Qualcomm says disputes are weighing on revenue

Qualcomm Inc. said revenue dropped 20% in its latest quarter and is likely to fall by a smaller amount in the current period, as disputes with customers including Apple Inc. continue to take a toll on the maker of communications chips.

Revenue fell by slightly more than expected to $4.8 billion in the three months through December, Qualcomm’s fiscal first quarter. However, the San Diego-based chip maker said it swung to a profit of $1.07 billion in the quarter, from a loss of nearly $6 billion a year earlier, when it was hit by big charges related to the U.S. tax overhaul and a European antitrust fine.

While Chief Executive Steve Mollenkopf said the company’s semiconductor business remains strong, Qualcomm posted significant revenue declines in both its chip-making and patent-licensing businesses.

Qualcomm’s latest results were hurt in part by weakness in sales of lower-tier units in China as the economy there slows, Chief Financial Officer George Davis said on an investor call.

Qualcomm said it expects revenue in the current quarter to be anywhere between flat to down 16% from the same period a year ago, pointing to further clouds on the horizon amid a softening mobile-phone market and disputes over its patent-licensing practices.

Qualcomm shares, which gained 1.6% in regular trading Wednesday, rose another 2.5% in after-hours trading following the results, as its profit beat expectations. That left the stock still down by about a third from its high point last year of $76.50 in September.

Despite the immediate market reaction, some investors remain concerned about Qualcomm’s longer-term prospects, with litigation from the Federal Trade Commission and Apple still hanging over it.

Jeff Helfrich of Dallas-based investment adviser Penn Davis McFarland, which holds Qualcomm stock, said the company had failed to deliver repeatedly on promises to shareholders on its future earnings, and that the legal challenges to the business model were now at the top of investors’ list of concerns.

"The real story for Qualcomm now is, is their business model going to make it through this litigation they’re going through?" he said.

Qualcomm has defended its patent policies as fair and consistent with industry practices. The company has said it will drive growth in its business from the global transition to 5G wireless technology and from expanding into new products and businesses.

The company has been locked in battles with customers and regulators over practices in its patent-licensing business, which has historically accounted for most of its profits.

Apple sued Qualcomm over those practices two years ago, claiming they were unfair, and later the iPhone maker and its contract manufacturers started withholding payments to Qualcomm. Huawei Technologies Co. also has been withholding licensing payments to Qualcomm, although the chip maker said the Chinese smartphone giant made a partial royalty payment of about $150 million in the latest quarter.

Qualcomm also has been fighting the FTC, which claimed in a lawsuit that the company illegally used its dominance in the market for smartphone modem chips to leverage above-market rates for its patent licenses.

Closing arguments in the FTC case took place Tuesday, and the Apple case is set for trial in April. Should those decisions go against Qualcomm, the company could be forced to license patents to chip-making competitors and base its licensing fees off the lower price of individual chips rather than the price of entire handsets.

As it fights Apple’s legal challenges, Qualcomm executives pointed to recent victories in patent-enforcement cases against the smartphone giant in Germany and China. Mr. Mollenkopf said he expected more favorable patent-infringement rulings in the coming months.

Qualcomm said its profit in the fiscal first quarter was 87 cents a share, compared with analysts’ consensus estimate of 76 cents. Adjusted profit was $1.20 a share, beating forecasts of $1.09, which was near the midpoint of Qualcomm’s guidance range of $1.05 to $1.15 a share.

Qualcomm reported that total mobile-chip shipments fell 22% year-over-year to 186 million, in line with the 175 million to 195 million it had forecast. Revenue from the chip business fell 20% to $3.74 billion, compared with analysts’ projected $3.8 billion, according to FactSet data.

Meanwhile, licensing revenue dropped 20% to $1.02 billion, above the company’s forecast but shy of analysts’ projected $1.06 billion.

This quarter, Qualcomm expects to earn between 40 cents and 50 cents a share in profit on $4.4 billion to $5.2 billion in revenue. Analysts currently expect 41 cents a share and $4.83 billion in revenue, according to FactSet.

–Maria Armental contributed to this article.

Write to Asa Fitch at [email protected]

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