Weakness in the smartphone market

This semiconductor earnings season brought steep revenue and earnings declines to companies with high exposure in the smartphone, graphics, and data center markets where demand has weakened. The two largest handset makers, Apple (AAPL) and Samsung, reported significant declines due to weak demand from China (FXI). These declines had a catalyst effect on the revenue of Intel, TSMC, and Texas Instruments, which serve Apple and Samsung.

Loss of Apple Orders Dents Qualcomm’s Q1 2019 Earnings

Qualcomm’s fiscal 2019 first-quarter earnings highlights

The biggest pinch was felt by Qualcomm (QCOM), which earns almost all its revenue from selling and licensing smartphone chipsets. In its fiscal 2019 first-quarter earnings, which were released on January 30, Qualcomm stated that its revenue fell 20% YoY to $4.84 billion with a 20% decline in both chipset and licensing businesses. The revenue missed analyst estimate of $4.9 billion. Qualcomm’s chipset revenue fell, as the company lost modem orders for Apple’s iPhones. Mobile station modem shipments fell by 51 million units YoY to 186 million units.

Despite falling revenue, Qualcomm’s stock rose 1.5% in after-hours trading on January 30 as it increased its non-GAAP (generally accepted accounting principle) EPS by 25% YoY to $1.2, beating the analyst estimate of $1.09.

Qualcomm’s progress towards the $7.5 EPS target

To avoid getting acquired by Broadcom (AVGO) in early 2018, Qualcomm promised shareholders it would deliver EPS of $6.75 to $7.5 in fiscal 2019 by reducing costs, undertaking stock buybacks, and resolving licensing disputes with customers.

To achieve EPS of $1.2 EPS in the first quarter of fiscal 2019, Qualcomm reduced its operating expense through restructuring and layoffs, repurchased stocks worth $1.02 billion, and received $150 million in licensing fees by settling its disputes with Huawei.

Qualcomm’s CEO Steve Mollenkopf expects to report decent 2019 results as weakness in smartphone demand is offset by increasing demand for 5G technology. A game changer for Qualcomm could be the settlement of its dispute with Apple. Qualcomm claims that Apple has withheld $7 billion in royalty payments. If the settlement also halves the licensing amount, it would bring significant cash inflow to Qualcomm.

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