On Wednesday, semiconductor giant Qualcomm handed investors a mixed bag when delivering its fiscal third-quarter earnings report and its fourth-quarter forecasts. On the one hand, the corporation beat analyst predictions by generating $2.1 billion in revenue during Q3 2019. As such, the chipmaker increased its year-on-year revenues by 75 percent.
On the other, the firm’s quarterly income benefited from a one-time settlement payment from Apple. In April, the company disclosed that the iPhone maker would pay it between $4.5 billion and $4.7 billion in Q3 2019 to end the two corporations’ ongoing legal disputes.
Furthermore, Qualcomm offered bleak guidance for its Q4 financial performance that will likely also apply to its 2020 income.
Qualcomm’s Grim Immediate Future
During an investor conference call, Qualcomm CEO Steve Mollenkopf offered two interconnected reasons why his company’s near-term financial performance will be soft. First, he explained that the ongoing weakness of the smartphone market would hurt the firm’s end-of-year revenue. Notably, the corporation derives most of its revenue from licensing its chip patents to other firms.
Sanford C. Bernstein analyst Stacy Rasgon concurred with Mollenkopf’s assessment. “The market’s saturated now. People buy phones when they break,” noted Rasgon. “It’s bad all around. It’s going to be a while.”
Mollenkopf also said that the smartphone market would stay flat in Q4 because consumers are waiting for the deployment of 5G technology. As such, wireless carriers are experiencing soft sales for current generation premium hardware. Indeed, Samsung’s recent report that its Galaxy S10 handset underperformed in the last quarter supports Mollenkopf’s perception.
However, the executive believes that when America’s major carriers bring their 5G networks online, consumers will flock to buy new smartphones. As such, the handset manufacturers serving the U.S. market will place significant orders for next-generation chipsets.
Though the 5G deployment may lift all chips in the mobility industry, Qualcomm’s long-term financial picture still has some significant holes in it.
Qualcomm’s Even Worse Long-Term Outlook
The biggest impediment to Qualcomm’s future success is the circumstances of its recent court loss to the Federal Trade Commission. In May, U.S. District Court Judge Lucy Koh found that the chipmaker exhibited anti-competitive behavior to assert its market dominance. In particular, the judge found that the firm used its chipset patent monopoly to extract exorbitant royalty payments from its clients.
As a result, Koh ordered Qualcomm to renegotiate its licensing agreements to give its customers more favorable terms. Since doing so would devastate its revenue, the corporation is appealing the judge’s decision. Furthermore, the company has already received significant pushback from one of its clients regarding its pricing.
Qualcomm and Huawei are currently fighting over a new supply contract. While the two corporations hash out terms, the Chinese conglomerate has ceased making royalty payments. If Qualcomm can’t get Judge Koh’s decision reversed, it’ll likely end up in similar payment conflicts with other clients, such as Samsung and Apple.
Speaking of Apple, the iPhone maker’s recent purchase of Intel’s smartphone modem business suggests that its supply deal with Qualcomm won’t last regardless. Also, the European Commission recently slapped the firm with a $272 million antitrust fine.
With that array of long-term challenges, the corporation is in for a rough decade.