Qualcomm revenue rises as it gains in China market

Qualcomm's second-quarter results show the chipmaker is overcoming hurdles in China, while rival Intel faces fresh headwinds in servers - the key to its profit.

San Diego-based Qualcomm, the biggest maker of semiconductors that run smartphones, reported earnings and gave forecasts that beat analysts' estimates as it gets paid more licensing fees in China and gains market share there.

Intel posted growth in its data centre business that fell well short of its own targets, creating concern momentum in that profitable unit is slowing.

The two companies, which dominate their respective markets but have made few inroads onto each other’s turf, have struggled to grow as the PC market has collapsed and smartphone expansion slowed.

Qualcomm late Wednesday said it is performing better than the slowing phone sector, particularly in China, and is overcoming resistance by phone makers in that country to paying for its patents.

Revenue in the period that ends in September will be $5.4 billion to $6.2 billion, the company said Wednesday in a statement. Profit before certain items will be $1.05 to $1.15 a share.

Analysts on average had projected sales of $5.72 billion and profit of $1.08 a share, according to data compiled by Bloomberg. Net income in the third quarter, which ended June 26th, rose to $1.4 billion, or 97 cents a share, from $1.18 billion, or 73 cents, a year earlier. Excluding certain items, profit was $1.16 a share, compared with an average estimate of 97 cents.

Sales in the recent period increased to $6.04 billion, up 3.6 per cent from a year earlier. That makes it the first quarter in a year that the company hasn’t posted a double-digit percentage decline. Analysts on average predicted $5.59 billion.

Intel, which had benefited from the explosion in mobile internet through its server business, said that business grew 5 per cent in the quarter, compared with a target of double-digit per centage gains for the year.

“Intel has some explaining to do,” said Kim Forrest, an equity analyst at Fort Pitt Capital Group. As more companies switch to buying their computing power over the internet and give up equipping their own data centres, Intel should be seeing a commensurate uptick in demand for server chips from cloud providers, she said, adding that “the last quarter was a bit light in the data centre group too”.

Missed Target

Intel executives faced multiple questions on a conference call with analysts about how the company will get back on course in servers. Corporate purchases of these computers will improve in the second half, a new design will help with average selling prices and the company has “signals” from customers that an increase in orders is on the way, the company said.

For the data centre group, that was the third quarter in a row in which revenue gains missed the company’s target. It’s also the second consecutive quarter that growth in that unit has fallen below 10 per cent, putting it well behind progress needed to reach its goal for the business this year.

"It's not slowing down in the long term," chief executive Brian Krzanich said on the conference call. "It's going to be driven by the many more devices that are going to connect to the cloud."

The company's biggest customers - companies such as Google and Microsoft - order chips in large batches to build new data centres, then pause purchases while they make sure their infrastructure is working at full capacity. That results in "lumpy" demand, he said.

“You need a lot of growth in the back half and they’re awfully confident, but I don’t know,” said Stacy Rasgon, an analyst at Sanford C. Bernstein. He doesn’t believe that corporations will return to investing heavily in their own data centres. “In the best case, enterprise is flat but really it’s probably down.”

Intel shares fell as much as 3.9 per cent in extended trading following its announcement. Qualcomm gained as much as 7 per cent.

China Crisis

The worldwide market for smartphones is on course to grow just 3.1 per cent in 2016 following an expansion of 10.5 per cent last year and a 28 per cent surge in 2014, according to IDC.

While Qualcomm isn't seeing anything to contradict that kind of outlook, according to chief executive Steve Mollenkopf, it is doing better within that environment, particularly in China, the biggest national market for phones, he said.

In the chipset business, which provides the company with the majority of its revenue, Qualcomm did better than expected with Chinese phone makers who are grabbing a larger portion of their home market. At the same time, its attempts to persuade more of them to pay royalties for using Qualcomm technology are gathering momentum and fewer are holding out on money they owe it, the company said.

“It was a really strong quarter - it was strong in both businesses, in particular the license business,” Mr Mollenkopf said. “We got some money a little earlier than we would have thought.”

Qualcomm is suing China’s Meizu Technology Co, trying to force the phone maker to negotiate a licence agreement for using the chipmaker’s technology. That’s seen as a test case for the ability of China’s intellectual property courts to enforce such agreements.

Qualcomm is prepared to pursue similar legal action against companies that continue to avoid paying what they owe or negotiate, President Derek Aberle said on Wednesday’s conference call

Bloomberg