Qualcomm warned that its cellular modem shipments could fall up to 40% year over year in the fourth quarter as the slowdown in China's massive smartphone market and the pivot from 4G to 5G technology create headwinds for the world's largest supplier of chips used in smartphones. The company said the slowdown is largely due to Huawei's market share gains in China after the United States slapped it with the supply ban in May.
The San Diego, California-based company last week blamed its weaker-than-feared sales and profit forecast for the current quarter on a slowing smartphone market and headwinds in China, the world's largest handset market. Qualcomm forecast sales in the range $4.3 billion to $5.1 billion in the fiscal fourth quarter of 2019, falling short of analyst estimates of $5.7 billion. The outlook represents a 12% to 26% decline in sales year over year.
The company's earnings are projected to slide from 89 cents per share in the fourth quarter of 2018 to between 65 cents and 75 cents per share in the fourth quarter of 2019. Qualcomm sees shipments of cellular modems falling between 31% and 40% in the fourth quarter as consumers hold onto smartphones longer before replacing them. The outlook translates into 140 million to 160 million units, down from 232 million units a year earlier.
"The Huawei 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," chief executive officer Steve Mollenkopf said on a conference call with analysts last week. Qualcomm should start to regain its strength in the first quarter of 2020 as new 5G smartphones are rolled out, he said.
Qualcomm, which makes money by selling modem chips and charging smartphone vendors for access to its massive patent portfolio, said that trade tensions were to blame in part for slowing demand in China. Huawei has been pushing to gain market share in China's smartphone market since the Trump administration added it to an export blacklist in May. Huawei, however, mostly buys modem chips from its HiSilicon semiconductor unit.
Huawei's smartphone shipments in China surged 31% year over year in the second quarter, even as the overall market there slowed. Huawei, the No.2 player in global smartphone sales, captured 38% of the total market in China last quarter, up from about 28% in the same quarter a year ago, according to market researcher Canalys. That represented the biggest market share of any vendor in China, the world's largest smartphone market, since 2011.
Qualcomm has also been dogged by a prolonged dispute with Huawei over its patent royalty rates. Huawei, the world's largest vendor of telecommunications equipment, has stopped royalty payments to Qualcomm during the dispute but it has been shelling out smaller amounts every quarter in good faith. The payments totaled around $150 million last quarter. But Qualcomm stripped out any further fees from Huawei in its fourth quarter forecast.
"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 any corresponding benefit in product or licensing revenue," Mollenkopf said, adding that Huawei's bet on China's sprawling smartphone market came back to bite Qualcomm's other major customers in the country. "This was a very unusual share shift and we were probably impacted more than others," he pointed out.
Huawei's market share gains in the second quarter caused its largest Chinese rivals and many of Qualcomm's largest Chinese customers to lose ground. The three largest players behind Huawei in China's smartphone market—Oppo, Vivo and Xiaomi—dropped more than 2% market share each in the second quarter. That dampened the demand for Qualcomm's cellular chipsets, which are used in many of Oppo, Vivo and Xiaomi's high-end handsets.
Qualcomm is also struggling as major customers in China work through 4G inventory before they start selling 5G smartphones in early 2020. Qualcomm said its Chinese customers are pulling 4G product launches in the second half of 2019, doubling down on the release of new 5G handsets in the first half of 2020. Mollenkopf said shipments of Qualcomm's 5G modems and RF components would start ramping up in the first calendar quarter of 2020.
"We see continued weakness in China demand, Huawei gaining share inside China and many Chinese OEMs managing inventory ahead of 5G," said interim chief financial officer Dave Wise. The smartphone slump pushed Qualcomm to slash its 3G, 4G and 5G device shipment forecast by roughly 100 million in 2019. Shipments are forecast to be between 1.7 billion to 1.8 billion units in 2019, down from its previous estimate of 1.8 billion to 1.9 billion.
That translates into global smartphone sales slipping in the mid-single-digits in 2019, he said. Qualcomm is trying to tough it out as 5G technology is deployed around the wolrd. The company's sales dropped to $4.9 billion last quarter from $5.6 billion a year ago, ignoring the $4.7 billion gain from its legal settlement with Apple in April. Net income, however, jumped from $1.2 billion, or 81 cents a share, to $2.15 billion, or $1.75 a share, over the last year.
"We delivered another solid quarter operationally in the midst of slower demand for 4G devices as the market prepares for the global transition to 5G," Mollenkopf said in a statement. “Our 5G design wins have doubled over the last three months, leaving us extremely well positioned as 5G ramps in early calendar year 2020," he added. More than 150 smartphones and other designs are currently in development using Qualcomm's 5G modem chipsets.