Qualcomm predicts slower growth, looks to push into server chips

Qualcomm (NASDAQ:QCOM) executives noted that the company continues to face hurdles in China, and partially as a result the firm said it is now expecting a slightly more conservative growth rate during the next five years. However, the chipset giant still thinks it has plenty of room to grow thanks to increasing LTE and smartphone adoption and its decision to move into new areas, such as supplying silicon for servers.

At its annual investor conference, Qualcomm said it is holding "difficult discussions" with Chinese authorities regarding an antitrust investigation, according to Bloomberg. Qualcomm Chairman Paul Jacobs said in a meeting with government officials in Hangzhou, China, that the company is looking to find a "win-win solution" that allows it to keep growing its business in the world's largest smartphone market.

Qualcomm said it "expects to collect on substantially all LTE devices" in its efforts to rep patent-licensing fees from Chinese OEMs using LTE technology in China. 

For nearly a year the Chinese National Development and Reform Commission has been looking into Qualcomm's licensing fees in the country. Qualcomm derives most of its profit from licensing fees and most of its revenue from sales of chipsets and modems.

According to Bloomberg, Chinese Premier Li Keqiang said Qualcomm has more opportunities in the country than challenges. "And even though there are some challenges, there will be win-win solutions," Li said while meeting with Jacobs.

Qualcomm could be hit with a fine as high as $1 billion related to the Chinese probe, and could also be forced to make concessions that would negatively impact its licensing business. That's particularly troubling for Qualcomm at a time when Chinese carriers are rolling out LTE networks and more device makers are selling LTE devices.

Qualcomm said it expects its total revenue to grow between 8 percent and 10 percent annually over the next five years, and it expects its earning per share to surge even more. However, as Reuters notes, in the past Qualcomm has forecasted double-digit annual growth in revenue and earnings per share over five years. In addition to its China difficulties, Qualcomm also faces lower payments from OEMs and average selling prices of smartphones continue to drop.

Meanwhile, Qualcomm confirmed it intends to jump into the server market. The firm is already the largest chipset provider of smartphone application processors and baseband processors, and has been moving into other areas, such as connected cars and the Internet of Things for growth.

Qualcomm's server push will pit the company against Intel and Advanced Micro Devices, which have dominant positions in the server market.

"We are engaged with customers," Qualcomm CEO Steve Mollenkopf said, according to the Wall Street Journal. "It will take us a while to build this business, but we think it is an interesting opportunity going forward."

"Qualcomm's cautiously optimistic on adjacent markets of networking, mobile compute, auto/OEM and IoT with higher growth expected vs. core markets, albeit off a lower base," RBC Capital markets analysts Mark Sue and Ameet Prabhu wrote in a research note. "On server/data-center customers, it's early days; we're not expecting meaningful contributions anytime soon."

Intel has 98 percent of the market for servers based on PC chips, according to Bloomberg. However, Qualcomm plans to use technology for servers that use chipset architecture from ARM Holdings.

For more:
- see this Bloomberg article
- see this Reuters article
- see this WSJ article (sub. req.)
- see this CNET article
- see this GigaOM article

Related Articles:
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Qualcomm touts LTE Broadcast software at Uplinq conference, sidesteps China issues
Qualcomm extends LTE to entry-level smartphone processors
Qualcomm could be nearing settlement of Chinese antitrust investigation

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