Qualcomm (QCOM, Financial) reported strong first-quarter results, exceeding EPS and revenue expectations, and provided positive guidance for Q2. However, the stock is declining due to concerns about its licensing business. Although the QTL segment represents only about 15% of Qualcomm's revenue, it is highly profitable, contributing 36% to total EBT in Q1 due to its 75% EBT margins compared to the 32% margins of the QCT semiconductor business.

The QTL segment reported $1.54 billion in revenue for Q1, slightly missing estimates. For Q2, Qualcomm forecasts QTL revenue between $1.25 billion and $1.45 billion, suggesting modest year-over-year growth of 2% at the midpoint. In Q1, QTL revenue grew by 5% to $1.54 billion.

• Qualcomm does not expect revenue from Huawei due to U.S. restrictions. The greater concern is potential contract losses with other Chinese OEMs amid escalating U.S.-China trade tensions.
• Despite efforts to diversify revenue streams, China remains a significant market, accounting for about 45% of Qualcomm's business. The company maintains a competitive edge in high-end smartphones, particularly with its Snapdragon 8 Elite chipsets, but faces potential competition from Chinese firms.
• Handset revenue, QCOM's largest segment, rose 13% to $7.6 billion in Q1, driven by strong demand for premium Android phones. However, Q2 guidance suggests a slight slowdown with an expected 10% growth in QCT handset revenues.
• Qualcomm anticipates a reduction in sales to Apple (AAPL, Financial), a 10% customer, as Apple transitions to its own chips. By 2026, Qualcomm's business with Apple may significantly diminish, a factor already reflected in the stock's 25% decline since mid-June 2024.
• The Internet of Things (IoT) segment showed significant growth, with revenue up 36% to $1.5 billion, surpassing expectations. The turnaround is attributed to Qualcomm's expansion into the PC/laptop markets with the Snapdragon X Plus 8-core platform, supporting new AI tools.

Despite Qualcomm's strong Q1 performance and outlook, concerns over its licensing business and dependence on China are impacting its stock. Growth in PC and automotive markets, where Q1 revenue increased by 61%, may help offset China-related challenges, but trade policies remain a significant risk.