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MediaTek expects headwinds in China mobile market in 2018

World's No. 2 phone chipmaker only sees global growth in handsets below $400

MediaTek's co-Chief Executive Rick Tsai will become the sole CEO beginning in February. (Photo by Cheng Ting-fang)

TAIPEI -- Taiwan's MediaTek, the world's No. 2 mobile chipmaker after U.S. rival Qualcomm, on Wednesday said its revenue for the current quarter ending March is expected to drop up to 20% amid a sluggish smartphone market in China. 

"We have seen that Chinese customers were more conservative in placing orders in the last quarter and in the current quarter, as the country's domestic market slows down substantially," Rick Tsai, MediaTek's co-chief executive, said in an earnings call.

"For all of 2018, we expect to find the smartphone market saturated, as it is taking much longer for consumers to purchase a new phone," said Tsai, who will become the sole CEO in February. 

He said there is still room this year for global growth in sales of smartphones with a price tag below 2,500 yuan ($395), but he said he could not see any upside for most premium phones.

Tsai added that the company would bring facial recognition, computer vision and artificial intelligence applications, which previously were found only in high-end phones, to chipsets for mid-range phones in order to stimulate growth and enhance gaming and multimedia programs.

The company supplies to nearly all the major Chinese smartphone makers, including Huawei Technologies, Oppo Electronics, Vivo, Xiaomi, Gionee and Meizu Technology, as well as South Korea's Samsung Electronics' mid- to low-end phones.

For the first quarter of this year, MediaTek projected that its revenue will be between 48.3 billion New Taiwan dollars and NT$53.2 billion ($1.65 billion and $1.82 billion), down as much as 13.8% from the same period a year earlier, and down 12% to 20% from the fourth quarter of last year -- weaker than analysts' expectations of an 8% decline in the traditionally slow season. The company's gross margin is expected to be 35.5% to 38.5% for the current quarter.

Aaron Jeng, an analyst at Nomura Securities in Taipei, said he sees a very weak start for MediaTek in the first three months of this year, but expects a strong rebound beginning in the second quarter.

MediaTek's earnings forecast comes after Qualcomm, its biggest competitor, also hit a rough patch. On Jan. 24, Qualcomm was slapped with a fine of 997 million euros ($1.24 billion) by European Union regulators for paying Apple to exclusively use its chips, from 2011 to 2016. The world's No. 1 mobile chip company also recently began paying a $778 million penalty in 60 installments to Taiwan's antitrust watchdog, which ruled in October that the company violated antitrust laws. Qualcomm was hit with similar fines in South Korea in 2016 and China in 2015.

Meanwhile, Qualcomm has been locked in a prolong legal battle with the iPhone maker since the beginning of 2017 over licensing fees, and it is fighting a hostile takeover bid by its U.S. rival Broadcom.

Tsai said he has no stance on and control over whether other companies -- referring to Qualcomm and Broadcom -- will merge, but his team will not be distracted by the action. "We would deal with the consolidation trends and changing market conditions very cautiously," he said.

Roger Sheng, an analyst at research firm Gartner in Shanghai, said the current events at Qualcomm could have a negative impact on its operations. He said MediaTek is likely to regain some global market share this year but the upside would be limited.

"The world's top two mobile chipmakers are facing headwinds in a stalled mobile market and could see increasing impact as big-name smartphone makers are building all -- or at least a part -- of core processor chips in-house," Sheng said.

Sheng said for all of 2018, he expects roughly 30% of a total 16 billion application processors for smartphones to be built in-house by deep-pocket handset makers. For instance, Apple has designed all of its core processor chips for years, while Samsung Electronics, Huawei Technologies and Xiaomi produced part of their core processor chips themselves, rather than buying them all from mobile chip designers.

For all of 2017, MediaTek had revenue of NT$238.21 billion, down 13.5% from the previous year due to a loss in market share to Qualcomm. Net profit for the year edged up 0.2% from 2016 to NT$24.07 billion.

For the fourth quarter, MediaTek's sales fell 12% to NT$60.4 billion. Net income nearly doubled to NT$10.16 billion, mainly due to disposal gains from the sale of shares in China's Shenzhen Huiding Technology, also known as Goodix.

MediaTek's gross margin of 37.4% in the final quarter of 2017 improved substantially from 34.5% in the same quarter a year earlier, and was also up from the record low of 33.5% in the first quarter of last year.

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