On Jan. 30, wireless technology specialist Qualcomm (QCOM +1.36%) announced its financial results for the first quarter of its fiscal 2019. The company's revenue came in at $4.8 billion and its non-GAAP earnings per share reached $1.20. CEO Steve Mollenkopf said the revenue was in line with company guidance, while the EPS was $0.10 above the midpoint of its guidance range.
The company expects revenue for the second quarter to come in between $4.4 billion and $5.2 billion, with non-GAAP EPS ranging from $0.65 to $0.75. At the midpoints of these ranges, the company is forecasting year-over-year declines of approximately 8% and 13%, respectively.
Qualcomm is expecting big things from its Snapdragon 855 chip. Image source: Qualcomm.
To better understand the results and the forecast, let's look at what management had to say on the company's most recent earnings call.
Check out the latest earnings call transcripts for companies we cover.
1. There's life beyond the Apple setback
As you might recall, Qualcomm lost the Apple modem-chip business entirely for the current iPhone product cycle. This contributed significantly to the 19.6% revenue decline that Qualcomm's chip business suffered in the first quarter of fiscal 2019. During the earnings call, Raymond James analyst Chris Caso pointed out that the company's guidance for the second quarter of fiscal 2019 calls for a 15% decline in chip sales.
During the call, Caso asked management for insight into how the business is performing, excluding the Apple loss. CFO George Davis explained that Qualcomm is "actually seeing strong positioning in our products really everywhere else," adding that "if we're seeing any weakness in the guide, it's really in low-tier units, which is partially seasonal and also ... a reflection of the economy in China."
Davis also admitted during the question-and-answer session that in China, the overall market isn't the only problem -- the company is also losing some market share at the low end of the market.
To understand this better, it's important to realize that smartphones are sold at many different price points -- there's everything from iPhones, which cost north of $999 for the highest-end models to basic smartphones that can cost $200 or less. Higher-end phones tend to sport more powerful and feature-rich processors, while lower-end devices tend to have slower chips with fewer features, which are therefore cheaper to build.
Qualcomm segments its processors into multiple tiers that it refers to as premium-tier, high-tier, mid-tier, and low-tier in order of decreasing cost and capability. It's those lowest-end models that seem to be the problem for Qualcomm in China.
2. Higher-end smartphones are helping
On the call, Cristiano Amon, the head of Qualcomm's chip business, added some commentary about the trends in that business.
"As George said, we see [weakness] on the low end of the units, but we continue to see a favorable product mix toward the higher-feature smartphones," Amon said. The idea here is that higher-end smartphones require Qualcomm's more advanced (read: more expensive) chips, helping to improve the company's average selling prices on those chips.
Amon added that "we expect that trend to continue, especially important as we look at the launch of 5G technology ... toward the later part of [2019] and 2020."
3. There's reason for excitement with 5G
Qualcomm executives often cite the imminent smartphone industry transition to 5G wireless technology as a key growth opportunity. Unsurprisingly, management provided commentary on the topic during the call.
Mollenkopf touted Qualcomm's upcoming premium Snapdragon 855 smartphone chip (which can be paired with the company's external Snapdragon X50 5G modem), claiming that the platform has "over 100 design wins in development."
The executive also said that "as 2019 progresses, we anticipate continued 5G network launches in the United States, Europe, Japan, Australia, and China," and that the company is "working with more than 20 operators toward commercial rollouts starting this year, and we expect to be the 5G modem supplier of choice for the majority of the first wave of 5G devices."
Speaking of that first wave of 5G devices, Mollenkopf reminded investors that the company "announced 30-plus commercial 5G mobile design wins based on our 5G chipsets" at the CES trade show in early January. On top of that, the executive claimed that "nearly all of the devices related to these 5G design wins use our RF front-end solutions and we expect these design wins to have a meaningful positive impact to our RF front-end product line." (RF front-end solutions handle all of the tasks needed for a device's modem to interface with its antenna.)
Gaining traction in RF front-end chips allows Qualcomm to increase the amount of revenue that it generates from each smartphone that it supplies chips for, helping to boost the growth of its chip business.
