Qualcomm Profit Plunges Without Royalties From Apple -- 2nd Update
July 19 2017 - 7:33PM
Dow Jones News
By Ted Greenwald
Qualcomm Inc. on Wednesday said profit fell 40% in its latest
quarter, the first in years that didn't include patent royalties on
devices from Apple Inc.
The San Diego company reported profit in the three months
through June 25 of $865 million on total revenue of $5.37 billion,
which fell 11% from a year earlier. It highlighted strength in its
business selling chips for smartphones and other devices, but said
revenue in the patent-licensing division, where the company has
earned most of its pretax profit, fell 42% to $1.17 billion.
Qualcomm, the leading producer of smartphone chips, is in an
escalating legal dispute with Apple, which has blocked licensing
payments that previously flowed to Qualcomm for iPad and iPhone
sales. Apple's manufacturing partners late on Tuesday sued the chip
maker in federal court, claiming it uses unlawful means to boost
its royalty rate. Before halting royalty payments, Apple paid
Qualcomm approximately $10 per iPhone in royalties, some analysts
estimate.
Qualcomm had warned that the Apple dispute would sharply reduce
its earnings in the latest period. Its results on Wednesday came in
above the expectations of analysts and just above the midpoints of
its own forecasts, with the company citing growth in areas such as
automotive, security, and smart devices that are adjacent to its
core business.
Shares fell 3.1% after hours Wednesday, following an advance of
0.9% to $56.78 in regular trading. The stock price has fallen
roughly 9.7% through Wednesday's close since Apple filed its
initial suit in January against Qualcomm.
Results for the quarter shed little light on a point of major
concern to investors: the place of Qualcomm chips in future
versions of the iPhone. Apple puts Qualcomm's communications chips
in roughly half of its iPhone 7 units, the other half of which use
chips from Intel Corp.
Qualcomm declined to present information it usually provides
regarding device sales, citing the litigation with Apple's
manufacturing partners.
Anticipation is high what will presumably be a premium-priced
iPhone celebrating the brand's 10th anniversary, but it is not
clear whether Apple will choose Qualcomm for that. Qualcomm's
estimate of chip shipments in the fourth quarter exceeded the tally
of Northland Securities Inc. analyst Tom Sepenzis by roughly 10
million units. That is a good bump in expected chip shipments, but
not enough to make a decisive call about Qualcomm's participation
in next-generation iPhones, he said.
In addition to the Apple impact, Qualcomm's earnings also were
affected by the lack of revenue from an unidentified customer that
is withholding royalties, Qualcomm said, in a dispute first
revealed along with last quarter's disclosure. The company's
forecasts for the fourth quarter also left out that revenue.
Qualcomm said pretax earnings on chip sales rose 58% from the
year-ago quarter, on revenue that grew 5% to $4 billion. The chip
business has been growing faster than the overall market in China,
the company said. However, slack sales of Android phones and a
sharp drop in handset shipments in China in the quarter led to an
oversupply that weighed on sales, analysts noted.
Qualcomm dominates the market for smartphone chips and collects
patent royalties on nearly every smartphone globally, including
those that don't use its chips. In recent years, it has faced an
international wave of opposition from regulators, customers, and
competitors who say that it unfairly extracts exorbitant royalties.
The company also is accused of violating its obligation, as an
owner of patents deemed essential to cellular communications, to
license its intellectual property widely.
Qualcomm has denied these allegations. It has sued Apple and the
contract manufacturers that assemble iPhones. It moved earlier this
month to block imports of some Apple devices into the U.S., and on
Wednesday it took similar action in Germany.
Qualcomm Chief Executive Steve Mollenkopf said on the earnings
conference call that he expects the dispute with Apple to be
settled out of court.
Another question that weighs heavily on Qualcomm's future is the
fate of its $39 billion bid to buy NXP Semiconductors NV. Many
investors are optimistic that the deal would bolster Qualcomm by
combining its expertise in digital processing with NXP's in
automotive chips.
Four jurisdictions including the U.S. have approved the tie-up,
the company said. But European Union authorities recently suspended
their inquiry while waiting for Qualcomm to deliver information
they had requested.
Mr. Mollenkopf on Wednesday reiterated that he expects the deal
to close "on the terms we've agreed to" by the end of the year.
Overall, Qualcomm reported per-share earnings of 58 cents for
the quarter, down from 97 cents a year ago.
On an adjusted basis that excludes items including stock-based
compensation, Qualcomm reported per-share profit of 83 cents.
Analysts polled by Thomson Reuters on that basis had expected
earnings of 81 cents a share on revenue of $5.3 billion.
For the fourth quarter ending in September, Qualcomm forecast
adjusted earnings per share between 75 cents and 85 cents on
revenue to between $5.4 billion and $6.2 billion.
Write to Ted Greenwald at Ted.Greenwald@wsj.com
(END) Dow Jones Newswires
July 19, 2017 19:18 ET (23:18 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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