Qualcomm Inc. (QCOM) is feeling the sting of macro conditions and the lack of firm footing in 5G after reporting its fiscal third-quarter results on Wednesday evening.
The San Diego-based semiconductor stock was down around 7.5% before Thursday's opening bell, adding to a tough trend into earnings. The pre-market decline implies Qualcomm shares will open at their lowest level since May, back toward prices seen after excitement over its Apple Inc. (AAPL) deal eased.
Qualcomm's results were mixed on the headline numbers, with its earnings per share (EPS) figure exceeding a lowered bar set by Wall Street, but revenue missing the mark. Group revenue fell 13% to $4.9 billion, a figure that narrowly missed analysts forecasts.
The real trouble for shareholders came with a bearish fourth-quarter forecast that set revenue expectations in a range of $4.3 billion to $5.1 billion and EPS in a range of $0.65 to $0.75, a deceleration that would miss the Refinitiv estimates of EPS of $1.08 on $5.63 billion in revenue.
"The Huawei (Technologies) export ban, along with the pivot from 4G to 5G which accelerated over the past couple of months, has contributed to industry conditions particularly in China that we expect will create headwinds in our next two fiscal quarters," CEO Steve Mollenkopf said, explaining the lighter outlook. "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 added that existing 4G inventory and a nascent shift toward 5G still needs time to take hold, with an inflection point not expected for the next two quarters.
While analysts remained confident that Qualcomm can perform better once this inflection point is reached, the messy expectations in the near term lowered estimates across many firms.
"Qualcomm's results and outlook were marred by the effects of a weak smartphone market, led not only by the macro challenges in certain geographies, but also by an apparent hold-off on end-customer interest in 4G phones on the cusp of the release of a slew of 5G phones starting in early 2020," J.P. Morgan analyst Samik Chatterjee said. "Qualcomm is also facing challenges relative to Huawei's aggressive push for market share in the domestic China market, driving a negative customer mix for Qualcomm which remains more exposed to Huawei's competitors in the local market."
With about 65% of Qualcomm's revenue derived from mainland China, this competition is no small challenge.
Chatterjee lowered his price target for Qualcomm from $96 to $88 in light of the challenges in coming quarters. However, he retained an "Outperform" rating for the long term due to the 5G shift.
"While some of the headwinds, including the effects of the negative customer mix, might persist into 2020, we believe that a significant part of the headwind in relation to market weakness is positioned to reverse into a tailwind with the launch of 5G phones in 2020," he said. "We are revising our fiscal year 2020 expectations materially on the back of the market weakness, but expect the ramp in 5G through calendar 2020 to drive strong growth in revenue and earnings in fiscal year 2021."
The other key for investors to keep in mind are legal challenges at Qualcomm, namely its ongoing litigation with the Federal Trade Commission (FTC) over antitrust practices and negotiations with Huawei over licenses.
The ruling issued in May stated that Qualcomm used its dominant position in chips to force exorbitant licensing fees and threatened the largest segment of the company's business.
"On July 8, we filed our motion for a partial stay with the Ninth Circuit Court of Appeals. And as you may have seen, the Department of Justice on behalf of the United States filed a statement of interest that supports our request," Mollenkopf updated shareholders. "We cannot predict the exact timing, but we expect the Court of Appeals to rule in our stay motion in the near future. In the meantime, as can be seen from our results this quarter, licensees continue to perform under their agreements, consistent with our view, that the District Court decision does not nullify the existing license agreements."
Mollenkopf said he expects an appeal to be heard by the end of the calendar year.
Amid the trade war, Qualcomm is also fighting Huawei over licensing issues.
"With regards to Huawei, we continue to pursue a negotiated resolution of the dispute, focused on a final agreement," Mollenkpf said without offering a timeline.
The quarter ahead includes no expectation of benefits from Huawei given its blacklist status and remaining legal overhang.