BlackBerry Arbitration Ruling Cuts Into Qualcomm's Profit -- 2nd Update

By Ted Greenwald Features Dow Jones Newswires

An arbitration decision in a dispute with BlackBerry Ltd. weighed on Qualcomm Inc.'s earnings in the latest quarter, a further blow to its results after the chip maker paid a hefty South Korean government fine the previous quarter, and a reminder of ongoing challenges to its patent licensing business.

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The smartphone chip leader reported a second-quarter profit of $749 million on total sales of $5.02 billion, as the arbitration decision cut sharply into the company's top line and helped pull down revenue in its patent licensing segment by 40%, to $1.33 billion. That division, which licenses patents essential to mobile communications and collects royalties on nearly every smartphone sold, typically brings the majority of Qualcomm's pretax net profit. The impact from the BlackBerry decision amounted to $974 million, the company said.

Overall, Qualcomm reported earnings per share 50 cents, down from 78 cents a year earlier. Adjusting for certain factors, Qualcomm reported per-share profit of $1.34 a share, topping analysts' expectations of $1.19, according to Thomson Reuters.

Qualcomm, meanwhile, worked to quell concerns over royalty payments withheld on sales of Apple Inc. iPhones. It said Apple's contract manufacturers had underpaid royalties during the quarter commensurate with amounts that are currently in dispute.

The question is how much of those royalties will continue to be absent going forward. Qualcomm noted as much in its report, saying it wasn't clear whether Apple's manufacturers would underpay during the third quarter, potentially hurting its revenue and profit.

Still, shares of Qualcomm rose on the earnings beat, climbing 2.4% after hours to $53.85. The stock's price has dropped sharply this year, down 19% through Wednesday's close and the worst performer in the PHLX Semiconductor Sector Index year-to-date, as the U.S. Federal Trade Commission sued the company for anticompetitive practices in its patent licensing division. Qualcomm has filed a motion to dismiss the case.

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Days later, Apple filed its own allegations of unfair dealing around Qualcomm's intellectual property licensing business. Qualcomm has characterized the conflict as a commercial dispute in which Apple aims to cut costs.

For the current third quarter, Qualcomm projected that its adjusted earnings per share would range from 90 cents to $1.15 a share, compared with analysts' estimates of $1.09 a share.

Beyond its business licensing patents to phone makers, the San Diego, Calif., company holds dominant market share in mobile chips. Its latest high-end smartphone chip is in a portion of Samsung Electronics Co.'s flagship Galaxy S8 phones as well as flagship devices from Sony and Xiaomi, Qualcomm said, and Apple uses its communications chips in some iPhones.

Qualcomm's chip sales have declined in recent years after a period of robust growth, reflecting slowing growth in smartphones. The falloff has led the company to set its sights on new markets. In the latest quarter, its MSM chip shipments fell to 179 million from 189 million in the year-earlier period.

Qualcomm's equipment and services division posted $3.69 billion of revenue for the quarter, up from $3.35 billion a year earlier.

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

An arbitration decision in a dispute with BlackBerry Ltd. weighed on Qualcomm Inc.'s earnings in the latest quarter, a further blow to its results after the chip maker paid a hefty South Korean government fine the previous quarter, and a reminder of ongoing challenges to its patent licensing business.

The smartphone chip leader reported a second-quarter profit of $749 million on total sales of $5.02 billion, as the arbitration decision cut sharply into the company's top line and helped pull down revenue in its patent licensing segment by 40%, to $1.33 billion. That division, which licenses patents essential to mobile communications and collects royalties on nearly every smartphone sold, typically brings the majority of Qualcomm's pretax net profit. The impact from the BlackBerry decision amounted to $974 million, the company said.

Qualcomm, meanwhile, worked to quell concerns over royalty payments withheld on sales of Apple Inc. iPhones, a consequence of disputes between the two companies that came to a head in lawsuits filed by Apple in January. It said it expected Apple's contract manufacturers to underpay royalties during the quarter commensurate with the amount that is currently in dispute, but also widened its range of guidance for the third quarter to reflect uncertainty over iPhone-related royalties. The guidance doesn't include a scenario in which no payments are made by the contract manufacturers, Qualcomm said.

The question is how much of those royalties will continue to be absent going forward. Qualcomm noted as much in its report, saying it wasn't clear whether Apple's manufacturers would underpay during the third quarter, potentially hurting its revenue and profit.

"Things we can control, we're executing well on," Qualcomm Chief Executive Steve Mollenkopf said in an interview.

Still, shares of Qualcomm rose on the earnings beat, climbing 2.4% after hours to $53.85. The stock's price has dropped sharply this year, down 19% through Wednesday's close and the worst performer in the PHLX Semiconductor Sector Index year-to-date, as the U.S. Federal Trade Commission sued the company for anticompetitive practices in its patent licensing division. Qualcomm has filed a motion to dismiss the case.

Days later, Apple filed its own allegations of unfair dealing around Qualcomm's intellectual property licensing business. Qualcomm has characterized the conflict as a commercial dispute in which Apple aims to cut costs.

Qualcomm, in a recent court filing answering Apple's lawsuit, alleged that Apple influenced contract manufacturers that assemble iPhones, and which have license agreements with Qualcomm, to stop paying royalties for their use of Qualcomm's patents. Apple's alleged interference was retaliation for the chip maker's own withholding of payments it owed to Apple in a separate contract dispute, Qualcomm claimed. Apple, in its lawsuit, tallied those payments at $1 billion. Qualcomm said it expects iPhone royalties to be withheld only up to that amount.

Royalties on iPhone sales lately have accounted for about 12% of Qualcomm's total revenue and as much as 30% of its per-share earnings, according to Srini Pajjuri of Macquarie Capital.

Beyond its business licensing patents to phone makers, the San Diego, Calif., company holds dominant market share in mobile chips. Its latest high-end smartphone chip is in a portion of Samsung Electronics Co.'s flagship Galaxy S8 phones as well as flagship devices from Sony and Xiaomi, Qualcomm said, and Apple uses its communications chips in some iPhones.

Qualcomm's chip sales have declined in recent years after a period of robust growth, reflecting slowing growth in smartphones. The falloff has led the company to set its sights on new markets. In the latest quarter, its MSM chip shipments fell to 179 million from 189 million in the year-earlier period.

One target of growth: Cars. Qualcomm agreed to purchase NXP Semiconductors NV, a leader in chips for the automotive industry, for $39 billion in late 2016. The purchase, which hasn't yet closed, is a bet that Qualcomm can boost sales of its own products through NXP's automotive relationships and extend its role in the Internet of Things, the trend toward outfitting a wide variety of everyday devices with computing and communications capability. It also may make Qualcomm less dependent on intellectual property sales -- which are threatened by recent regulatory and legal actions -- in favor of revenue from product sales.

Qualcomm said Wednesday the deal is on track to close by the end of the year.

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

(END) Dow Jones Newswires

April 19, 2017 19:57 ET (23:57 GMT)