Mixed quarterly results fortunes for Samsung, Intel and Qualcomm

Samsung’s first quarter results show why companies are fighting to acquire Toshiba’s memory business in Japan. The Korean firm, the world’s largest memory supplier, announced its highest quarterly profit for three years, mainly because of the strength of its chip division, and particularly its memory products.

The semiconductor division reported its highest ever operating profit of KRW6.31 trillion ($5.6bn), up 140% year-on-year on the back of a boom in sales of both DRAM and NAND flash memory soared amid a boom in memory chips. Total semiconductor sales of KRW15.7 trillion won ($13.9bn) were up 40% year-on-year.

This enabled Samsung to post a group operating profit of KRW9.9 trillion ($8.7bn), up 48% compared with the first quarter of 2016. Total sales for the quarter were up 5%, to KRW50.55 trillion ($48.5bn).

According to TrendForce, a research firm that tracks memory prices, DRAM pricing is expected to rise for the rest of this year, while global memory sales are expected to grow to 85.3bn this year, up from 77.3bn in 2016.

Another strong area for Samsung was its display unit, which saw its revenues rise 21% to KRW7.29 trillion ($6.4bn). However, following the Galaxy Note 7 fiasco, and under pressure from Apple and Chinese challengers, the mobile business saw its sales fall by 17% because of lower Galaxy shipments.

Samsung expects its chip business to drive more growth in the current Q2, because of demand for mobile memories, high-density DRAM and server solid state drives. It also expects to see a rise in 10nm applications processor shipments and strong sales of image sensors and display driver ICs. However, it is also looking for an uptick in the mobile division following the roll-out of the Galaxy S8 and S8+.

Over at Intel, the world’s largest chip vendor posted improved first quarter revenues and profits though it missed analyst expectations in its critical data center business. Its Q1 revenue was roughly on Wall Street target at $14.8bn, up from $13.7bn in the same period last year and a record for the quarter. Net income was impressive at $3bn, up 45% on the year-ago figure. Earnings per share (EPS) of $0.66 beat analyst expectations of $0.65. Operating income was up 40% to $3.6bn.

Margins are among the most closely watched metrics at Intel and they were encouraging, up 2.5 percentage points year-on-year to hit 61.8%.

However, the all-important data center group, which posted $4.2bn in revenue, fell short of analyst expectations of a 10% year-on-year jump, which would have translated to a total of $4.4bn.

The data center business is growing on the back of high telco and webscale investments in cloud infrastructure, but Intel needs to make its momentum unstoppable in order to fend off challenges from ARM-based server processors and architectures developed inhouse by major players like Google and Amazon. Intel is sampling its Skylake server processors, and said it expects they will drive growth for the data center group when volume sales kick in, in the second half of the year.

As the PC business declines, and with the mobile efforts a failure outside modems and WiFi, the Internet of Things is Intel’s great hope for reasserting itself at the client end of the computing chain. Connected cars, edge computing gateways and wearables have all attracted significant investment from the company, and it agreed to pay $15bn for Israeli machine vision pioneer Mobileye in March. IoT revenue in the first quarter was up 11% year-on-year to $721m but will be boosted in future by Mobileye.

Intel is not giving up on the mobile market despite pulling out of the smartphone system-on-chip game after repeated failures. It has engaged in a neck-and-neck battle with Qualcomm to deliver the first pre-standard 5G modems, and of course, the virtualization of many telco networks gives Intel a major opportunity in telecoms infrastructure. It is also working on specialized processors and accelerators to support base stations and other elements, and it has high end switch-chips for transport networks.

On the earnings call, CEO Brian Krzanich claimed Intel was “in the lead” in developing 5G chips and pledged to deliver silicon for 5G from the modem to the base station to integrated backhaul.

Ironically enough, the Client Computing Group – in which PC chips are still the biggest contributor – delivered $8bn in revenue, up 6% year-on-year, mainly because Intel is now focusing on higher-priced components. But Intel CFO Bob Swan was not confident about that trend continuing and expects PC average selling prices to fall throughout the year. “We’re more cautious than analysts on PC sales,” he said.

On the back of this respectable quarter, Intel upgraded its 2017 revenue forecast slightly, by $500m to $60bn, which would be a record. It also upped its annual capital equipment budget by 20% to $12bn, a level it expects will continue into 2018, in part to support a ramp-up in the booming memory market, especially in its 3D NAND and 3DXP products. In Q1, the Flash group was the fastest growing unit, with revenues up 55% to $866m. Another relatively small division, the former Altera FPGA company, turned in an 18% rise to hit $425m.

Intel has also set new cost cutting targets. “Bob and I have looked at being more efficient, we reduced 1% of spending based on revenue in 2016 and in 2017 we’ll take out another 1% or a little more,” Krzanich said. “Bob as CFO has brought in new ways of thinking of how to continue that trend.”

Qualcomm was having a less positive quarter, with its fiscal Q2 results hit by patent battles round the world (see Wireless Watch April 24). Its net profits were down 36% year-on-year to $700m, most of the decline relating to one-off items connected to patent litigation, such as the recent ruling on $815m of historical royalty payments to BlackBerry, and the $868m file imposed by South Korea’s antitrust authorities.

However, the real shadow over its performance this year is the licensing war with Apple, and details emerged from the quarterly results filings, which showed just how much is at stake.

Apple has told Qualcomm it will not pay patent fees until the licensing dispute between the two companies is resolved. Apple filed suit in January, claiming it overpaid, to the tune of $1bn, for Qualcomm patent usage, and alleging abuse of a dominant market position. Qualcomm filed a countersuit last month, claiming Apple had breached and mischaracterized agreements.

Qualcomm has now downgraded its guidance for the current fiscal third quarter as a result of the withholding of Apple payments. It now expects revenues between $4.8bn and $5.6bn, down from previous guidance of $5.3bn to $6.1bn, indicating that Apple royalties amount to about $500m per quarter. The year-ago Q3 revenue figure was $6bn. Earnings per share impact is even greater, because patent fees are a high profit business. They are now predicted to be $0.52 to $0.62, down from $0.67 to $0.92.

Qualcomm said Apple was “improperly interfering” with royalty agreements and that the licences remain valid and enforceable.  Apple has acknowledged that payment is owed for the use of Qualcomm’s intellectual property but insists contract terms be changed.

Qualcomm said in its countersuit filing that it paid Apple to refrain from asserting patents and revealed that it gets royalty fees for iPhones and iPads through Apple’s contract manufacturers including Compal, Foxconn, Pegatron, and Wistron. In its statement last week, it said initial indications were that any royalties from Apple’s contract manufacturers in Q3 “would likely be insignificant”.

According to EETimes, using rough estimates based Apple’s annual unit shipments of iPhones and iPads, Apple pays Qualcomm about $8 a system in patent royalties. Apple sold more than 211m iPhones last year, more than 231m the previous year, and hit peak quarterly sales for the iPad of 26m units in 2013, though many iPads are sold without cellular, the main source of patent fees for Qualcomm.