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Qualcomm Forecast Shows Chinese Phone Market on the Mend

Updated on
  • Chipmaker hints at sharp decline in Apple modem orders
  • CEO still hopeful on NXP acquistion in midst of trade fracas

Qualcomm Inc. issued an optimistic forecast for the current quarter, a sign demand is beginning to improve in China, the largest smartphone market.

Sales will be $4.8 billion to $5.6 billion in the fiscal third quarter, the San Diego-based company said Wednesday in a statement. Analysts on average expected revenue of $5.45 billion, according to data compiled by Bloomberg.

Qualcomm said smartphone chip orders are showing signs of life in China after slumping at the end of last year. Concern about the market deepened in recent weeks after lackluster results from other suppliers to handset makers, especially Apple Inc.

Even as global smartphone growth slows -- causing pain for Apple, a top smartphone maker -- Qualcomm benefits because it’s supplying manufacturers in China that are growing by taking market share from Apple.

Sales of phones in China have been good enough to shift a buildup of unused components, said Qualcomm Chief Financial Officer George Davis. “You’ve seen inventory go down pretty rapidly,” he added.

The company’s shares rose as much as 4.3 percent in extended trading after closing at $49.75 in New York. The stock is down more than 20 percent this year, making it the second-worst performer on the benchmark Philadelphia Stock Exchange Semiconductor Index in that period.

Profit in the fiscal second quarter was 80 cents a share, excluding certain items. Adjusted revenue was $5.2 billion. Analysts had predicted adjusted earnings of 70 cents a share on revenue of $5.19 billion.

“China’s coming from a deep bottom and getting a little bit better," Mike Walkley, an analyst for Canaccord Genuity Inc., said ahead of the results. “You’ve seen China burn through a lot of excess inventory."

While Qualcomm still supplies some chips to Apple, a legal dispute has soured relations between the two companies and the iPhone maker has started using chips from other suppliers. Qualcomm said on Wednesday that it experienced a large decline in orders for modems from one customer. Apple is the main customer for that type of Qualcomm component. That suggests recent industry reports of weaker component demand may be pointing at Apple, rather than a general slowdown.

Qualcomm has been plagued by endless legal battles, government fines, a waning smartphone market, customers that won’t pay and a failed hostile takeover bid by rival Broadcom Ltd. Earlier on Wednesday, the stock touched its lowest intraday level since early 2016. All that left a low bar for Qualcomm’s quarterly results.

One of the cornerstones of the company’s plan to reignite earnings growth is its acquisition of NXP Semiconductors NV. That deal, the biggest Qualcomm has ever attempted, was announced in 2016 and is still waiting for regulatory approval in China.

The company is confident it can close the transaction ahead of a July 25 deadline. While trade tension between the U.S. and China suggests permission is unlikely to come soon, the two sides are likely to settle into calmer negotiations starting next month, said Chief Executive Officer Steve Mollenkopf.

“We’re obviously not immune to the difficult environment that exists between the countries,” he said. “From a timing perspective, this is not the best time to take the temperature.”

Should the chipmaker fail to close the acquisition, it is prepared to buy back $20 billion to $30 billion of its own stock. Qualcomm had a market capitalization of $74 billion at the close Thursday.

While selling mobile chips provides the company with the majority of its revenue, licensing patents that underpin the fundamentals of all modern phone systems contributes the bulk of its profit. The latter unit has struggled in the face of a worldwide legal assault by Apple, which has stopped paying.

Qualcomm said on Thursday that dates for key phases of the legal fight with Apple are rapidly approaching, raising the likelihood of settlement or a victory that would give it leverage in talks.

Qualcomm forecast license sales of $850 million to $1.05 billion in the current period, a decline of as much as 27 percent from a year earlier. The fees this division charges may fall as some customers opt for new agreements that cover a smaller number of patents only used in industry standards, Qualcomm said. In the past, Qualcomm had licensed all of its patents together.

License fees are charged as percentage of the selling price of a phone, but there’s often a cap for more expensive devices. The company amended its agreement with Samsung Electronics Co. to lower the cap. Currently, if a Samsung phone is sold for more than $500, the fee is calculated as a percentage of $500 and no more. The new deal sets the cap at $400. Samsung is the world’s largest smartphone maker.

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