Qualcomm Drops After Sales Forecast Signals Weak Demand in China

(Bloomberg) -- Qualcomm Inc. gave a lackluster third-quarter sales forecast, citing weaker demand for smartphones in China. The disappointing outlook overshadowed the benefits of settling a prolonged legal dispute with Apple Inc., sending the shares down in extended trading.

Fiscal third-quarter revenue will be $9.2 billion to $10.2 billion, the San Diego-based company said Wednesday in a statement. Excluding a one-time payment from Apple, revenue in the current period will be $4.7 billion to $5.5 billion. At the midpoint, that fell short of the $5.26 billion average estimate of analysts, according to data compiled by Bloomberg.

“You’re going to see Chinese weakness reflected in the next couple of quarters,” Chief Executive Officer Steve Mollenkopf said in a telephone interview. Qualcomm won’t disclose the terms of its settlement with Apple or what the iPhone maker will pay in licensing fees but “we ended up with a resolution that’s consistent with our program,” he said.

Qualcomm stock fell about 3 percent in extended trading following the quarterly results and forecast. The stock had surged more than 50 percent since the Apple deal was announced April 16, closing Wednesday at $86.37 in New York.

The stock decline was amplified by the lack of details offered by Qualcomm executives about Apple’s future royalty payments. That caused confusion among analysts and investors, who peppered executives with questions about the topic during a conference call, said Mike Walkley, an analyst at Cannaccord Genuity.

“The stock’s had a huge run and the guidance at first blush was disappointing,” Walkley said. He estimates that Apple will pay about $7.50 per phone in royalties, much higher than the $5 he had projected previously. “They’ve gotten an excellent deal, better than most people thought they could salvage,” Walkley said of Qualcomm.

Mollenkopf had long insisted that the chipmaker’s legal troubles were just a commercial dispute that would be resolved when 5G services came along and focused the industry’s attention back on growth, and the settlement with Apple validated his view.

Investors now want to see Qualcomm, in its projected fifth year of revenue declines, convert its claimed leadership in that fifth-generation wireless technology into growth again. Before that happens, the company, like the rest of the industry, is struggling with lackluster consumer demand for smartphones from consumers.

Qualcomm is unique because the majority of its revenue is generated by selling chips that connect handsets to cellular networks, but the bulk of its profit comes from licensing patents it says cover the fundamentals of all modern, high-speed data phone systems. The licensing rights were challenged by Apple, which argued in court and in submissions to regulators that Qualcomm was unfairly jacking up rates using its strength as a supplier of chips.

In the settlement of the litigation, Apple said it would make a one-time payment to Qualcomm, and the two reached a multiyear agreement, in which Qualcomm will sell chips to Apple and collect royalty payments from the iPhone maker in exchange for licensing its technology. Qualcomm said the deal will be worth $2 a share in profit when shipments of chips “ramp up.”

Qualcomm’s fiscal third-quarter forecast includes revenue of $4.5 billion to $4.7 billion from the Apple payment and “the release of our obligations to pay or refund” the iPhone maker and its contractors as a result of the litigation, the company said.

The company’s earnings and outlook also provide a window into demand for products made by some of the world’s biggest technology companies, such as Samsung Electronics Co. Like the rest of the industry, Qualcomm has struggled to grow as consumer excitement about smartphones has cooled. In the first quarter, global shipments fell 4 percent to 330 million, according to Strategy Analytics.

In response, Qualcomm is trying to push wireless technology into new areas such as automobiles, personal computers and connecting everyday devices to the internet.

Qualcomm reported that revenue declined 4.6 percent to $4.98 billion from $5.22 billion in the quarter ended March 31. Profit was $663 million, or 55 cents a share, compared with $330 million, or 22 cents a share, a year earlier.

Analysts on average estimated earnings of 47 cents a share on sales of $4.8 billion.

Qualcomm isn’t completely free of legal entanglements. A judge in California is still considering a case brought by the U.S. Federal Trade Commission accusing Qualcomm of acting like a monopoly. The company also is still in a dispute with China’s Huawei Technologies Co. about licensing fees and is only receiving partial payment.

The Chinese company is making some payments on royalties while the two sides work toward a deal, Qualcomm said. The settlement with Apple will help resolve that disagreement, the chipmaker’s executives said on the call.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack

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