- Shares decline to lowest price in more than five years
- Company's problems `are structural and not going away'
Qualcomm Inc. forecast fiscal second-quarter sales and profit that may fall short of analysts’ estimates, indicating that increasing competition in the slowing smartphone market is weighing on semiconductor orders. The shares tumbled.
Net income in the period that ends in March will be 69 cents to 79 cents a share on revenue of $4.9 billion to $5.7 billion, Qualcomm said Wednesday in a statement. On average, analysts had projected earnings of 84 cents on sales of $5.66 billion, according to data compiled by Bloomberg.
Qualcomm’s division that makes processors and modems for phones, its biggest business by revenue, is getting squeezed on two fronts: the overall market is slowing, and competitors are churning out chips that rival Qualcomm’s on price or performance. At the same time, the top three smartphone makers -- Samsung Electronics Co., Apple Inc. and Huawei Technologies Co. -- are increasingly designing their own parts, further eroding demand.
“Their issues are structural and not going away,” said Stacy Rasgon, an analyst at Sanford C. Bernstein. He has the equivalent of a hold rating on the stock. “The market is saturating. The competitive environment is getting worse.”
Qualcomm shares slipped 8.3 percent to $43.59, the lowest price since September 2010, at the close in New York. They have declined 13 percent this year.
Profit in the first quarter, which ended in December, fell to $1.5 billion, or 99 cents a share, from $1.97 billion, or $1.17 a share, a year earlier, Qualcomm said. Sales declined to $5.78 billion. Analysts had projected earnings of 83 cents on sales of $5.68 billion.
Chief Executive Officer Steve Mollenkopf said the smartphone market continues to grow, but there’s “weakness” among the top-tier brands, which includes Apple and Samsung.
“Worldwide, the premium tier is down a little bit from our previous expectations,” he said following the report.
The overall smartphone market is becoming saturated, making it tougher for many of Qualcomm’s customers to find growth. Apple yesterday reported its slowest iPhone growth since the device was introduced in 2007, and said that handset sales would fall for the first time ever in the March quarter.
Mollenkopf has been trying to halt and reverse sales declines that have cut Qualcomm’s revenue by more than 10 percent for three straight quarters. He’s trying to get Qualcomm’s technology into new markets such as servers, cars and medical devices as the company’s main phone-chip business becomes more competitive and overall growth slows.
Last year was the first that the smartphone market expanded by less than 10 percent, according to market researcher IDC. Demand in China, which has fueled market growth, is slowing to a percentage in the “low single digits” percent because of economic concerns, IDC said. Phone purchases in that country will increasingly be driven by the replacement of existing devices, rather than new consumers buying for the first time.
Qualcomm is unique among semiconductor makers in that it gets most its profit from licensing patents. Makers of phones pay the company royalties, whether or not they use its chips. That lucrative profit pool has come under attack as governments around the world examine Qualcomm’s business practices. Some Chinese manufacturers have used their government’s investigation of the U.S. company as a reason to hold off on paying all the fees that Qualcomm says these companies owe.
Derek Aberle, Qualcomm’s president, said the company is making headway in getting Chinese companies to sign licensing agreements. Qualcomm signed four deals during the recent quarter and has “less than a handful” of key contracts left to work out, Aberle said in an interview on Wednesday.
Still, Qualcomm said it’s deferring $100 million in revenue per quarter as a result of a contract dispute with South Korea’s LG Electronics Inc., which alleges it overpaid royalties to Qualcomm. While Qualcomm said it believes LG’s claims are “without merit,” the two companies are working through an arbitration process that could extend into next year.
Qualcomm’s biggest source of revenue, the design and sale of modems and microprocessors, has lost some of its industry leadership as other companies have caught up in the capabilities their chips offer. The largest makers of phones are also increasingly designing their own chips as they try to distinguish their most expensive phones from others’, cutting into Qualcomm’s market.
Following a strategic review, Qualcomm last month rejectedcalls by some investors to split itself in two, deciding to keep the chipmaking and patent-licensing businesses together. Historically Qualcomm’s chip business has generated patents that have then been turned into high-margin licensing revenue. That cash influx, in turn, has helped the company fuel industry-leading research and design efforts, keeping its products ahead of rivals in capabilities.