Qualcomm loses Apple’s business and drops NXP deal. What’s next?

Qualcomm’s problems continue to build.

The company this week announced it would walk away from its long-stalled deal to purchase NXP and will therefore pay a $2 billion breakup fee and start a $30 billion stock-buyback program. Separately, the company announced that Apple won’t use its modem chips in the next iPhone, a statement that likely reflects Apple’s decision to fully replace Qualcomm’s silicon with Intel’s chips in its forthcoming iPhones.

These latest developments follow Apple’s ongoing $1 billion lawsuit against Qualcomm, the company’s continuing efforts to cut $1 billion in costs through thousands of layoffs, and President Trump’s move earlier this year to block Broadcom’s attempt to purchase Qualcomm through a hostile takeover.

“The company has been through a lot in the last year,” acknowledged Qualcomm CEO Steve Mollenkopf in concluding the company’s quarterly conference call with analysts.

Of course, Mollenkopf and other Qualcomm executives on the call sought to play up the positives in Qualcomm’s finances and position in the market. For example, in Qualcomm’s most recent quarter, the company posted gains in both revenues and net income (PDF), and Qualcomm executives argued that the company remains well positioned to take advantage of the move to 5G and to grow in adjacent industries like automotive and internet of things.

Further, investors didn’t appear too concerned about Qualcomm’s situation; the company’s stock was up roughly 5% in after-hours trading following the release of the company’s earnings, as investors cheered the company’s massive stock-buyback program.

But Mollenkopf’s dismay at Qualcomm’s failure to close its purchase of NXP was palpable. "It was very clear to us that the macro environment was a very difficult macro environment to get something of this size through. It was not clear that that was going to change in the future dramatically, particularly in the time window that we saw that we had to really move,” Mollenkopf said during Qualcomm’s quarterly conference call with investors. Mollenkopf didn’t elaborate on the “macro environment,” but Qualcomm’s purchase of NXP needed only approval from the Chinese government, which is currently embroiled in a budding trade war with the United States under the Trump administration.

Added Mollenkopf: “The company needs to focus on the opportunities that are ahead. I think that's important. The other aspect is that we need to provide certainty, not only to our partners and shareholders but also to our employees as to where we're going. And so we looked at all that together in a big mix, and basically decided the right thing to do was to move on."

Mollenkopf acknowledged that Qualcomm’s purchase of NXP was intended to help the company expand into new markets including the automotive and IoT sector, but he argued that during the two years that Qualcomm has worked to close its purchase of NXP, it has managed to make headway in both sectors by itself.

“We already feel that we’re a pretty large player” in the automotive area, Mollenkopf said, adding that “we do not have as strong an organic channel” in the IoT business and so would have to “augment that.”

And what of Qualcomm’s loss of Apple’s iPhone business? That of course has been a distinct possibility ever since Apple filed its first lawsuit against Qualcomm early last year for what it has argued are Qualcomm’s unfair patent-licensing practices. But Qualcomm’s Cristiano Amon said that, despite losing Apple’s modem business, Qualcomm feels “pretty good about our modem leadership.”

Nonetheless, Apple remains one of the world’s leading smartphone makers, and the complete loss of the company’s modem business represents yet another challenge for Qualcomm’s leadership.

But one analyst doesn't see much direct impact to Qualcomm from the news. "While Apple iPhone design-loss is likely to hit Qualcomm’s baseband volume to some extent, Strategy Analytics believes that Qualcomm is unlikely to be affected in terms of revenue, thanks to improved product mix with higher priced baseband-integrated applications processors," said Sravan Kundojjala, a market consultant at Strategy Analytics. "In recent quarters, Qualcomm has significantly improved its Snapdragon product mix with higher priced 600, 700 and 800 series of chips, which support advanced LTE modem features and also drive demand for Qualcomm’s RF front-end components.”

So could Qualcomm win back Apple’s modem business? “If the opportunity presents itself, I think we will be a supplier of Apple,” Amon said.

Article updated July 26 with additional commentary.