[dropcap]Q[/dropcap]ualcomm, the biggest maker of chips used in mobile phones, has forecast steep declines in profit and licensing sales, underscoring its dependence on the royalties that one of its largest customers, Apple, has stopped paying.
Sales in the company’s licensing division, which collects fees for use of its mobile technology, will sink as much as 47% in the current period to as little as US$1bn, the company said. That will drag down overall revenue by as much as 13% in the quarter, which ends in September. The guidance excludes patent fees related to products from Apple and another customer whose contract is in dispute.
While demand has been growing for Qualcomm’s chips, which provide the bulk of revenue, CEO Steve Mollenkopf is grappling with a bigger set of problems in the licensing business, his most lucrative unit. The company is facing antitrust inquiries from governments around the world and financial results have become harder to predict since payments related to the iPhone were halted earlier this year. The two companies are now locked in escalating rounds of lawsuits and counter moves.
“I don’t think they’ve ever had this many challenges going on at the same time,” said David Heger, an analyst at Edward Jones & Co. “Ultimately, they can get all of these things resolved, but it’s a case of what does it look like when they do? Qualcomm, in terms of earnings, has more to lose than Apple.”
Qualcomm shares dropped as much as 4.3% in extended trading. Earlier, they gained less than 1% to $56.78 at the close of trading in New York. The stock has lagged behind other chip makers this year, losing 13% and making it the worst performer on the benchmark Philadelphia Stock Exchange Semiconductor Index in that period.
Demand from China led generally strong order for chips in the third quarter, which ended in June, Mollenkopf said in a phone interview following the report. Qualcomm likes its position in the legal disputes, he said, and thinks defending itself is in the best long-term interests of the company and its shareholders.
“The product business delivered solid results,” Mollenkopf said. Regarding the legal conflicts, “our posture is very clear. We have a very strong case,” he said.
Forecast challenge
The company broke out a forecast for the licensing division to help investors understand how the disputes are affecting its profitability. Analysts struggled to do that in their estimates, which accounts for the difference between Qualcomm’s profit prediction and the market expectations, chief financial officer George Davis said.
In the June quarter, Qualcomm’s sales were in line with forecasts the company had given in late April, when it revised projections it had made less than two weeks earlier as it tried to gauge the impact of its feud with Apple.
The San Diego-based company is unique in the chip industry in that it gets the majority of its profits from selling the right to use patents that cover the fundamentals of all modern phone systems. It gets a cut of the selling price of every smartphone, regardless of whether the handset includes one of its chips. That revenue stream has attracted the ire of Apple, one of the biggest payers of those fees.
Qualcomm’s Mollenkopf has previously said he views the suits as commercial negotiations aimed at securing a lower rate, and he thinks they can be resolved through settlements, as his company has done in the past. Analysts have expressed concern that should Qualcomm not prevail, it’ll lose a source of profit that funds industry-leading research and development, an advantage that has kept its chips ahead of rivals and provided it with new intellectual property to license.
Adjusted profit in the current period may fall to $0.75-$0.85/share, less than the average analyst estimate for $0.91. Overall sales in the fourth quarter will be $5.4bn-$6.2bn, the company said Wednesday. That compares with average analysts’ projections for sales of $5.52bn, according to data compiled by Bloomberg.
Qualcomm’s net income in the third quarter fell to $865m, or $0.58/share. Excluding certain items, profit was $0.83/share, compared to an average estimate of $0.81. Adjusted sales fell 11% to $5.4bn. Analysts had predicted revenue of $5.3bn. — Reported by Ian King, (c) 2017 Bloomberg LP