Qualcomm Shows China Progress While Intel Stokes Server Fear

Updated on
  • Intel’s data center business lags well behind growth target
  • Qualcomm gets catch-up licensing payments, more chip orders

Qualcomm Inc.’s second-quarter results show the chipmaker is overcoming hurdles in China, while rival Intel Corp. faces fresh headwinds in servers -- the key to its profit.

San Diego-based Qualcomm, the biggest maker of semiconductors that run smartphones, reported earnings and gave forecasts that beat analysts’ estimates as it gets paid more licensing fees in China and gains market share there. Intel posted growth in its data center business that fell well short of its own targets, creating concern momentum in that profitable unit is slowing.

The two companies, which dominate their respective markets but have made few inroads onto each other’s turf, have struggled to grow as the PC market has collapsed and smartphone expansion slowed. 

Qualcomm late Wednesday said it’s performing better than the slowing phone sector, particularly in China, and is overcoming resistance by phone makers in that country to paying for its patents. Intel, which had benefited from the explosion in mobile internet through its server business, said that business grew 5 percent in the quarter, compared with a target of double-digit percentage gains for the year.

“Intel has some explaining to do,” said Kim Forrest, an equity analyst at Fort Pitt Capital Group. As more companies switch to buying their computing power over the Internet and give up equipping their own data centers, Intel should be seeing a commensurate uptick in demand for server chips from cloud providers, she said, adding that “the last quarter was a bit light in the data center group too.”

Missed Target

Intel executives faced multiple questions on a conference call with analysts about how the company will get back on course in servers. Corporate purchases of these computers will improve in the second half, a new design will help with average selling prices and the company has "signals" from customers that an increase in orders is on the way, the executives said on the call.

For the data center group, that was the third quarter in a row in which revenue gains missed the company’s target. It’s also the second consecutive quarter that growth in that unit has fallen below 10 percent, putting it well behind progress needed to reach its goal for the business this year.

“It’s not slowing down in the long term,” Chief Executive Officer Brian Krzanich said on the conference call. “It’s going to be driven by the many more devices that are going to connect to the cloud.”

The company’s biggest customers -- companies such as Google and Microsoft Corp. -- order chips in large batches to build new data centers, then pause purchases while they make sure their infrastructure is working at full capacity. That results in "lumpy" demand, he said.

“You need a lot of growth in the back half and they’re awfully confident, but I don’t know,” said Stacy Rasgon, an analyst at Sanford C. Bernstein. He doesn’t believe that corporations will return to investing heavily in their own data centers. “In the best case, enterprise is flat but really it’s probably down.”

Intel shares fell as much as 4.5 percent, their biggest decline in a month. They were trading at $34.19, down 4.2 percent, at 9:54 a.m. in New York. Qualcomm gained as much as 7.7 percent, it’s biggest increase in more than seven months.

China Crisis

The worldwide market for smartphones is on course to grow just 3.1 percent in 2016 following an expansion of 10.5 percent last year and a 28 percent surge in 2014, according to IDC Corp.

While Qualcomm isn’t seeing anything to contradict that kind of outlook, according to Chief Executive Officer Steve Mollenkopf, it is doing better within that environment, particularly in China, the biggest national market for phones, he said.

In the chipset business, which provides the company with the majority of its revenue, Qualcomm did better than expected with Chinese phone makers who are grabbing a larger portion of their home market. At the same time, its attempts to persuade more of them to pay royalties for using Qualcomm technology are gathering momentum and fewer are holding out on money they owe it, the company said.

“It was a really strong quarter -- it was strong in both businesses, in particular the license business,” Mollenkopf said by phone. “We got some money a little earlier than we would have thought.”

Qualcomm is suing China’s Meizu Technology Co., trying to force the phone maker to negotiate a license agreement for using the chipmaker’s technology. That’s seen as a test case for the ability of China’s intellectual property courts to enforce such agreements. Qualcomm is prepared to pursue similar legal action against companies that continue to avoid paying what they owe or negotiate, President Derek Aberle said on Wednesday’s conference call.