QualComm: The Margins

By Vijay Nagarajan, Guest Author

In the first part of this series, “QualComm: Legal Battles galore”, we looked at the legal events involving QualComm this year. We further looked at the significance of these events in “QualComm:The aftermath”. In this piece, I shall delve a little deeper into the impact of the legal battles and any further reversal that QualComm (QCOM) may suffer, by taking a look at the company’s financials for 2006.

The year 2006 saw QualComm’s revenues grow to $7.53 billion at a gross margin of 71% and an operating margin of 36% (down to 32.5% TTM). The company made $4.78 billion selling chips and services, primarily attributed to the QualComm CDMA Technologies (QCT) division, while licensing and royalties resulted in $2.75 billion. The QCT operating margins stood at 26% (higher than the industry average of 14%) while QTL margins were as high as 90%. A numerical analysis of this data along with CDMA-based chipset shipment volumes during this period reveals interesting data-points –

• Average royalty/licensing fee per CDMA-based handset sold (including CDMA2000, WCDMA/HSDPA, EV-DO) is $11, about 5% of handset average selling price (ASP).
• Average price per IC is $24 (11% of CDMA-based handset ASP).

With these numbers, we can evaluate the impact of legal reversals on the company’s business model-

• Verizon’s deal with BroadCom gives the latter $6 per handset sold (2.8% of handset ASP). If this serves as a precedent for deals that companies hope to strike with QualComm in the future, it spells trouble for the San Diego company. For example, if it pays a $5 royalty on the estimated 300 million chipsets for 2007, its gross margin is expected to come down from the consistent 70% mark to around 58%. The corresponding QCT operating margins will come down to single-digits. Though higher than the industry average of 50%, the projected gross margin signifies the impact on the IP business model. Continued reversals will thus make QualComm a more typical semiconductor company.
• Each dollar shaved off the IC selling price will result in the gross margin going down by about 1.5%. The corresponding QCT operating margins will be 4.5% lower.

This would then call for a reduction in the 20% R&D budget to buttress the operating margin – a paradigm shift from its business model. Further, it needs to capture more of the market to increase volumes. This implies investigation into new technologies, features and highly integrated products ahead of the competition.

In subsequent articles, we will look into the various technologies and technological directions that may influence the outlook and business model of QualComm and how the company is already looking into some of these aspects on the engineering side.

This segment is a part in the series : QualComm