After tepid growth for years, in June 2021, The wireless giant finally show signs of fire. Investingdeck tries to connect this leap with 5G, EV, and the Internet of Things. We also cover the Qualcomm business model to help readers get the bigger picture.
. . .
In This Issue
The Ruler of The Sky.
In its fiscal year ended June 2021, Qualcomm recorded 24.3 Billion in revenue, up almost 60% from the previous period. This upside is a sign that finally, The San Diego chip giants delivered long-awaited growth: 5G. Thanks to its Snapdragon 888 5G Mobile Platform that is embedded in the flagship smartphone (including iPhone 13).
We conclude that the upside of the revenue is due to the increase of unit prices instead of the volumes. Simply said, 5G technology is expensive – every new technology is expensive at the beginning before reaching economies of scale.
In flagship territory, we believe that the Snapdragon could retain its position as a dominant chip (5G modem included) supplier. But in the midrange segment, competition will heat up. For instance, Realme X7 Max 5G uses MediaTek as its chip. We need to know how this materializes in financial performance. At the moment, we are happy with Qualcomm’s position as flagship partner – it gives more profit margin. Competing in the mid or low-end smartphone market is really painful, so we are happy that Qualcomm playground isn’t there.
Another opportunity for Qualcomm is the absence of Huawei in 5G games – at least for now. Huawei has great technology that can beat the US, sorry, we mean Qualcomm. Thus, with the spirit of nationalism, Donald Trump makes a restriction for Huawei that means a lot to Cristiano Amon-led company.
Qualcomm is Things of Internet
The rollout of 5G allows faster and more reliable data transfer, thus, enable devices to communicate with each other. To be cool, we call it the Internet of Things (IoT). IoT means more and more communication, data transfer, and here is the field that Qualcomm excels in.
5G, besides the smartphone modem, has opened the gate of new opportunities for Qualcomm. With communication features, devices could act as a software-hardware entity, thus, 5G could transform into 5G – as -a – Services1 or Cristiano Amon calls it “IoT as Services”.
Together with automotive and radio frequency, Amon says that IoT will grow 60% in the next year. A spectacular number, but we need to keep our foot on the ground since the IoT boom since we do not see any urgency to rush IoT applications in the near term. Also, we do not see any significant contribution from 5G to Qualcomm revenue at the moment. 5G is potential, but we need to see more triggers.
Into Qualcomm Business Model
Officially, Qualcomm separates its revenue into two segments. They are Equipment – services and License. At a glance, it looks like a different kind of product (or service), but for us, the licensing segment can be monetized due to the equipment – services segment. Let us take a look at the story deeper, and we will back to IoT and 5G again, to see how it all connected.
Modem Role in Qualcomm Business Model
Everyone knows that Qualcomm makes a modem. What makes it special is its reliability and efficiency.
Designing modems for a laptop or console games are very different from designing chips for mobile devices. As the name implies, mobile devices matter most about efficiency – since it is mobile and electric sources is unreachable for long period. In simple data transfer activity like texting in WhatsApp, the advantage of using the Qualcomm platform isn’t too apparent. But, when the task begins to be more complex, everything is different.
When a connection-hungry game like Genshin Impact is played, the modem needs to be very efficient, it has to be able to deliver the data and at the same time preserve the power. Qualcomm makes this kind of chip – and Qualcomm makes it so good. So good that almost any smartphone vendor needs it.
This segment generates more than 16 Billion in Fiscal Year 2020
Bonus Segment: License in Qualcomm Business Model
Knowing that ist modem has unparalleled quality, Qualcomm isn’t afraid to take further steps. The smartphone vendor has to pay a percentage of their smartphone to Qualcomm – yes, this is insane: percentage of A whole phone price, not only Qualcomm chip embedded inside. Everyone is complaining, but everyone is willing to pay.
The Qualcomm side believes that royalty should be paid since it has patented the communication algorithm. According to some resources, The San Diego-based will charge more than $15 for each 5G smartphone. As you expect, everyone will pay for it.
Qualcomm set its own rule, if you want our chip, you have to pay the license.
This segment deliver more than 7 Billion in the Fiscal year 2020.
Let’s get to our point:
- 5G will boost Qualcomm revenue, but it will somehow slow down at some point. When another chipmaker has the same feature, the profit margin will be eroded. Another problem for 5G is it isn’t set up properly in some countries. It will be useless having a superspeed modem without network support.
- IoT is interesting, but with no essential trigger, the rollout will take time. Someday if IoT really matters, it is interesting how Qualcomm plays its card. Will it play no license no chip in this field? And how the related parties will respond?
- Another thing that worries us if Qualcomm’s overuse of its dominant position will spark any anger for other parties. Apple ever thinks to switch from Qualcomm to Intel – and we believe some big-name vendor is quietly looking for a more economical solution. Also, we need to keep watching if there is any other legal challenge to Qualcomm’s business model. For now, Qualcomm is enjoying the euphoria of 5G – and we believe its position is undisputed right now.
- Even officially the modem segment accounted for 69% of Qualcomm revenue, in our perspective it is 100%. The licensing business will exit if and only if the modem segment does well. Any significant problem in the modem segment means catastrophe for Qualcomm.
We recommend readers visit our post about Qualcomm economic moat here.
- following IaaS, PaaS, SaaS