Qualcomm Falls as Forecasts Show Licensing Struggle in China

  • Chipmaker experiencing delays in royalty signups, CEO says
  • Chipset demand came in stronger than company had predicted

Qualcomm Inc. shares plummeted the most in 15 years after the company forecast quarterly sales and profit that fell short of some analysts’ estimates, underscoring the chipmaker’s struggle to collect technology-licensing fees for smartphones sold in China.

The company said it’s facing tough negotiating tactics at phone makers in the world’s most-populous nation, as some companies there withhold payments and stop reporting shipments in an attempt to secure better terms. That led to the weaker outlook for the company’s licensing business, its most profitable.

The shares fell 15 percent to $51.07 at the close Thursday in New York, the biggest single-day plunge since April 2000, according to data compiled by Bloomberg.

While the chipmaker said it’s seeing better-than-expected demand from one of its largest customers for parts used in cheaper handsets, Qualcomm gets about 60 percent of its operating income from licensing its mobile technology. That high-margin business fuels research and development in chips and enables the company to outpace most rivals in bringing new features to phones. The fallout from an antitrust investigation by Chinese regulators, settled earlier this year, is still hampering Qualcomm’s efforts to collect patent royalties and fully benefit from growth in the world’s largest mobile-phone market.

“You should read this as just a delay in signing up people, not a change to the overall capability of us to go after that market,” Chief Executive Officer Steve Mollenkopf said. “The fourth quarter came in at the high end of expectations, driven by higher demand for chipsets than we had thought.”

China Settlement

In February, China’s National Development and Reform Commission, which had been investigating Qualcomm for antitrust violations, announced a settlement under which Qualcomm paid a fine and agreed to reduced royalty rates for phones sold for use in China. That freed Qualcomm to sign new accords in country and and pursue handset makers that had been underpaying for licenses or holding out on fees entirely.

Qualcomm is preparing to step up its efforts -- including possible legal action -- against some of the Chinese holdouts and expects to get paid in full eventually, President Derek Aberle said.

Net income in the period that ends in December will be 80 cents to 90 cents a share on revenue of $5.2 billion to $6 billion, Qualcomm said Wednesday in a statement. On average, analysts had projected earnings of 86 cents on sales of $5.76 billion, according to data compiled by Bloomberg.

Qualcomm's 12-Month Stock Movement
Qualcomm's 12-Month Stock Movement

Qualcomm shares had dropped 19 percent this year through Wednesday, compared with a 1.9 percent decline in the benchmark Philadelphia Stock Exchange Semiconductor Index.

Growth in Check

In the fiscal fourth quarter, which ended Sept. 27, Qualcomm’s net income fell to $1.1 billion, or 67 cents a share. Sales slid 18 percent to $5.46 billion. Analysts on average predicted earnings of 62 cents on revenue of $5.21 billion.

Qualcomm’s rise up the ranks of semiconductor makers -- its revenue has more than doubled since 2010 -- has been checked by moves by the biggest handset makers to lessen their reliance on its products. The company’s annual sales fell in fiscal 2015 for the first time since 2009, after averaging more than 20 percent growth since 2010.

The company’s chip business has been squeezed by a slowdown in the broader smartphone market, where the top two providers -- Apple and Samsung Electronics Co. -- are increasingly using their own components rather than buying from Qualcomm. As Apple and Samsung post sales gains with new phones that don’t use Qualcomm’s Snapdragon processors, smaller providers that use the chip are shipping fewer phones.

“Once Apple went to the larger screen, they’ve started to dominate the high end of the market, and Samsung’s been quite aggressive and has a better phone than last year,” said Mike Walkley, an analyst at Canaccord Genuity Inc. “The other camp, which happens to be Qualcomm’s core Snapdragon customers, is sick to dying.”

Apple’s iPhone, which gained a couple of points of market share in the third quarter, uses a Qualcomm radio chip but not its more expensive Snapdragon processor. Samsung, still the leading phone maker worldwide, has also been increasingly using its own silicon in its Galaxy line of devices.

A new chip, the Snapdragon 820, will help make Qualcomm’s products more competitive and start to improve its share of the phone-chip market in the second half of calendar 2016, Mollenkopf said. He said his company’s relationship with Samsung is getting better, not worse.

Smartphone Growth

Samsung and Apple had a combined 37 percent of the market for smartphones worldwide in the calendar third quarter, according to IDC. Smartphone shipments overall rose 6.8 percent, less than the researcher had forecast. That’s about half the rate of the preceding three-month period, and compares with a 28 percent surge in 2014.

San Diego, California-based Qualcomm is also facing challenges from regulators around the world to its licensing business, which pulls in profit by charging phone makers for use of patents on cellular technology -- regardless of whether they use Qualcomm chips. The European Union and the U.S. Federal Trade Commission are investigating the company following the antitrust ruling against Qualcomm in China.

Chip Shipments

Underlying the difficulties its chip division is facing, chip shipments totaled 203 million in the recent quarter, down 14 percent from a year earlier, Qualcomm said. Still, that exceeded the company’s projections as a large customer ordered more parts for middle-market and low-end handsets, Mollenkopf said.

Qualcomm remains positive about broader smartphone demand and expects growth to be at a percentage in the double digits for calendar 2016, Aberle said.

Investors are still waiting for Qualcomm management’s full response to its change in fortunes. In July, the company unveiled plans to cut its workforce by 15 percent, shook up its board membership and is said it was reviewing strategic alternatives, including a breakup. The moves, including planned cost reductions of $1.4 billion, came under pressure from activist hedge fund Jana Partners LLC.

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