Qualcomm Sales May Miss Estimates as Legal Fights Loom

  • CEO Mollenkopf calls Apple suit regrettable commercial dispute
  • Chipmaker says it has no indication royalty payments will stop

Qualcomm Gives Murky Forecast, Glass Half Empty?

Qualcomm Inc. forecast sales and profit for the current period that may miss estimates, providing investors with a window into its business ahead of a fight to defend its most profitable unit from regulatory and legal attacks around the world.

Revenue in the chipmaker’s second quarter will be $5.5 billion to $6.3 billion, the company said Wednesday in a statement. Profit before certain items will be $1.15 to $1.25 a share. That compares with the average analysts’ projection for sales of $5.9 billion and profit of $1.19 a share, according to data compiled by Bloomberg.

Chief Executive Officer Steve Mollenkopf and his leadership team face multiple challenges as they work to complete the acquisition of NXP Semiconductors NV, ignite growth in a slowing smartphone market and now fend off accusations of illegal business practices. Last week Apple Inc., one of the biggest purchasers of Qualcomm chips, added to lawsuits accusing the company of abusing its position as a holder of basic phone-system patents to bolster its dominance in the smartphone-chip market.

Qualcomm’s licensing division provides the bulk of its profits and contributes to an industry-leading research-and-development budget, which in turn helps the company’s chips set the pace in technology advances. The company’s stock has declined 13 percent since the start of this year on concern that this strategy, successful for most of Qualcomm’s history, is threatened by regulatory investigations in the U.S., Korea, Taiwan and Europe and by Apple’s suit.

Mollenkopf said that Apple’s “regrettable” suit is a negotiating tactic for lower licensing payments. Qualcomm will continue to supply the iPhone maker with chips and expects Apple’s manufacturing partners, who pay the licensing revenue due on the phones on behalf of Apple, to continue to do so. Qualcomm and Apple had engaged in talks for a direct license, executives said.

Commercial Dispute

“They want to pay less than the fair value that Qualcomm has established in the market place,” Mollenkopf said after the earnings report on an hour-long conference call that focused almost exclusively on how the company will fend off its legal challenges. “This is a commercial dispute.”

Qualcomm’s leaders pointed to their company’s record of success in the courtroom as the basis for their confidence that they’ll succeed in the current round of cases. They intend to argue, as in the past, that Qualcomm’s technology has served the whole industry and resulted in enormous profits for companies including Apple that have benefited from the explosion in use of smartphones.

In its results, Qualcomm reported net income in the first quarter, which ended Dec. 25, declined to $682 million, or 46 cents a share, and included a $868 million charge to account for a fine issued by the Korea Free Trade Commission. Excluding certain items, profit was $1.19 a share, compared with an average estimate of $1.18. Sales gained 4 percent to $6 billion -- Qualcomm’s third straight quarter of increases after four consecutive double-digit percentage declines. Analysts had predicted revenue of $6.11 billion.

Shares Fall

Qualcomm shares declined as much as 4.3 percent in extended trading after gaining 3.5 percent to close at $56.90 in New York.

“Investors have a lot of doubt right now,” said Kevin Cassidy, an analyst at Stifel Nicolaus & Co. “Investors are thinking not that they win, but how much profit do they lose?”

Chief Financial Officer George Davis said the company’s businesses are continuing to improve, which is reflected in the forecast. China, in particular, has been a “strong story” as increasing licensing payment collection helped the business exceed expectations in the most recent period, he said in a phone interview.

“The underlying business is operating quite strongly,” Davis said. Demand for high-end phones in some markets has even pushed up average selling prices, he said. Davis said that Qualcomm isn’t expecting customers to suspend licensing fee payments amid the ongoing law suits and no such scenario is in the company’s forecasts.

Cassidy, the Stifel Nicolaus analyst, said he thinks Qualcomm will eventually prevail in court and called Apple’s suit a negotiating tactic. The iPhone maker accused the chip company of withholding $1 billion in rebates in retaliation for Apple’s cooperation with South Korean antitrust authorities and pressuring Apple into licensing agreements under the threat of withholding chip supply.

Qualcomm gets the bulk of its revenue from selling chips, but more than half of its profit from the separate licensing business. Its patents cover the fundamentals of cellular technology, meaning it rakes in billions in licensing fees. That position and years of legal victories mean the chipmaker gets paid a royalty every time a mobile phone is sold, regardless of whether its own chip is in the device.

One common thread in all of the cases is the contention that royalty rates should be calculated as a percentage of the price of the phone components that Qualcomm invents and sells -- measured in tens of dollars. Currently, licensing fees are tallied as a percentage of the price of the entire phone, which is usually in the hundreds of dollars.

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