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5 August 2019

Apple windfall saves Qualcomm from revenue decline amid China woes

Qualcomm blamed weakened Chinese demand for a 13% year-on-year decline in revenues in its fiscal third quarter, and warned that it expects the same pattern to persist into the fourth quarter.

The chip giant reported revenues down 13% year-on-year to $4.89bn, excluding a one-time payment from Apple of $4.7bn, resulting from the recent settlement of the companies legal actions. With that payment, fiscal Q3 revenues were $9.6bn, up 73% on the year-ago quarter. And the windfall also helped deliver net profit up 79% to $2.1bn.

There are some good signs on the horizon in China, the world’s biggest smartphone market. Qualcomm said its Chinese customers – which include Oppo, OnePlus, Vivo and Xiaomi – are “managing inventory ahead of 5G”. In other words, they are slowing purchases of 4G chipsets because they want to make a big push behind 5G products when they launch those in late 2019 or 2020.

However, Qualcomm’s business has also been affected by the increased market share of Huawei in its home market. Amidst trade wars and threatened bans on its equipment in the USA and elsewhere, Huawei has been focusing heavily on its home base, taking share from other handset makers. Huawei has its own chipsets, courtesy of its HiSilicon unit.

“As a result of the US export ban, Huawei shifted their emphasis to building market share in the domestic China market where we do not see the corresponding benefit in product or licensing revenue,” said Qualcomm CEO Steve Mollenkopf on the earnings call.

He added: “The Huawei export ban, along with the pivot from 4G to 5G — which accelerated over the past couple of months — has contributed to industry conditions, particularly in China, that we expect will bring great headwinds in our next two fiscal quarters.”

However, he said Qualcomm was uniquely placed to benefit from the scaling-up of 5G deployments once that happens, in China and elsewhere, from 2020. “Today, we are the only chipset vendor that has 5G system level solutions spanning both sub-6 GHz and millimeter bands. This is key to global deployments,” he told analysts, saying that more than 150 devices are now “launched or in development” using Qualcomm’s 5G chipsets.

“By the first calendar quarter of 2020, we anticipate reaching the inflection point as our financial results begin to reflect the benefits of our substantial efforts over the years to bring 5G into the market worldwide,” Mollenkopf added.

For its fiscal fourth quarter, Qualcomm is expecting revenues of between $4.3bn and $5.1bn, well below analyst predictions of $5.63bn on average. That would equate to declines of between 12% and 26% year-on-year. It expects shipments of its most important product portfolio, modem and system-on-chip chipsets for handsets, to be down about 4% sequentially and down 31% to 40% year-on-year.

Wall Street was also disappointed by Qualcomm’s reduced forecast for total handset shipments in 2019, which it cut by 100m units compared to its previous estimates, to between 1.7bn and 1.8bn units.