Qualcomm Inc. gave a disappointing revenue and profit forecast that confirmed industrywide concern the demand for smartphones is weakening.
The company also announced an agreement with Samsung Electronics Co. it said will help resolve some of the challenges facing its technology licensing business, an area that hostile bidder Broadcom Ltd. has focused on in its appeal to Qualcomm’s shareholders.
Sales will be $4.8 billion to $5.6 billion in the fiscal second quarter. Earnings per share, excluding some items, will be 65 cents to 75 cents, the San Diego-based company said Wednesday in a statement. Analysts on average expected revenue of $5.6 billion and profit of 86 cents a share, according to data compiled by Bloomberg.
Qualcomm is seeing a build-up of inventory in phone parts in China and lower orders. The company also has experienced a steeper drop in orders for its modem-only products than normal for this time of year, said Chief Financial Officer George Davis. Apple Inc. is one of the biggest buyers of these products.
The outlook shows the chipmaker is “being hit with the same thing everyone else is being hit with,” referring to the waning smartphone demand. Chief Executive Officer Steve Mollenkopf said. On the licensing side, the Samsung agreement demonstrates “these things get settled,” he added.
For Qualcomm’s management, the earnings report is one of the last chances to make the case to investors that the company should remain independent rather accept a $105 billion bid by Broadcom. Mollenkopf is appealing to shareholders who’ve suffered with a stock that has underperformed the market because of the struggling licensing business.
The licensing unit has been hit with regulatory fines around the world and a challenge from Apple, one of its largest customers, which has stopped paying up as the two prepare to battle in the courts.
“The big wild card is settling these licensing disputes and that’s the hardest hurdle for investors,” said Mike Walkley, an analyst at Canaccord Genuity.
Profit in the fiscal first quarter was 98 cents a share, excluding certain items. Revenue was little changed at $6.1 billion. Analysts had predicted adjusted earnings of 91 cents a share on revenue of $5.9 billion. The chipmaker said it had taken a $6 billion charge, including $5.3 billion related to a one-time repatriation of overseas cash, as a result of recent changes to U.S. tax law.
The company’s shares declined about 1 percent in extended trading after closing at $68.25 in New York. The stock fell 1.8 percent last year, making it the fourth-worst performer on the benchmark Philadelphia Stock Exchange Semiconductor Index at a time the index jumped 38 percent.
Qualcomm is unique in the semiconductor industry because it gets the majority of its profit from licensing technology. While chips that connect phones to networks and run programs on smartphones contribute the majority of its sales, patents on inventions that cover the fundamentals of all modern phone systems allow the company to collect highly profitable fees from phone makers.
Sales in the company’s chip business gained 13 percent to $4.65 billion in the fiscal first quarter. Licensing revenue dropped 28 percent to $1.3 billion.
Regulators from South Korea, Taiwan, Europe and China have levied fines on Qualcomm, alleging it abused its dominant market position. The U.S. government is also investigating. Apple, which also accused Qualcomm of illegally leveraging its position in phone chips, has stopped paying licensing fees. That dispute alone is costing Qualcomm about $2 billion a year. Qualcomm has countered that all of this action is a coordinated attack based on false claims by Apple and that it will win in court eventually.
The company’s management may not have the time to play out their court strategy. After Qualcomm’s board rejected Broadcom Chief Executive Officer Hock Tan’s Nov. 6 offer of $70 a share in cash and stock, Broadcom nominated board replacements, appealing directly to shareholders. That will be put to a vote March 6.
The chipmaker announced Wednesday that Samsung has withdrawn its objection to Qualcomm’s appeal of the fine in South Korea and had entered into a multiyear strategic relationship that will involve a variety of technological areas. Qualcomm said the agreement guarantees the world’s largest phone maker will pay royalties, based on the price of each phone sold, until 2023.
Qualcomm’s patents enable it to get paid a percentage of the total sales price of a phone. Apple and others argue that cost places too much value on the chipmaker’s inventions and the basis for those payments should be reduced to the price of Qualcomm’s chips.
Mollenkopf said his company is “open to finding a path to resolution” with Apple, but must do so in a way that doesn’t give the iPhone maker an advantage over other phone makers.
Qualcomm also is trying to close its $47 billion purchase of NXP Semiconductors NV. The deal passed regulatory examination in Europe earlier this month, but is being held up by China. Meanwhile activist funds such as Elliott Management Corp. are arguing the offer undervalues NXP. Qualcomm had aimed to close the deal by the end of 2017.