Qualcomm Inc. gave a downbeat fourth-quarter sales forecast, indicating lingering weakness in smartphone demand while consumers wait for devices with the next generation of wireless technology.
Fiscal fourth-quarter revenue will be $4.3 billion to $5.1 billion, the San Diego-based company said Wednesday in a statement. That compares with an average of analysts’ estimates of $5.72 billion, according to data compiled by Bloomberg. The forecast projects a decline in sales of 12% to 26% from the period a year earlier.
Phone makers have largely given up on releasing new high-end phones based on current technology and consumers are delaying their purchases until the debut of fifth generation, or 5G, cellular services, Chief Executive Officer Steve Mollenkopf said. That’s making the near-term outlook for phones look “soft,” but only temporarily ahead of an expected surge in demand for new devices, he said.
“They’ve all cut and run toward 5G,” Mollenkopf said in a phone interview. Carriers are heavily deploying new network equipment and the forthcoming phones are as slim and light as their 4G predecessors, he said, meaning the market will rapidly accelerate at the beginning of 2020.
Qualcomm shares fell about 5% in extended trading after closing at $73.16 in New York. The stock has gained 29% this year, keeping pace with advances by other semiconductor-related shares.
Net income rose to $2.1 billion, or $1.75 a share, in the fiscal third quarter, from $1.2 billion, or 81 cents, a year earlier. Earnings were boosted by a one-time payment from Apple to settle their dispute and the resumption of royalty payments. Excluding certain items, profit was 80 cents, compared with an average estimate of 76 cents. Adjusted revenue declined to $4.9 billion from $5.6 billion a year earlier. Analysts on average had predicted $5.1 billion in sales.
On a conference call, analysts questioned Qualcomm’s confidence that the current period’s shortfall will be reversed once the new networks are in place and the phones are on sale. The company has reduced its prediction for the total size of the market this year by 100 million units. Some analysts said they are concerned the numbers reflect little future growth for the industry regardless of what technology is in the phones.
“The market’s saturated now. People buy phones when they break,” said Stacy Rasgon, an analyst at Sanford C. Bernstein. “It’s bad all around. It’s going to be a while.’ ’
The chipmaker is also still struggling to work through legal challenges that threaten its right to charge royalties on the technology for all phones used on modern networks, Qualcomm’s main source of profit.
Qualcomm’s licensing customers are nonetheless continuing to pay licensing fees, Mollenkopf said. The chipmaker is still in dispute with Huawei Technologies Co. over the terms of a new agreement. The Chinese company had been making partial payments, but those will stop as they try to finalize a deal, he said.
Huawei, which is not a major customer of Qualcomm’s semiconductor unit, has been pushing heavily to boost its share of the market for smartphone chips in China, Mollenkopf said. Huawei’s increasing presence has cost Qualcomm business among other Chinese device makers that are big users of Qualcomm’s chips.
While Qualcomm settled its broad-ranging legal dispute with Apple Inc. and the iPhone maker agreed to resume using its chips, the company lost a U.S. Federal Trade Commission case that alleged unfair business practices. U.S. District Judge Lucy Koh in San Jose, California, ordered Qualcomm to renegotiate patent licenses. Qualcomm is appealing the decision and seeking a stay on Koh’s decision so that it doesn’t have to immediately start those renegotiations.
Investors have been waiting to see Qualcomm, in its projected fifth year of revenue declines, parlay its claim of leadership in 5G wireless technology into sales growth. The new services are debuting this year with handsets from Samsung Electronics Co. that will take advantage of the faster downloads and response times offered by the upgraded networks. Most analysts expect wider availability next year.
Qualcomm is unique in the chip industry because it gets the bulk its profit from licensing patents that it says cover the fundamentals of all modern phone systems. The majority of the company’s revenue comes from selling chips that run phones and connect them to cellular networks.
Growth in the smartphone market has stalled, leading some analysts to conclude that it’s reached a saturation point worldwide. In response, Qualcomm is trying to push wireless technology into new areas such as automobiles, personal computers and everyday devices that connect to the internet.
Smartphone shipments declined 2.3% in the second quarter to 333.2 million units, IDC said Wednesday. While the market contraction hit all regions, the slowdown in China “was less severe,” than it has been, the market researcher said.