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Qualcomm Loses Apple Business To Intel, Confronts Smartphone Drop

While not mentioning Apple ( AAPL ) by name, Qualcomm ( QCOM ) implied it will lose business to Intel ( INTC ) as a chip supplier for the iPhone 7, Apple’s newest smartphone expected to launch this fall. The comments came during the company’s quarterly earnings  conference call after the market close Wednesday, with Qualcomm’s EPS guidance falling short of Wall Street estimates. Qualcomm CEO Steve Mollenkopf told analysts it was important for planning purposes to factor in “a range of second-sourcing assumptions at our large customers.” He said improving demand for premium and high-tier devices in the second half of the fiscal year would be “offset by reduced demand for thin modem products and low-tier chipsets.” “Apple iPhone 7 modem share loss is confirmed,” wrote Pacific Crest Securities analyst Michael McConnell in a research note late Wednesday, a point of view shared by other analysts. The understanding is that Intel will be a second-source supplier to Apple for chips in the iPhone 7 that manage connections to wireless networks, called either modem or baseband chips. Qualcomm is expected to remain the primary supplier to Apple for these chips, but the win by Intel was seen as a setback to Qualcomm, the leading smartphone chip developer. McConnell says Qualcomm is likely to lose a 20% to 30% share of baseband chips in the new iPhone to Intel, worth annual revenue of about $600 million to $900 million, he wrote. He maintained an overweight rating on Qualcomm but lowered the price target to 61 from 63. Qualcomm stock was down about 1%, near 51.50, ahead of the closing bell in the stock market today . Qualcomm stock is down 25% in the past year. Smartphone Slowdown Weighs On Qualcomm The loss to Intel comes as Qualcomm is maneuvering through a slowdown in smartphone sales as the market nears saturation. Qualcomm lowered its guidance on smartphone device sales to about 1.67 billion in 2016 from previous guidance of 1.72 billion. It expects year-over-year growth of about 8%, down from 10%. IDC estimates smartphone shipments in 2015 rose 10% to 1.4 billion units, slowing from 27% growth in 2014. IDC expects smartphone growth in China to be flat in 2016. It was the maturing smartphone market and the potential for market share loss that that caused Rosenblatt Securities to downgrade Qualcomm to neutral from buy, though it maintained a price target of 57. RBC Capital analyst Amit Daryanani said there was a lot to digest in the Qualcomm earnings report, given the increased uncertainty. Risks to the stock price include lower smartphone pricing, lower royalty rates, increased competition from a variety of manufacturers and slower smartphone growth. Qualcomm is dealing with the market changes in multiple ways. It has focused on a $1.4 billion cost-reduction plan, boosting cash flow and profit, bolstering research and development, positioning for industry growth and making China licensing a top priority, among other steps. The company says that it’s on track to realize at least $700 million in savings in fiscal 2016, an increase of $100 million from its original estimate. Qualcomm reported revenue of $5.6 billion for the quarter ended March 27, down 19% from the year-earlier quarter but beating the consensus estimate of $5.34 billion. It was the fourth quarter in a row of decelerating revenue, year over year. Earnings per share minus items fell 26% to $1.04, but that number topped the 96-cent consensus estimate of analysts polled by Thomson Reuters. It was the fourth quarter in a row that EPS has decelerated. Qualcomm’s fiscal Q3 revenue guidance beat, but views on EPS missed.

