Smartphone chip company Qualcomm Inc. is trading lower today after it issued a forecast for its fiscal fourth quarter that fell short of Wall Street’s expectations.

The company blamed its poor guidance on weakening smartphone handset sales. Qualcomm’s stock fell almost 3% in the extended trading session, erasing a 2% gain from earlier in the day. The stock is now down 18% since the start of the year, amid a broader selloff in tech stocks.

The company actually did well in the quarter just gone, reporting net income of $3.73 billion for the third quarter, up 84% from the same period one year earlier. Earnings before certain costs such as stock compensation came to $2.96 per share, with revenue growing 37%, to $10.93 billion, for the quarter. The performance was better than expected, with Wall Street analysts modeling lower earnings of $2.87 per share on revenue of just $10.88 billion.

Qualcomm President and Chief Executive Cristiano Amon (pictured) said the company delivered record-breaking QCT Automotive and IoT revenues in what was a very “challenging macroeconomic environment.”

It was a strong quarter from Qualcomm no doubt, but whatever optimism those results generated crumbled away as the company went on to reveal its fourth-quarter guidance. Qualcomm said it’s expecting earnings of between $3 and $3.30 per share on sales of $11 billion to $11.8 billion. That’s lower than Wall Street’s target of $3.23 per share in earnings and $11.87 billion in sales.

Qualcomm’s biggest business is selling microchips and modems to smartphone makers. In the quarter, the company said, the handset business saw revenue jump 59% on an annual basis to $6.15 billion, even as there have been suggestions that smartphone sales are already slowing down as a result of deteriorating macroeconomic conditions.

The smartphone industry has come under pressure from runaway inflation, the growing risk of a recession and repeated COVID-19 lockdowns in China that have forced consumers cut back on spending and exacerbated ongoing supply chain problems. The industry watchdog International Data Corp. recently said it expects global smartphone sales to decline by about 3.5% this year.

Though Qualcomm has ridden out the storm so far, its forecast suggests it’s in for a rougher ride for the remainder of the year. It suggests that falling smartphone demand is likely to hurt its business in terms of both revenue and earnings. At the same time, the company said it expects its operating expenses to increase by around 6% to 8% on a sequential basis in the next quarter.

“Like other vendors whose welfare depends significantly on the optimism of consumers, Qualcomm’s tightened forecast is eminently sensible,” said Charles King of Pund-IT Inc. “Given global inflation and currency fluctuations, recession concerns in key markets and the continuing disruptions of COVID-19 variants, caution is probably the most sensible approach to the future for most any business to take.”

Qualcomm Chief Financial Officer Akash Palkhiwala said on a conference call that the company expects smartphone chip sales in the middle and lower tiers to be the worst-hit. The more expensive chips it sells for high-end smartphones are expected to keep on selling, it said. Qualcomm added that it still expects its handset chip revenues to grow by just under 50% this year.

Qualcomm reports handset sales within its Qualcomm CDMA Technologies business unit, which also accounts for sales of other kinds of chips, such as RF front end, chips for cars and low-powered processors for connected devices. During the quarter, that segment saw revenue grow by 45% from one year ago to $9.38 billion. Handsets were the fastest-growing segment, despite the company’s recent efforts to diversify its business.

Elsewhere, automotive chip sales grew 38%, to $350 million, a record high for the company. As for the IoT business, that did $1.83 billion in revenue, up 31% from the year before.

Meanwhile, the Qualcomm Technology Licensing unit that accounts for licensing fees related to 5G and other technologies the company develops, added $1.52 billion in sales, up 2% from a year ago. The unit remains a strong source of profit for Qualcomm, despite not growing as fast as it did in previous years.

Holger Mueller of Constellation Research Inc. said Qualcomm put in a very strong quarter when compared to most other chip vendors, who’re far from being able to match its revenue growth.

“Qualcomm is well prepared for potential rainy days ahead, almost doubling its revenue,” the analyst said. “Things will get tougher for its QCT business, but the team around Cristiano Amon still predicts 18-25% revenue growth for the next quarter. If Qualcomm can pull this off it is very likely to stay on the top of the pack in regards of growth. Things are looking sunny in San Diego.”

Alongside its earnings, Qualcomm announced that it’s extending an existing patent license agreement with Samsung Electronics Co. Ltd. until the end of 2030. Samsung has also agreed to expand its use of Qualcomm’s Snapdragon chips in future premium Galaxy smartphones. “Qualcomm is well-positioned to be the company bringing advanced connectivity, data processing and intelligence to the edge, enabling cloud-edge convergence,” Amon said.

King told SiliconANGLE the extension of Qualcomm’s agreement with Samsung was good news for both companies and will bring positive, long-term benefits. “Along with highlighting the positive synergies the pair have found and nurtured together, it also promises stability in design and development processes that should benefit Qualcomm’s and Samsung’s partners and customers,” King said.

The only blot on Qualcomm’s report was that its gross margin fell short of Wall Street’s targets because of rising chip production costs that were blamed on component shortages. Qualcomm reported a gross margin of 56%, versus the estimated 57.8%.

During the quarter, Qualcomm spent $1.3 billion shareholder returns, including $842 million on dividend payouts.

Photo: Qualcomm