Qualcomm struggles to collect royalties in China, stock falls

Reuters News
Posted: Jul 23, 2014 4:15 PM

By Noel Randewich

SAN FRANCISCO (Reuters) - Qualcomm Inc's <QCOM.O> revenue outlook for the September quarter was below Wall Street's expectations and its shares fell on Wednesday after the leading mobile chipmaker said it was having trouble collecting royalties from some manufacturers in China.

With smartphone shipments tapering off in wealthy markets such as the United States, attention has shifted to China, where a new high-speed 4G network is driving fresh demand for smartphones with leading-edge technology.

But Qualcomm is now having trouble collecting licensing revenue from some device makers in China, including a growing number of local manufacturers the U.S. chipmaker has done limited business with before now, Qualcomm President Derek Aberle said in an interview.

"There was some impact in the quarter that we just reported in Q3 and we expect the impact will be larger in the next quarter and potentially for a number of quarters until we can get these things resolved," Aberle said.

While the majority of Qualcomm's revenue comes from selling so-called baseband chips that enable phones to communicate with carrier networks, most of its profit comes from licensing patents for its widespread CDMA cellphone technology.

Qualcomm has had trouble collecting royalties for its technology in the past in China and the recent proliferation of local companies making low-cost gadgets for Chinese consumers is complicating the picture, said Evercore analyst Mark McKechnie.

“There’s a lot of new guys ramping up new 4G phones and tablets over there," McKechnie said. "They have a lot of licensees there already that are paying them, but this is going to be a pretty big challenge for the company in the coming years.”

While China and China Mobile [CHNMC.UL], the world's largest carrier, are a major opportunity for Qualcomm, the company also faces regulatory pressure there. It is being investigated by China's anti-monopoly regulator, which says it suspects Qualcomm of overcharging and abusing its market position, allegations which could lead to fines of more than $1 billion.

The chipmaker on Wednesday reported third-quarter revenue of $6.81 billion, up 9 percent from the year-ago period. Analysts on average had expected third-quarter revenue of $6.52 billion, according to Thomson Reuters I/B/E/S.

Qualcomm had third-quarter net income of $2.24 billion, up 42 percent. GAAP diluted earnings per share were $1.31. Its non-GAAP earnings per share were $1.44, well above the midpoint of its previous forecast of between $1.15 and $1.25.

It said revenue in the fiscal fourth quarter, which ends in September, would be between $6.5 billion and $7.4 billion, with a midpoint of about $6.95 billion. Analysts on average expected fourth-quarter revenue of $7.15 billion.

Qualcomm shares were down 4.72 percent in extended trading after closing up 0.09 percent at $81.60 on Nasdaq.

(Reporting by Noel Randewich; Editing by Chizu Nomiyama and Cynthia Osterman)