Profit and revenue slide as royalties from Apple devices stop
flowing to chip maker
By Ted Greenwald
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 20, 2017).
Qualcomm Inc. on Wednesday said profit plunged 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 revenue of $5.37 billion, down
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 embroiled
in a legal dispute with Apple, which has blocked licensing payments
that previously flowed to Qualcomm for iPad and iPhone sales.
Before halting royalty payments, Apple paid approximately $10 per
iPhone in royalties, some analysts estimate.
Apple's manufacturing partners late on Tuesday sued the chip
maker in U.S. court on allegations that it uses unlawful means to
boost its royalty rate.
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, networking, security, and smart devices that are
adjacent to its core business.
Qualcomm said pretax earnings on chip sales rose 58% on revenue
that grew 5% to $4 billion. The chip business has been growing
faster than the overall market in China, it said.
Its shares fell 1.7% 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 and its
manufacturing partners.
Anticipation is high for a coming, presumably premium-priced
iPhone celebrating the brand's 10th anniversary, but it isn't clear
whether Apple will choose Qualcomm for that model.
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 -- a good bump in expected
chip shipments, but not enough to make a decisive call about
Qualcomm's participation in next-generation iPhone models, he
said.
In addition to the Apple impact, the results also were affected
by the lack of potential revenue from an unnamed 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.
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
today it took a 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.
Also up in the air is Qualcomm's $39 billion bid to buy NXP
Semiconductors NV. Qualcomm Chief Executive Steve Mollenkopf on
Wednesday reiterated that he expects the deal to close "on the
terms we've agreed to" by the end of the year.
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 enquiry while waiting for Qualcomm to deliver information
they had requested.
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 20, 2017 02:47 ET (06:47 GMT)
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