After months of listening to Broadcom say flattering things about Qualcomm during its hostile takeover bid, it’s tempting to see Qualcomm as a prized jewel bursting with potential. But now that Broadcom’s pursuit has been permanently blocked due to national security concerns, it’s worth remembering that Qualcomm is a company with serious problems and an uncertain future.
Qualcomm was king when its chips became essential during the early days of the mobile revolution. But more recently, it’s become a wounded duck. The company saw its annual revenue fall for three straight years, from $26.5 billion in fiscal year 2014 to $23.5 billion in fiscal year 2017. In its most recent quarter, revenue was essentially flat year-over-year.
Qualcomm said its revenues were impacted by its ongoing patent royalty dispute with Apple, one of its most important partners. Apple was upset about the royalty costs it had to pay for parts of its iPhones that touched Qualcomm’s patents.
“We did not record any QTL revenues in the first quarter of fiscal 2018 or fourth quarter of fiscal 2017 for royalties due on sales of Apple’s or the other licensee’s products,” Qualcomm said in its most recent earnings release. “The first quarter of fiscal 2017 results included approximately $740 million in QTL revenues related to the products of Apple and the other licensee in dispute. We expect the actions taken by these licensees will continue until the respective disputes are resolved.”
The company also noted that it was hit with a $1.2 billion charge after the European Union ruled it had conspired with Apple to shut out competitors from the market for smartphone chips. In addition, it’s facing an $868 million charge as the result of a fine imposed by the Korea Fair Trade Commission in the first quarter. And it incurred a $778 million charge imposed by the Taiwan Fair Trade Commission in the previous quarter.
Faced with a possible merger block last week, Broadcom issued a statement that sought to highlight Qualcomm’s mounting legal issues and their financial impact, as well as suggesting shareholder discontent.
“There can be no question that an American Broadcom-Qualcomm combination will provide far more resources for investments and development to that end,” the Broadcom statement said. “Entrusting this effort to a failing Qualcomm management who lacks the support of its owners, and that pays out much of its excess cash flow in fines as a result of serial lawbreaking, would not be in America’s long-term interests.”
Meanwhile, Qualcomm has been on the other end of a stumbling M&A drama. In October 2016, it reached a deal to acquire NXP Semiconductors. But NXP shareholders weren’t having it. They refused to back the deal, and Qualcomm is still trying to convince them 17 months later.
In an effort to block Broadcom, which didn’t want NXP, Qualcomm recently raised its offer for NXP to $44 billion. The bid expires within the next week, and Qualcomm is still waiting to see if enough NXP shareholders will bite. If not, it has offered to spend on money share buybacks to keep its own investors happy.
Of course, Qualcomm has done a great job of positioning itself as an early leader in 5G technology, one of the things that made it attractive to Broadcom and the reason the U.S. government ultimately decided it shouldn’t fall into foreign ownership. Still, that position offers the company some hope as initial rollouts of 5G seem to be happening faster than originally expected.
At the same time, it’s hard to know when those deployments will become meaningful to Qualcomm’s bottom line. Right now, Qualcomm has said it expects 5G to become a significant source of income next year (its fiscal year 2020 that ends in September) as more trials ramp up and deployment expands. But 5G is still awaiting some final standards and faces regulatory challenges around things like spectrum that vary by country and region. Most critically, carriers that will deploy the technology are looking at big capital costs while still trying to figure out what business models will actually justify that spending.
In other words, 5G involves a lot of moving parts, and Qualcomm doesn’t control most of them.
If the company can limp through the next couple of years and continue to invest enough in its 5G R&D, it could come out the other end with blazing growth. But at the moment it’s sitting in a pool of uncertainty that leaves an opening for competitors.