Qualcomm Profit Slides as Royalty Dispute Continues -- Update

By Ted Greenwald Features Dow Jones Newswires

Qualcomm Inc.'s quarterly profit plunged 89%, crippled by a $778 million charge related to a fine by Taiwanese regulators and Apple Inc.'s continued withholding of patent royalties on iPhones and iPads.

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The penalty imposed by Taiwan in October was Qualcomm's third since 2015, fallout from a wave of international regulatory challenges to the company's business practices. Qualcomm is appealing Taiwan's decision.

Meanwhile, Apple has withheld fees it owes for its use of Qualcomm's intellectual property as it battles for lower royalty rates. The escalating conflict has overshadowed Qualcomm's financial performance since Apple filed suit in January.

Qualcomm on Wednesday reported revenue from licensing intellectual property, which typically contributes well more than half of Qualcomm's pretax earnings, dropped 36%.

Sales of chips for mobile devices rose 13%, which Qualcomm attributed to strong performance in China, higher prices and success in markets beyond smartphones, such as automotive and networking.

In an interview, Chief Executive Steve Mollenkopf said Qualcomm's chip-sales results "cap off six quarters of good continued growth" and that the company's forecast "shows we expect that to continue."

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For the current quarter ending in December, Qualcomm forecast adjusted per-share earnings between 85 cents and 95 cents on revenue between $5.5 billion and $6.3 billion.

Overall, Qualcomm on Wednesday reported fourth-quarter revenue of $5.91 billion, down 4.5% from the same period a year earlier. Profit was $168 million in the fourth quarter, down from $1.6 billion.

Qualcomm is the largest provider of communications chips for smartphones, and its products form the heart of many higher-end Android phones. As a holder of patents essential to implementing cellular standards, Qualcomm collects royalties on nearly every smartphone sold world-wide, regardless of whether they include the company's chips.

However, its business is embattled on several fronts. Apple and Qualcomm are locked in an escalating war over royalty rates, and Apple has directed the Taiwan-based companies that assemble Apple devices not to pay royalties for their use of Qualcomm's technology.

The tussle now threatens to spill into chip sales. Apple uses Qualcomm's communications chips in a portion of recent iPhones and iPads, but it has taken steps to eliminate Qualcomm's products from its next generation of devices, The Wall Street Journal reported earlier this week.

On its call with investors, Qualcomm declined to discuss any particular media reports but said it is confident in its modem road map, and said it continues to work at being a good supplier to Apple.

The company counseled investors to be patient as the dispute continues. "It's important to keep in mind that litigation of this size and magnitude takes a while," said Don Rosenberg, chief legal officer, on a conference call with investors.

A previously disclosed second licensee, which Qualcomm hasn't named, also has been withholding royalty payments. Qualcomm on Wednesday said that disagreement began before its dispute with Apple, and involves unrelated issues.

Regulators in some countries, meanwhile, have determined Qualcomm uses its dominant position in chips to thwart competitors and charge exorbitant royalties, bringing fines and demands that the company change its business practices.

Qualcomm is banking on its pending acquisition of NXP Semiconductors NV to broaden its product line and give it an avenue into the automotive industry, where the dollar value of chips built into cars is growing rapidly. The $39 billion deal has been held up by European regulators, though, and some NXP owners are holding out for a higher price.

In its conference call, Qualcomm for the first time acknowledged its schedule for closing the deal, which it consistently has said would occur by the end of the year, could slip into 2018. It said the original offering price stands and continues to be attractive to NXP.

Qualcomm's shares were up marginally after-hours trading at $53.80, after finishing 4 p.m. trading in New York up 4.8% to $53.46. As of Wednesday's close, the stock's price has fallen roughly 17% since Apple first took legal action against Qualcomm in January.

The San Diego, Calif., chip maker reported per-share earnings of 92 cents on an adjusted basis, omitting share-based compensation and other items. Analysts had expected 81 cents a share on $5.8 billion in revenue, according to a survey by Thomson Reuters.

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

(END) Dow Jones Newswires

November 01, 2017 19:02 ET (23:02 GMT)