Regulatory fines, trouble with Apple weigh on Qualcomm’s financial results
Qualcomm reported fourth quarter and full year earnings on Wednesday that were overshadowed by its ongoing legal dispute with Apple,
For Qualcomm, there are so many external tornadoes swirling around its business – ranging from its patent war with Apple to its slow-moving bid to acquire NXP Semiconductors -- that its financial results almost take a back seat.
So even though the San Diego cellular technology giant posted solid results for its fiscal fourth quarter Wednesday, Wall Street analysts were looking for updates from executives on bigger questions.
They included the high-profile lawsuits with Apple over patent royalties; potential delays and price re-negotiation of the proposed $38 billion acquisition of NXP; the status of legal appeals on hefty fines from global anti-monopoly regulators; and the prospect of Apple ditching Qualcomm’s chips from future iPhones.
There were partial answers to some of these questions, particularly regarding NXP acquisition and legal matters. In the headline-grabbing dispute with Apple, Qualcomm appears to be prepared for a long fight.
“We remain focused on defending our business and our patented inventions for the long term,” said Chief Executive Steve Mollenkopf in a conference call with analysts.
For its fiscal fourth quarter ended Sept. 25, Qualcomm reported revenue of $5.9 billion and net income of $200 million, or 11 cents per share, under Generally Accepted Accounting Principles.
That’s down from $6.2 billion in revenue and earnings of $1.6 billion, or $1.07 per share, for the same quarter last year.
The decline stemmed in part from Apple withholding patent royalty payments to Qualcomm beginning this spring as a result of the companies’ legal spat – which has cut Qualcomm’s revenue by roughly $500 million a quarter.
Qualcomm previously forecast GAAP earnings of 55 cents to 65 cents per share in the fourth quarter, but that prediction was derailed by a $778 million charge (52 cents per share) for a fine imposed by the Taiwan Fair Trade Commission last month.
Qualcomm intends to appeal the judgment in court — raising concerns regarding its due process rights.
Qualcomm would have beat its earnings target without the Taiwan fine, and its revenue for the quarter came in above the $5.8 billion forecast by Wall Street analysts.
Chip sales were particularly strong for the quarter, thanks to increases from smartphone makers in China and a 25 percent gain in sales to industries outside of smartphones, such as automotive, Internet of Things and networking.
The Apple dispute weighed down Qualcomm’s patent licensing business, which accounts for a majority of the the company’s profit.
A second large, unnamed smartphone maker also isn’t paying patent license fees to Qualcomm. Negotiations are continuing but no lawsuits have been filed at this time.
For its full fiscal year, Qualcomm reported revenue of $22.3 billion, down 5 percent from 2016.
Net income came in at $2.5 billion, or $1.65 per share, compared with $5.7 billion the prior year.
Some big judgments against the company hurt its profitability for the year. A $927 million fine from South Korea’s anti-monopoly regulator, a $940 million reduction in revenues after losing an arbitration dispute with Blackberry and the big Taiwan fine hampered results.
In addition to the Taiwan appeal, Qualcomm is appealing the South Korea judgment.
The NXP acquisition, a transformative deal that will diversity Qualcomm’s semiconductor business into automotive, secure payments and other industries beyond smartphones, was expected to be completed late this year.
Though the deal has been approved by five countries, it still is awaiting clearance from regulators in Europe, China, South Korea and Japan.
Mollenkopf said while the company continues to work to complete the deal by the end of calendar year 2017, the transaction may slip into early 2018.
Analysts say Qualcomm may have to pay a higher price to acquire NXP than the $110 a share that both companies agreed to last year -- in part because of NXP’s strong performance and activist shareholders lobbying for more money.
At least for now, Qualcomm isn’t talking about paying more.
“Along with NXP, we continue to see this as an attractive deal for both our stockholders and NXP shareholders at $110 a share,” said Mollenkopf.
Looking ahead, Qualcomm expects fiscal first quarter sales of $5.5 billion to $6.3 billion, and GAAP earnings per share of 63 cents to 73 cents.
Qualcomm released results Wednesday after markets closed. Its shares ended trading up 4.8 percent at $53.46 on the Nasdaq exchange.
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