Qualcomm defends licensing scheme as suits pile up and revenues fall short

REUTERS/Mike Blake/File Photo

(Reuters) – Qualcomm reported a lower-than-expected 3.9% rise in quarterly revenue on Wednesday, and defended its licensing model in the face of multiple legal challenges over its alleged “anticompetitive” tactics.

The company’s shares were down 3.8% at $54.75 in aftermarket trading.

The US Federal Trade Commission and Apple have sued the chip supplier, accusing it of resorting to “anticompetitive” tactics to maintain a monopoly over chips used in smartphones.

Apple also filed a lawsuit against Qualcomm in Beijing on Wednesday, alleging that it abused its clout, and is seeking 1 billion yuan ($145.3 million) in damages.

Qualcomm executives firmly defended the company’s licensing model on its quarterly conference call, and said its revenue forecast did not include any impact from the dispute with Apple.

“Apple’s attack on Qualcomm’s business model is not only an attack on Qualcomm, but also an attack on the smartphone competition that Qualcomm’s business model enables,” the company’s President Derek Aberle said.

The company said it expects to continue to supply to Apple during the dispute. Executives said Qualcomm’s contracts with the iPhone maker’s suppliers were still valid and does not expect it to impact the current quarter.

Charter Equity Analyst Edward Snyder said that Qualcomm may have to appease Apple to some extent, to protect the company’s smartphone market share.

“Even if they win the battle, they might lose the war,” Snyder added.

Stacy Rasgon, an analyst with Bernstein, noted that Qualcomm’s fiscal second quarter revenues will come from mobile phones that were shipped in December. If Apple’s suppliers decided to cut off payments in January, when Apple filed its lawsuits, the impact would not show up until Qualcomm’s fiscal third quarter. The company has given no guidance yet for that quarter, he added.

Qualcomm’s licensing business generates royalties earned through the licensing of wireless patents to the mobile industry. It also books direct sales of the chips themselves.

“The chipset unit margin outlook is quite weak,” said Rasgon. “Licensing is decent. The question is how much that licensing revenue is catch-up from previous quarters versus sustainable run rate.”

Qualcomm is a major supplier to both Apple and Samsung Electronics, with the two accounting for 40% of its 2016 annual revenue.

The San Diego-based company also forecast current-quarter adjusted profit of $1.15 to $1.25 per share and revenue of $5.5 billion to $6.3 billion.

Analysts on average were expecting a profit of $1.20 per share and revenue of $5.90 billion, according to Thomson Reuters I/B/E/S.

Net income attributable to the company more than halved to $682 million, or 46 cents per share, in the first quarter ended Dec. 25, due to the charge. (http://bit.ly/2jqEoha)

The company said the latest quarter included an $868 million charge related to an investigation by South Korea’s antitrust regulator, Korea Fair Trade Commission, in December.

Revenue rose to $6 billion from $5.78 billion, but missed analysts’ estimate of $6.12 billion.

Excluding items, Qualcomm earned $1.19 per share, slightly above analysts’ estimates of $1.18.

(Reporting by Narottam Medhora in Bengaluru and Stephen Nellis in San Francisco; Editing by Shounak Dasgupta and Lisa Shumaker)

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