China was the star of the show going into Qualcomm Inc.’s third quarter earnings report. Trade tensions, as well as slowing phone sales in China, had a chilling effect on the San Diego-based semiconductor company’s expectations for the end of 2019.
Qualcomm lowered its estimates for device shipments by 100 million units for the end of 2019. The company shipped 156 million mobile station modem (MSM) chips in the quarter ending June 30. For the fourth quarter, the company expects between 140 million and 160 million shipments. Qualcomm’s stock fell more than 5 percent in afterhours trading on July 31 to $69.16.
Qualcomm’s Interim Chief Financial Officer, David Wise, said a “meaningful portion” of the expected reduction of sales is related to China. One of the biggest factors is a reduction in Chinese customers buying new phones; Wise said device sell-through rates were down 20 percent year-over-year in China. Qualcomm executives chalked this up to a pause in 4G sales ahead of 5G. The new, fifth-generation technology promises faster data speeds with less latency.
For the quarter ending on June 30, Qualcomm brought in revenues of $9.6 billion, including the $4.7 billion settlement payment from Apple Inc. It reported a net income of $2.15 billion, up 78 percent from last year. Next quarter, it expects revenues of $4.3 billion to $5.1 billion.
Qualcomm CEO Steve Mollenkopf said he expected headwinds for the next two quarters from the export ban to Huawei, as well as slowing demand for 4G phones. Leaders from Qualcomm, Intel, Broadcom, and other tech companies went to the White House in mid-July to talk about the ban, which has restricted them from selling products to Huawei.
“As a result of the export ban, Huawei shifted their emphasis to building market share in the domestic China market, where we do not see the corresponding benefit in product or licensing revenue,” Mollenkopf said in an investor call.
In fact, Huawei gaining a larger share of the Chinese market has affected Qualcomm more than losing direct sales to Huawei as a result of the trade ban, Wise said.
In addition, Qualcomm still needs to hammer out a new licensing agreement with Huawei. The two struck an interim agreement in January, which resulted in a $150 million payment last quarter, but Qualcomm doesn’t expect any revenues from Huawei in the fourth quarter.
The solution for all of this? 5G, Qualcomm executives said.