Qualcomm Fiscal Q2 Earnings Top Estimates, But EPS Guidance Shy

Chip supplier Qualcomm ( QCOM ) posted better than expected fiscal second-quarter earnings after the market close Wednesday, but its EPS guidance lagged estimates, and shares were down nearly 3% in after-hours trading. Qualcomm reported revenue of $5.6 billion for the quarter that ended March 27, down 19% from the year-earlier quarter but beating the consensus estimate of $5.34 billion. Earnings per share minus items fell 26% to 1.04, but that number topped the 96-cent consensus estimate of analysts polled by Thomson Reuters. For its fiscal third quarter, Qualcomm guided to sales of $5.2 billion to $6 billion; the midpoint, $5.6 billion, was down 4% from the year-earlier quarter, but it was slightly ahead of the analyst consensus estimate of $5.56 billion for the quarter that ended March 27. Still, Qualcomm projected Q3 EPS in the range of 90 cents to $1.00, vs. 99 cents last Q3 and below the consensus of $1.02. Qualcomm CEO Steve Mollenkopf pointed to the quarter’s bright spots. “We delivered a stronger-than-expected quarter as we continue to execute our strategy for the next phase of growth,” Mollenkopf said in the company’s earnings conference call. “2016 is a transition year for Qualcomm, and we are making good progress.” He said that progress includes in its licensing business, but he said that stronger than expected performance across all of Qualcomm’s chipset and licensing businesses drove the Q2 beat. Tough contract negotiations have stunted Qualcomm’s licensing revenue growth, along with a royalty dispute with South Korea-based LG. Last year, there were a number of lawsuits globally related to Qualcomm’s licensing business. Investors are also concerned about the under-reporting of device sales among China vendors. The completion of new licensing deals has helped to alleviate those concerns. With its earnings results, Qualcomm announced that it had resolved a licensing dispute with LG “through good faith negotiations” that provides LG access to Qualcomm’s broad portfolio of patented technologies. “We are continuing to build momentum into the second half of our fiscal 2016 with traction for our Snapdragon processors in the premium and high tiers and strong execution of our strategic realignment plan,” Mollenkopf said. The Snapdragon chips are in such phones as Samsung’s new Galaxy S7 and S7 Edge. China Remains A Priority For Qualcomm As part of its transition, Qualcomm has focused on a $1.4 billion cost reduction plan, boosting cash flow and profit, bolstering research and development, positioning for industry growth and making China licensing a top priority, among other steps. The company says that it’s on track to realize at least $700 million in savings in fiscal 2016, an increase of $100 million from its original estimate. Mollenkopf said that Qualcomm has more than 100 licensing deals with companies in China and is in active discussions with others. The company has made notable progress signing China license agreements, Michael McConnell, an analyst with Pacific Crest Securities, said in a research note prior to the earnings report. It’s inked four of the top five China smartphone makers, led by Lenovo, to new license agreements, he wrote. Qualcomm said that its MSM (Mobile Station Modem) chip shipments reached 189 million, down 19% year over year but above the midpoint of its guidance range. For Q3, it expects MSM shipments of about 175 million to 195 million units, down 13% to 22%. Its MSM chipsets target higher-end smartphones. Sales of cellphones based on Qualcomm chips totaled $70.1 billion, down 8% but above the midpoint of the company’s guidance. Qualcomm ended the year with $30 billion in cash and equivalents. In fiscal Q2, Qualcomm’s chip technology unit, called QCT, reported revenue of $3.3 billion, down 25% year over year. Its licensing unit, QTL, reported revenue of $2.1 billion, down 12%. Mollenkopf said that growth markets for Qualcomm include automotive, wearable devices and the Internet of Things.  

Bullish Views On Apple Supplier Qualcomm Hold As Earnings Await

With a lot of moving parts in play, smartphone chip supplier Qualcomm ( QCOM ) is scheduled to report earnings for its December quarter after the market close Wednesday. The consensus estimate for Qualcomm’s fiscal second quarter is for revenue of $5.34 billion, down 22% year over year and the fourth quarter in a row of revenue deceleration. Analysts polled by Thomson Reuters expect earnings per share minus items of 96 cents, down 31% and also the fourth straight quarter of deceleration. Tough contract negotiations have previously stunted Qualcomm’s licensing revenue growth, along with a royalty dispute with South Korea-based LG. Last year, there were a number of lawsuits globally related to Qualcomm’s licensing business. Investors also are concerned about the under-reporting of device sales among China vendors. The completion of new licensing deals has helped to alleviate those concerns. Qualcomm continues to make notable progress signing China license agreements, says Michael McConnell, an analyst with Pacific Crest Securities, in a research note. Since Qualcomm issued fiscal 2016 guidance, it has inked four of the top five China smartphone OEMs to new license agreements, with Lenovo being the highlight signing, he wrote. McConnell has a buy rating on Qualcomm  stock, and a price target of 63. Qualcom stock is trading near 52 ahead of Wednesday’s open, rising a fraction Tuesday and down 4% for 2016. Samsung Galaxy S7 Helping Qualcomm Credit Suisse analyst Kulbinder Garcha, in a research note, said he does not see the fundamental outlook for Qualcomm’s smartphone business improving. Still, he says improved execution at Qualcomm, a recovery at Samsung, rising revenue diversity and further compliance from Chinese vendors should give a boost to the earnings outlook. He reiterated an outperform rating on Qualcomm stock, with a price target of 67. “While we do see some potential weakness at Apple ( APPL ), i.e. weak shipments and potential share loss to Intel ( INTC ), we believe the early success of the (Samsung) Galaxy S7 indicate that our forecasts are sufficiently conservative,” he wrote. Canaccord Genuity analyst Michael Walkley recently maintained a buy rating on Qualcomm stock and a price target of 65. He wrote that while Intel might take some chip-unit share from Qualcomm for the Apple iPhone 7, Qualcomm will maintain its majority position. “Overall, we are impressed by Qualcomm’s long-term technical roadmap, believe more optimistic long-term technology licensing growth targets are achievable, and appreciate the new focus of the management team to streamline the business and cost controls,” Walkley wrote. Of the 35 analysts that follow Qualcomm, as reported by Thomson Reuters, seven rate the stock a strong buy and 12 a buy. Another 15 have holding ratings, and there is one underperform rating. Intel late Tuesday said it would cut about 11% of its workforce , some 12,000 positions, as it restructures to put less emphasis on the fading PC business and more on rising areas such as the Internet of Things. Despite years of efforts, Intel so far has had minimal success in getting its chips into smartphones and other mobile devices, but many observers say it will likely have chips inside the next Apple iPhone, expected to be released in September.