Smartphone chip manufacturer Qualcomm Inc.’s stock declined in after-hours trading today after it issued a poor outlook and warned that it must clear around two months of inventory within its core business.

The forecast came after the company posted its fiscal fourth-quarter financial results, which met expectations. The company reported earnings before certain costs such as stock compensation of $3.13 per share on revenue of $11.4 billion, up 22% from the same period one year earlier.

That resulted in a net income of $2.87 billion for the period, up slightly from the $2.8 billion profit it recorded a year ago. Wall Street had been looking for earnings of $3.13 per share on lower sales of just $11.32 billion.

It was a decent performance, but things came unstuck as the company offered its guidance. For the fiscal 2023 first quarter, Qualcomm said it’s expecting earnings of between $2.25 and $2.45 per share on revenue of between $9.2 billion and $10 billion. That was some way below Wall Street’s forecast of $3.42 per share in earnings and $12.02 billion in sales.

Qualcomm’s stock dropped more than 6% on the report, having already lost more than 4% earlier in the day.

The company said that because of the uncertainty caused by the macroeconomic environment, it has been forced to update its calendar year 2022 3G/4G/5G handset volumes guidance from a year-over-year mid-single-digit decline to a low double-digit decline. “The rapid deterioration in demand and easing of supply constraints across the semiconductor industry have resulted in elevated channel inventory,” the company said in a statement.

Qualcomm President and Chief Executive Cristiano Amon (pictured) said on a call with analysts that the company was seeing “accelerated weak demand” that’s related to macroeconomic headwinds and the prolonged COVID-19 situation in China. He added that a rapid deterioration in demand and easing of supply constraints across the chip industry would result in an 80 cents per share hit on Qualcomm’s first quarter earnings. “It’s a major factor,” Amon said. “It’s mostly a handset consumer story.”

It’s not the only factor, though, for Amon also admitted that Qualcomm’s biggest customers are spending less than before. “Companies across the board had much higher inventory policies, supply chain got resolved, and you got that macroeconomic uncertainty, you have a drawdown trying to bring inventory to a different level than it was during the situation of demand constraint,” the CEO said.

Qualcomm actually saw handset sales jump by 40%, to a record $6.57 billion in the quarter just gone, beating expectations. However, its forecast for the current quarter indicates a glut of inventory within the Qualcomm CDMA Technologies business unit, which also includes other kinds of chips, such as RF front end, chips for cars and low-power processors for connected devices. The company said it’s forecasting QCT sales of around $7.7 billion to $8.3 billion, way below Wall Street’s forecast of $10.42 billion.

Qualcomm’s QCT business had just delivered $9.9 billion in revenue in the fourth quarter, up 28% from a year earlier and above Wall Street’s consensus estimate of $9.84 billion. Within that unit, automotive chip sales jumped 58%, to $427 million, while IoT sales rose 24%, to $1.92 billion.

Meanwhile, the Qualcomm Technology Licensing unit that accounts for licensing fees related to 5G and other technologies the company develops, reported revenue of $1.44 billion, down 8% from a year ago. For the next quarter, Qualcomm expects the QTL business to deliver $1.45 billion to $1.65 billion in revenue, also below Wall Street’s forecast of $1.71 billion.

Constellation Research Inc. analyst Holger Mueller said Qualcomm can be pleased with its strong performance in the quarter just gone, even if it’s now bracing for tougher times ahead. “Qualcomm had a good quarter, especially on the handset side of its business, where it did record revenue,” Mueller said. “Its sluggish automotive business is building up some steam too. However, Qualcomm seems to be at the very top of the roller-coaster chip economy, and so it has to buckle up with stronger headwinds coming. We’ll soon see how fast a descent it’s facing.”

Charles King of Pund-IT Inc. said Qualcomm’s light guidance highlights certain issues that are especially problematic for chip vendors that are primarily focused on mobile devices such as smartphones and tablets. Whereas companies such as Intel Corp. and Advanced Micro Devices Inc. sell chips that apply to business applications and workloads, Qualcomm’s business is much more consumer-focused, King said.

“It’s easier for Intel and AMD to weather trends and events that affect the consumer side of their businesses,” King explained. “The dividing lines for Qualcomm and many of its customers are less clear though, so it is impacted by a range of issues well beyond its control. Those issues include smartphone vendors with excess inventory cutting back on orders due to uncertainty about the upcoming holiday shopping season. Unfortunately for Qualcomm, there are no easy answers to the current circumstances beyond battening down the hatches and riding out the storm.”

That is exactly what Qualcomm intends to do, and to help steady the ship, Amon announced that the company has instituted a hiring freeze and will make further reductions to its operating expenses as needed. “We are in a strong position to manage the near-term headwinds,” Amon insisted, adding that what the company is experiencing is just a “temporary cyclical inventory drawdown.”

Photo: Qualcomm