Shares of smartphone chipmaker Qualcomm Inc. trended down in after-hours today as the company revealed how macroeconomic forces had eaten away at its sales in the second quarter.

Its revenue declined 17% compared to the same period one year earlier, and the situation is not going to get better anytime soon, the company said. Qualcomm reported second-quarter earnings before certain costs such as stock compensation of $2.15 per share, with revenue for the period coming to $9.28 billion. Net income plunged 42%, to $1.7 billion.

The results were not as bad as some analysts had feared, with Wall Street also targeting earnings of $2.15 per share on lower revenue of $9.1 billion. However, they were not especially great either, and when Qualcomm followed up with soft guidance, investors scrambled for the exits. The company’s stock fell more than 6% in extended trading, having already lost more than 2% in the regular session.

Qualcomm said it’s expecting third-quarter earnings of $1.80 per share on revenue of $8.5 billion, some way below Wall Street’s forecast of $2.16 per share and $9.14 billion in sales.

In a conference call with analysts, Qualcomm Chief Executive Cristiano Amon (pictured) blamed a “challenging environment” for the company’s poor results. Worse, he said, executives have seen little evidence of an improvement in smartphone sales in China, one of its key markets. Industry analysts have forecast a tough year for smartphones, with International Data Corp. recently revealing that handset shipments fell 14% in the first quarter of the year.

“The evolving macroeconomic backdrop has resulted in further demand deterioration, particularly in handsets, at a magnitude greater than we previously forecasted,” Amon said.

That deterioration was all too evident in the numbers from Qualcomm’s CDMA Technologies business segment, which covers chips for smartphones, automobile and internet of things devices, as well as radio frequency front-end components. QCT revenue fell 17% year-over-year, to just $7.94 billion. The bulk of QCT’s sales come from handset chips that sit in the heart of most Android phones. According to the company, they made up $6.11 billion of QCT’s revenue, down 17% from a year earlier.

Charles King of Pund-IT Inc. said Amon’s comments, while off-putting for some investors, were hardly surprising given the current economic climate. “Throughout this earnings season we’ve seen tech companies overexposed in consumer markets, such as PCs, taking a real pounding,” King said. “In such circumstances, Qualcomm’s remarkable strength and penetration in smartphone markets becomes a weakness as its handset maker partners get pummeled.”

The analyst explained that Qualcomm’s smartphone business could struggle for some time to come due to the nature of the smartphone market, which is now rapidly maturing. “Next-gen models, even those of popular handset makers, deliver little more than incremental upgrades or a handful of new camera features,” he said. “While those may excite deeply committed fans, it seems likely that a significant number of users are quite comfortable with sitting out a generation or two before upgrading.”

The smartphone market’s decline was also visible with Qualcomm’s second-biggest business, the Qualcomm Technology Licensing segment, which sells access to patented technologies required for cellular service. Revenue from QTL came to $1.29 billion in the quarter, down 18% from last year.

Amon said Qualcomm is likely to see QTL revenue decline by more than expected in the third quarter, due to what “the timing of purchases by a modem-only handset customer.” That customer, although unnamed, is likely to be Apple Inc., which traditionally sources modems for iPhones and iPads from Qualcomm.

Qualcomm Chief Financial Officer Akash Palkhiwala summed up the overall situation for the company, and it was not what investors wanted to hear: “Given the weaker handset forecast, until demand normalizes and visibility improves, we anticipate customers will remain cautious with purchases,” he said.

Patrick Moorhead of Moor Insights & Strategy said Qualcomm’s problem is there’s not much it can do except to manage its expenses closely and keep innovating while it waits for the next big upturn in smartphone sales. Qualcomm’s innovation may bear fruit though, as the company has made clear it’s very interested in mobile generative AI applications.

“Up until now we have only heard of cloud-based generative AI and corresponding consumer and commercial applications,” Moorhead said. “The next wave of generative AI innovation will likely be in endpoints such as smartphones, PCs, cars and the internet of things. Qualcomm is well positioned to take advantage of this, and we could see the impact of this trend by the end of the year for Android smartphones.”

The one bright spot for Qualcomm during a dismal quarter was its nascent automotive business. The segment, which sells less advanced chips for cars, grew its revenue by 20% to $447 million during the quarter. Automotive chips seem to be in big demand lately. Earlier this week, NXP Semiconductor NV also beat Wall Street’s expectations and offered strong guidance. It is heavily reliant on automotive chip sales.

Constellation Research Inc. analyst Holger Mueller said that one positive for Qualcomm is that it has the luxury of being able to keep its cost base more or less constant, thus allowing it to remain profitable despite such a big drop in revenue. “The company deserves credit for delivering to guidance, as that’s no easy feat for a chipmaker these days,” Mueller added. “The challenge now is to deliver again on lowered expectations. Meantime, we will see how much investors are able to stomach its reduced margins.”

Qualcomm is at least making progress on the innovation front for the day that smartphone sales rebound. During the quarter, it announced the launch of its new Snapdragon X75 5G modem chip that’s expected to power a new generation of high-end smartphones.

The Snapdragon X75 chip comes with an improved artificial intelligence-powered processor that optimizes the phone’s internet connectivity speed to reduce the risk of internet outages. The new chip also supports Qualcomm’s new Satellite technology that enables smartphones to connect directly to satellite constellations such as Space Exploration Technologies Corp’s Starlink service.

Photo: Qualcomm