Qualcomm is increasingly exposed to ChinaQualcomm is increasingly exposed to China

Lawyered-up Qualcomm is used to winning courtroom battles against other developers of wireless technology. It undoubtedly helps to have one of the world's most valuable portfolios of 5G patents. A recent ranking by LexisNexis put it ahead of both China's Huawei and Sweden's Ericsson, the planet's biggest makers of 5G network products, for ownership of the patents that really matter. In the last fiscal year, Qualcomm earned more than four times as much in licensing revenues as Ericsson, extracting royalties from smartphone makers and other companies deemed to have relied on its technology smarts. Litigation is normal practice against those reluctant to pay up.

Yet the main QTL intellectual property unit, while still far more profitable than Qualcomm's chips business, has not recently been as lucrative as it once was. After hitting $6.4 billion in 2022, QTL sales slumped to just $5.3 billion in 2023. And while they rose to nearly $5.6 billion last year, the latest guidance is for zero growth in 2025, despite a year-over-year increase of 5% for the recently ended first quarter, to about $1.5 billion. The update seems largely responsible for a 4.6% drop in Qualcomm's share price during after-hours trading on the Nasdaq yesterday.

Investors have plenty of reasons to be optimistic about Qualcomm. After falling in 2023, smartphone shipments were up 7.1% last year, the highest rate of growth since 2021, according to data published this week by Omdia, a Light Reading sister company. Qualcomm derives the bulk of its sales from QCT, its chips business, and its first-quarter revenues were up a fifth year-over-year, to about $10 billion. Overall net income rose 15%, to roughly $3.2 billion.

But Qualcomm's heavy reliance on QTL for company profits makes shareholders nervous about any signs of weakness. Of the roughly $1.5 billion it made in QTL revenues for the first quarter, Qualcomm booked almost $1.2 billion as earnings before tax, giving it a margin of about 75%. QCT's equivalent margin was just 32%.

Huawei pain

The disappointing outlook for QTL is largely blamed on Huawei. Qualcomm's licensing agreement with the Chinese vendor has expired. And while it is in negotiations with Huawei about a potential renewal, the figures assume there will not be a settlement that boosts revenues in the current fiscal year. Should this happen, Qualcomm will naturally do better than it expects.

It also had what Alexander Rogers, QTL's president, described on this week's earnings call as "a really good run of execution" with other smartphone companies. They include Transsion, a Chinese vendor that will be unfamiliar to many consumers in the US and Europe. It has, said Rogers, "popped up the ranks of OEMs [original equipment makers] in terms of unit volume – very high up the ranks, actually." Omdia ranked it fourth last year.

But geopolitics is clearly a threat. Even before Donald Trump re-entered the White House last month, US authorities had revoked Qualcomm's license to sell 4G chips and other semiconductors to Huawei. Until then, sales had arguably been a lifeline for Huawei's ailing handset business, which had been cut off by US sanctions from TSMC, a Taiwanese foundry that previously made chips for HiSilicon, Huawei's in-house chips business. The Chinese company subsequently appears to have used SMIC, a local foundry, to produce 5G chips based on HiSilicon designs. Meanwhile, Qualcomm's share price remains 23% lower than it was in June 2024, shortly after it was stopped from selling 4G chips to Huawei.

Huawei had effectively disappeared off smartphone rankings after it was struck by US sanctions, selling a big portion of its handset business that traded under the Honor brand. While it remains a long way behind Xiaomi, Transsion and other Chinese companies, its 5G revival and growing market share made it the tenth-biggest company by volume of shipments last year, according to Omdia. If Huawei captures additional market share from Chinese OEMs still served by Qualcomm, the US chipmaker could suffer, as it has recognized in recent filings with the US Securities and Exchange Commission.

A much bigger China-related threat is that sanctions or tariffs upset Qualcomm's sales to those other Chinese customers. Despite the rifts between China and the US, Qualcomm has grown more heavily reliant on Chinese business and last year derived 46% of its revenues, about $17.8 billion, from customers with Chinese headquarters. Sales to China were up a third and as a percentage of total revenues grew from 37% in 2023 to 46% last year. The natural conclusion – that Chinese smartphones are increasingly powered by a US company's technology – is unlikely to go down well in some political circles.