Snapdragon Overheating: QCOM Loss May be Samsung’s Gain

Qualcomm, Inc. (NASDAQ:QCOM) returned solid results in its latest quarterly earnings with revenue up more than 7% year-over-year and profit up more than 5%. The company’s wireless modem chips were in the record 74.5 million iPhones Apple Inc. (NASDAQ:AAPL) sold over the holiday quarter and it has a new flagship Snapdragon chip ready to power this year’s generation of Android smartphones.

Snapdragon Overheating: QCOM Loss May be Samsung’s Gain
Source: Qualcomm

So why did QCOM drop 8% after those earnings were announced and continue dropping (it’s now down 12%)?

Blame the new Snapdragon 810 CPU.

The latest version of QCOM’s ubiquitous Snapdragon chips is reportedly having issues with overheating. There had been rumors that Samsung Electronics Ltd had concerns with the chip during development of its forthcoming Galaxy S6 smartphone and that the company was considering ditching the Snapdragon 810 in favor of its own Exynos CPU.

Other smartphone manufacturers have also been cited as having trouble with the chip, including HTC Corp. and LG Electronics Inc. At one point late last year, Business Korea was reporting Snapdragon 810 issues were threatening to delay the launch of new flagship smartphones in 2015 while manufacturers scrambled for a solution.

QCOM had always denied the rumors. In December, a spokesperson told TechRadar:

“We won’t comment on any of the rumor or speculation you referenced but I can tell you that everything with Snapdragon 810 remains on track and we expect commercial devices to be available in 1H 2015.”

However, in its first-quarter financial statement for 2015, QCOM lowered the revenue outlook for its semiconductor business. Among the reasons cited by Qualcomm:

“A shift in share among OEMs at the premium tier, which has reduced our near-term opportunity for sales of our integrated SnapdragonTM processors and has skewed our product mix towards more modem chipsets in this tier.”


“Expectations that our Snapdragon 810 processor will not be in the upcoming design cycle of a large customer’s flagship device.”

In other words, where there’s smoke there’s fire.

Even Qualcomm is now admitting it has a problem with the Snapdragon 810. Given that Samsung is the only smartphone manufacturer currently using Snapdragon chips that has the capability to substitute its own CPUs in place of the Snapdragon 810, it looks as though the QCOM earnings report is confirming the Galaxy S6 will be Exynos-powered.

The company also has ongoing challenges in China, particularly around technology licensing, but the Snapdragon 810 could be the more serious of its troubles.

When the world’s largest manufacturer of smartphones rejects your new CPU for its flagship smartphone — expected to be the top selling Android smartphone of 2015 — you have a problem.

Qualcomm currently holds a commanding 54% share of the market for smartphone CPUs. Its Snapdragon chips are in many mid-range Android, Windows and BlackBerry Ltd (NASDAQ:BBRY) phones and the higher margin top of the line Snapdragon 800 series powers virtually every flagship smartphone that isn’t an iPhone.

Losing the Galaxy S6 will be a public relations black eye for QCOM and clearly the company expects the lost sale to be costly. Having Samsung on your bad side is worse. Unlike the other smartphone manufacturers, Samsung has its own chip business — it’s currently the No. 4 smartphone CPU manufacturer — and the company has tested the waters in the past by using its own Exynos CPUs in European versions of Galaxy and Note devices.

Samsung may not be able to ramp up production sufficiently to offer a Snapdragon 810 replacement to other smartphone manufacturers (at least not in time for this release cycle), however QCOM should be concerned.

The Galaxy S6 will push the Exynos into the limelight and if it performs well, other manufacturers will take note. And with Samsung desperate to boost other lines of business amid  tumbling smartphone sales, there is long-term danger that Samsung could capitalize on this QCOM stumble to move more of its own business in-house and aggressively target other smartphone manufacturers who have traditionally powered their devices with Snapdragon chips.

In the meantime, companies like LG, HTC and Sony Corp (ADR) (NYSE:SNE) face some tough choices.

They can go ahead and release flagship smartphones with the Snapdragon 810 and live with any overheating issues through throttling. They could use previous generation or less powerful Snapdragon chips. Both of these options are likely to leave consumers underwhelmed.

They could wait for QCOM to fix the problem and produce a replacement (something that could take three months, plus the time required to test in their devices) — but that means pushing smartphone launch windows. Or they could try a rival chip like Nvidia Corporation’s (NASDAQ:NVDA) new Tegra X1 — except that high-powered CPU is a power hog that’s more targeted at automotive applications than mobile use.

In other words, most smartphone manufacturers will be wringing their hands over what to do.

The only clear winner out of this situation will be Apple — who has a shot at selling even more iPhones if new Android flagship devices are delayed or seen to be hobbled. Samsung may well be a winner if the Galaxy S6 launches while Android rivals are on hold, while the company could potentially book additional business for its Exynos CPUs as Snapdragon replacement in future devices.

Of course, if an Exynos-powered Galaxy S6 stumbles, Samsung could take the double hit of poor Galaxy sales plus a black eye for its mobile CPU ambitions.

There is a clear loser, though, and that’s QCOM. The current slide in its stock price could be the least of Qualcomm’s worries before all of this is over.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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