QCOM QUALCOMM Inc

By Ted Greenwald 

Qualcomm Inc. said its profit plunged 52% from a year earlier as it dealt with a tangle of challenges, including Apple Inc. and Huawei Technologies Co. continuing to withhold royalties for using the company's patents.

The San Diego-based chip maker reported a profit of $363 million for its fiscal second quarter. Revenue rose 4.9% to $5.26 billion.

The chip maker's shares were up 1.8% in after-hours trading. The stock finished Wednesday's session down 0.4% at $49.75, below its price of $53 a year ago and well below the $79 a share offered by Broadcom Inc. in an unsuccessful takeover effort that ended in March.

The results included a $310 million charge resulting from the company's efforts to save $1 billion in expenses by 2019. That program recently resulted in 1,500 layoffs in California.

Further cost cuts will be made "over the next few months," Qualcomm finance chief George Davis said in an interview.

Qualcomm said revenue from the sales of chips used in mobile devices rose 6% to $3.9 billion, continuing their steady growth in recent quarters.

Qualcomm's revenue from licensing patents, though, tumbled 44% to $1.26 billion, amid fallout from the company's lengthy disputes with Apple and Huawei, which have withheld billions of dollars in royalty payments. That part of the business typically contributes more than half of Qualcomm's pretax earnings.

Patent-licensing revenue will decline further in the months ahead, Qualcomm said on a conference call with analysts. For the current fiscal third quarter, it forecast lower revenue in that division by 10% to 27% from a year earlier. Some of the expected decline is due to terms of a revised licensing agreement with Samsung Electronics Co., the company said, and some is attributable to lower-cost agreements originally negotiated in China that are being rolled out world-wide.

Qualcomm leads the market in chips used in smartphones. Its products manage communications in some iPhones and they form the heart of many Android devices. As a holder of important patents on cellular technology, Qualcomm collects a royalty on nearly every smartphone sold world-wide, regardless of whether they include Qualcomm chips.

But the company in recent years has been beset by one challenge after another, capped by Broadcom's $117 billion hostile bid in November that was to become a relentless distraction throughout the first quarter. The Trump administration in March scuttled Broadcom's overture to protect Qualcomm's leadership in the next-generation cellular technology known as 5G.

Now Qualcomm faces several tough tasks: Complete its purchase of Dutch automotive chip maker NXP Semiconductors NV, a deal that is stalled in China's regulatory approval process; slash $1 billion in expenses to meet its profit goals; and settle its disputes with Apple and Huawei.

"We're executing on the plan we laid out that leads to our 2019 target" of between $6.75 and $7.50 in adjusted per-share earnings for that fiscal year, Chief Executive Steve Mollenkopf said in an interview.

Qualcomm is banking on its acquisition of NXP to immediately contribute $1.50 to its adjusted per-share earnings and broaden its product line, potentially reducing its dependence on royalties. The deal has passed muster in eight countries, but Chinese authorities are giving it a close look amid escalating trade tensions between the U.S. and China.

The company is "optimistic" about getting approval from China's Ministry of Commerce, also known as Mofcom, Mr. Mollenkopf said on the conference call with analysts. But "the environment is obviously quite difficult from a geopolitical point of view, at least right now."

He said "the issue is probably more related to the higher-level discussions between the countries as opposed to any individual issue related to Mofcom."

Qualcomm and NXP recently extended the deadline for completing the deal to July 25. "If it doesn't get done, we're going to move on to another approach," Mr. Mollenkopf said.

Should the deal fall through, Qualcomm has pledged to buy back enough of its own shares to boost earnings by an equivalent amount. The buyback would be a "very large program" amounting to $20 billion to $30 billion, Mr. Davis said on the call.

But that wouldn't address the strategic reasons for buying the automotive specialist, which Qualcomm has said would open a path to markets it expects to be worth $77 billion by 2020.

In the conference call, Mr. Mollenkopf said Qualcomm has a backlog of $4 billion in automotive contracts with companies gearing up for cars enabled for 5G cellular technology in 2021.

Qualcomm reported per-share earnings of 80 cents on an adjusted basis, omitting share-based compensation and other items. Analysts had expected 70 cents a share on $5.19 billion in revenue, according to a survey by Thomson Reuters.

Write to Ted Greenwald at Ted.Greenwald@wsj.com

(END) Dow Jones Newswires

April 25, 2018 19:06 ET (23:06 GMT)

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