Qualcomm shares have surged more than 10% since the world’s largest smartphone chip vendor on Wednesday said overall sales could start to recover in the first quarter of 2020 as consumers move en masse to 5G smartphones and its patent licensing business rebounds from a legal spat with Apple. Qualcomm said it expects 175 million to 225 million 5G smartphones to be shipped in 2020, signaling a strong year ahead.
Qualcomm sells more smartphone chips than any other vendor in the world. But the San Diego, California-based company makes most of its profit from licensing patents that are central to 3G, 4G and 5G technology and reaping the royalties from handset makers. The licensing business came to $1.22 billion in the fourth quarter of 2019, up 4% from the fourth quarter a year ago, bolstered by the return of royalties due on sales of Apple's iPhones and other devices.
Qualcomm resolved its dispute with Apple in the second quarter, and Apple agreed to pay out $4.7 billion in the settlement. The company has also entered long term patent licensing and chip supply deals with Qualcomm, opening the door for Apple to use Qualcomm's modems in its future iPhones, including 5G devices. Qualcomm said its licensing business would be in the range of $1.3 billion to $1.5 billion in the first quarter, up from $1 billion roughly one year ago.
"We're pleased with the progress we've made over the course of 2019 and believe the business is very well positioned for sustained long term growth," said Steve Mollenkopf, Qualcomm's CEO, on a conference call with Wall street analysts on Wednesday. The company said sales in the first fiscal quarter would be in the range of $4.4 billion to $5.2 billion, even though global shipments of its chips will be 145 million to 165 million units, down 11% to 22% year-over-year.
Qualcomm is looking to take advantage of its early lead in 5G technology, which it believes will breathe new life into the smartphone market, which has stagnated as consumers hold onto handsets longer. More than 230 smartphones or other devices are on the market or in development with its 5G modem chips, up from 150 over the last quarter. Alex Rogers, who leads the licensing business, said the company has hammered out more than 75 agreements for 5G.
The company plans to make 50% more money per 5G smartphone by charging higher prices for its modems, which are considered the world's most advanced. Qualcomm is selling a range of radio frequency front end ICs, including power amplifiers, switches and filters, and packaging them in antenna-to-modem solutions for tapping low band, mid band and millimeter wave 5G networks. Nearly every company relying Qualcomm's 5G modems is also buying its RF ICs.
Profit from the licensing business swung to $790 million in the fourth quarter, up 11% from the same quarter of 2018, not including patent royalties due on sales of Huawei's smartphones and other devices. Huawei, the world’s second largest smartphone brand behind Samsung, has halted payments to Qualcomm amid an ongoing dispute over what it feels are unfair royalty rates. Profit margins in the licensing business improved from 64% to 68% over the last year.
Overall sales slipped to $4.8 billion in the fourth quarter from $5.8 billion a year ago, on the higher end of its forecasted range of $4.3 billion to $5.1 billion. Profits rose to about $500 million, or 42 cents per share, up from a loss of about $500 million in the fourth quarter of 2018. Qualcomm's core chip business reported revenue of $3.61 billion in the fourth quarter, down 22% over the last year as chip shipments slumped 34% to 152 million units in the prior quarter.
The company has been fighting forces out of its control in the second half of the year. China's smartphone market has slowed in the second half of 2019 due to trade war uncertainty and a worsening global economy. Huawei has also been adding market share in China's market after it was banned from buying U.S.-made chips, siphoning market share from Xiaomi, Oppo and Qualcomm's other customers in China. Huawei uses custom modem chips in its flagship phones.
"We have seen weaker demand in China combined with Huawei gaining share in China," said Christiano Amon, Qualcomm's president. He said some customers in China are pulling 4G product launches in late 2019 replacing them with 5G rollouts in 2020. "With the exception of Huawei, every other launch from other OEMs is based on Qualcomm Snapdragon platforms, and that has positioned us very well for partnering with OEMs on 5G, including Samsung," he said.
Qualcomm has started selling its first generation cellular modem, the X50, for high-end smartphones. But the X50 modem is a standalone component that only supports 5G. Customers need to install a separate modem - for instance, the integrated 4G modem inside Qualcomm's Snapdragon SoCs - to enable the device can connect to today's networks. But tapping another modem adds to the overall thickness, cost and power consumption of the mobile device, analysts say.
Part of the problem was solved with Qualcomm's X55 modem, which can connect to 2G, 3G, 4G and 5G networks with an integrated device that can handle a global frequency range. Qualcomm plans to add the 5G modem to its high-end Snapdragon Series 8 SoC in 2020, which could lead to smaller, cheaper and lower power devices. Qualcomm will also add 5G modems to its mid-range 6 Series and 7 Series SoCs, which could curb the high cost of today's 5G phones.
Global shipments of new 3G, 4G, and 5G devices should be around 1.75 billion to 1.85 billion units in 2020, an increase of 3% in the first half of the year. 5G could represent more than 10% to 12% of all device shipments in 2020. Akash Palkhiwala, who was promoted on Wednesday to be Qualcomm's chief financial officer, said that both global and Chinese OEMs would start shipping 5G flagships in early 2020, followed by another set of product launches in the second half 2020.