Qualcomm Hit By Slowing Demand For Smartphone Chips

Qualcomm CEO Steven Mollenkopf speaks during a press conference at the 2014 Consumer Electronics Show (Photo credit: David Paul Morris/Bloomberg)

The smartphone business is maturing and Qualcomm is feeling it.

In its first quarter earnings released Wednesday, the San Diego mobile chip maker reported revenues are down 19% year over year at $5.77 billion, but beat Wall Street estimates of $5.69 billion, according to analyst polled on Yahoo Finance.

Qualcomm also reported profit declined 24% at $1.5 billion. Qualcomm beat earning per share estimates of $0.90 with $0.97.

Chip shipments for the quarter are down 10% from the same quarter last year with 242 million units shipped.

Forecasts for the second quarter fiscal earnings show that Qualcomm is expecting worse results than what analysts were projecting. The company expects a revenue range of $4.9 billion to $5.7 billion, versus analysts’ projections of $5.66 billion. The company, however, expects stronger results in the second half of the year. That’s when Qualcomm will likely start seeing results with the introduction of its new premium mobile chip, the Snapdragon 820.

The company has been resolving patent disputes over its wireless technology with China phone makers in recent months after having paid a $975 million fine to the Chinese government over antitrust allegations. Qualcomm has agreed on licensing terms with Xiaomi, Huawei, ZTE, Haier and others. Lenovo continues to be the only top five Chinese phone maker holding out on an agreement with Qualcomm.

Qualcomm disclosed on the earnings call that a new patent dispute has emerged with South Korean electronics giant LG — and this is separate from the recently opened antitrust investigation from the South Korean government, Qualcomm said. Although LG is paying licensing fees for the time being as the two work it out, Qualcomm is holding off on reporting $100 million that LG paid in licensing fees for the first quarter of 2016.

2015 was a bad year for Qualcomm over all. The company’s stock is currently down more than 25% over the past year. Qualcomm has had to deal with a number of obstacles, including an antitrust investigation from China, losing out on a lot of business in Samsung’s 2015 phones, and an activist investor suggesting the company consider breaking up its chip and licensing business.

Qualcomm has gotten through these issues for the most part, but now it’s dealing with a slowdown in the smartphone market. Even the mighty Apple phone engine experienced its first slowdown in iPhone sales. In Apple’s first fiscal quarter released on Tuesday, the company reported it had sold 74.77 million iPhones, a less-than 1% increase from a year ago. That’s the slowest growth rate the company has ever experienced since launching the iPhone in 2007. Apple said it’s starting to see a “softness” in the China market.

“The China market has gotten quite a bit weaker, but it’s more in the premium tier,” said Qualcomm president Derek Aberle in an interview following the company’s earnings call. “Over all, the Chinese market is quite strong. We’ve seen projections from all the major operators who have hit their numbers in the last two years.”

In the face of declining financials over the past year, Qualcomm has been busy working out a number of products and partnerships to move into new areas. Earlier this month it announced two major partnerships. The first was to create a $3 billion joint venture with Japan’s TDK to develop wireless radio components in a growing market that Qualcomm has lagged in: radio frequency chips that are used to convert radio waves into digital signals.

Another deal announced this month was with the Chinese government designed to grow in its new processing chips for servers. Qualcomm announced that it’s working with the regional government of the Guizhou Province to develop and license its server chips in a deal representing $280 million. It’s a few years out before any real financial results will start emerging, though.

Qualcomm next flagship mobile processor, the Snapdragon 820, seems to be going a lot better than last year’s Snapdragon 810 — which suffered from questions around performance and overheating. The company said it has more than 100 phone wins at this point. But even with all those phones using Qualcomm’s latest chip, that still doesn’t promise strong demand for smartphones in 2016.