Samsung dropping Qualcomm from Galaxy S6? Not so fast

Analysts say that it's unlikely that Samsung will completely drop Qualcomm from its Galaxy S6 launch. The reality may be a bit more nuanced than reports suggest.

Samsung will reportedly drop Qualcomm's Snapdragon 810 processor for its own chip with the Galaxy S6 launch, but analysts say the situation is a bit more nuanced.

Bloomberg reported that Qualcomm's Snapdragon 810 processor overheated in testing and Samsung decided not to use it. As a result, Samsung is going to use its own processor in a move that has been telegraphed. Samsung is trying to use its own processors to bolster its own chip making efforts.

In the big picture, Samsung is trying to become more vertically integrated and use its own parts from its various units to differentiate itself from Apple. Samsung at CES 2015 highlighted various Internet of things initiatives.

Also: Five reasons why the time is now for Samsung, BlackBerry to merge | Samsung's challenge: Build software, platforms to offset hardware sales volatility | Samsung at CES 2015: How enterprise fits it in with Internet-of-Things

For Qualcomm, billed by some as the next Intel due to its mobile dominance, losing Samsung would be a hit. What's unclear is how big of a hit Qualcomm would take.

Analysts handicapping the Bloomberg report noted that Samsung could use its own processor---called Exynos---in Korea and then Qualcomm elsewhere. These analysts also said in reports that Qualcomm has fixed the overheating issue.

Cowen analyst Timothy Arcuri said the Qualcomm worries are overblown:

A new wave of reports overnight indicate that Samsung has decided not to use Qualcomm's 64-bit octa-core Snapdragon 810 SoC to power ANY of its upcoming Galaxy S6 flagship high-end smartphones due to (long-rumored) overheating issues. We note the Galaxy S6 is widely expected to debut at Mobile World Congress (MWC) in early March and ship globally soon after.

We would make six points: 1) we believe the vast majority of investors with whom we speak are well aware of the issues and expect at least some of the models to be launched w/ Samsung's own Exynos processor so the press is hardly uncovering new information; 2) our work has long suggested that Qualcomm was rushed and didn't have time to customize the ARM core for 20nm for the 810 and there was an issue w/the ARM design (Apple is already fully customized, for example, so it didn't have this issue); 3) we believe the design issue was at the base layers - not metal as indicated by some competitors in Asia - and the resulting delay was ~2-3mos; 4) we believe Qualcomm already solved the issue and production for 810 is ~2-3mos behind schedule; 5) this press report speculates that Samsung will use Exynos for ALL models - we consider this UNLIKELY as Samsung would have to use a different modem and RF in addition to the SoC - this is a very big undertaking and our work suggested Samsung was not ready with a complete solution; 6) thus, our view remains unchanged - our best guess is that Samsung will likely launch the Galaxy S6 in Korea with its own Exynos but slightly delay shipments in other regions to accommodate Qualcomm's delayed schedule.

Meanwhile, BMO Capital Markets analyst Tim Long said Samsung's internal share of using its own Exynos processor in the Galaxy S and Note line has gone from 70 percent in 2012 to 20 percent in 2014. It's almost impossible for Samsung to reverse that share decline quickly.

In other words, Samsung couldn't boot Qualcomm if it wanted to. Nevertheless, Qualcomm could take a hit of some sort. Long estimates that Qualcomm derived about $1.5 billion in revenue from Samsung in calendar 2014 between application processors and baseband chips. Should Qualcomm lose $500 million in revenue from Samsung it equates to 3 cents a share to 5 cents a share from earnings.

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