform the quad-core 820 and dual-core A9.
Qualcomm claims the Snapdragon 820 has already secured over 60 design wins. But considering how much effort Samsung has put into the Exynos 8 Octa, it's unlikely Samsung will install the 820 in top-tier devices like the Galaxy S7. Instead, Samsung will likely keep using cheaper Snapdragon SoCs in cheaper devices like the Galaxy J series.
Don't panic just yet
Samsung's aggressive move into mobile chipmaking is troubling, but Qualcomm investors shouldn't panic just yet. Beyond its chip sales to Meizu, Samsung isn't likely to go head to head against Qualcomm in selling chips to other OEMs yet. While that move might generate higher revenues for the chipmaking unit, margins could quickly decline if a pricing war erupts. Qualcomm might strike a foundry deal with Samsung, which would allow it to profit from Snapdragon sales in exchange for installing its SoCs in select devices.
Nonetheless, investors who hoped Samsung would forgive Qualcomm's missteps with the 810 and rekindle its premium partnership with the 820 will likely be disappointed. Instead, Qualcomm's future depends more on expanding its chips to new markets like drones and ensuring that Chinese OEMs stop underreporting shipments in order to pay lower licensing fees.
