Wall Street was initially pleased with Qualcomm's (QCOM) latest earnings report, which featured solid December quarter sales and earnings beats and (though it took coronavirus concerns into account) solid March quarter guidance.
However, shares moved lower during Qualcomm's earnings call, and are down fractionally in Thursday trading on an up day for the Nasdaq. A few things shared by CFO Akash Palkhiwala on the call appear to be at play:
- Palkhiwala said that there's "significant uncertainty around the impact from the coronavirus on handset demand and supply chain." The comments come amid a growing number of reports indicating that the coronavirus outbreak is impacting both Chinese demand and production for smartphones and other goods.
- Palkhiwala forecast that Qualcomm's chip unit (QCT) would have a pre-tax profit margin of 15% to 17% in the March quarter. While that's up from a December quarter margin of 13%, some analysts wanted stronger guidance, given that QCT's sales are expected to be up 8% to 24% sequentially.
- Though this outlook -- like so much of the guidance shared lately by big-cap tech companies -- might be conservative, Palkhiwala said that Qualcomm expects its fiscal third quarter (June quarter) "to be in line with our second fiscal quarter," which suggests revenue could be below a pre-earnings consensus of $5.61 billion. He cited normal seasonality, along with (in what's likely a reference to a relatively early launch for Samsung's Galaxy S20 phones) "a little bit of an acceleration in 5G deployment."
In addition, while Qualcomm issued strong QCT revenue guidance for the March quarter, it still forecast that its MSM (processor and modem) shipments would be down by 10 million to 30 million annually, to a range of 125 million to 145 million. That could be a sign of mid-range share loss to Taiwan's MediaTek, which has pushed aggressively to land design wins for 5G system-on-chips (SoCs) within mid-range Chinese 5G phones.
But while Qualcomm's MSM shipments are still under pressure, its average selling price (ASP) is trending higher. Rising 5G modem sales are helping -- Qualcomm's second-gen 5G modem, the Snapdragon X55, recently began shipping -- and so is the rollout of Qualcomm's Snapdragon 865 flagship processor.
Both the X55 and 865 are poised to go into some Galaxy S20 models, as well as many other high-end Android phones launching this year. And the X55 is also likely to be used by Apple's (AAPL) fall 2020 iPhone lineup. Overall, Qualcomm forecasts 175 million to 225 million 5G phones will ship this year, compared with total 3G/4G/5G device shipments of 1.75 billion to 1.85 billion.
Qualcomm also forecast that its RF front-end chip (RFFE) sales, which are benefiting from high attach rates on phones featuring Qualcomm 5G modems, will rise more than 50% both sequentially and annually this quarter. Here, Qualcomm has a particularly strong position in the market for RFFE solutions for millimeter-wave (mmWave) 5G spectrum bands. While China and Europe aren't currently deploying mmWave, which can deliver a lot of bandwidth over a short range, a slew of U.S., Korean and Japanese carriers are.
In a nutshell, Qualcomm is making good on a lot of its past promises about the positive impact 5G phone launches would have on its chip business in general, and on its RF business in particular. And though Qualcomm's 2020 5G phone outlook doesn't assume any 5G-related boost to smartphone upgrade rates, the company's highly profitable licensing unit (QTL) will get a lift if 5G boosts phone upgrade rates and/or ASPs.
However, China is proving to be a wild card for the company in a few different ways right now. These range from coronavirus uncertainty, to MediaTek's Chinese 5G momentum (aided by China's current lack of mmWave deployments), to the fact that Qualcomm currently isn't collecting royalties from Huawei (the world's third-biggest smartphone OEM) thanks to a licensing dispute.
Also, Qualcomm disclosed on Wednesday that it's still working to sign long-term 5G licensing deals with two unnamed Chinese OEMs. While those talks go on, existing licensing deals with the OEMs were extended to the end of March.
Markets dislike uncertainty, and when it comes to China, there's a lot of it for Qualcomm right now. But if some of these clouds begin to lift -- for example, if the coronavirus outbreak subsides and/or a Huawei licensing deal is reached -- then Qualcomm's stock, which trades for less than 15 times its expected fiscal 2021 EPS, will get a lift.