Qualcomm Profit Plunges Without Royalties From Apple -- 2nd Update

By Ted GreenwaldFeaturesDow Jones Newswires

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.

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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)