Qualcomm Hangs on to Most Apple Gains After Earnings Report

Qualcomm shares fell about 3.5% on Wednesday as investors got their first look at the bottom line impact of a patent fight settlement with Apple, including a multibillion-dollar one-time payment and more modest future patent fees.

The stock kept most of the 50%-plus gains of the past few weeks, reflecting investor relief that Qualcomm had found a path to resume supplying chips to the iPhone. But Qualcomm's forecasts suggested Apple's licensing fees were not a big enough revenue boost to offset a weakening smartphone market.

Qualcomm will book a one-time payment of $4.5 billion to $4.7 billion in the fiscal third quarter from the settlement, as Apple catches up on royalties that the iPhone maker did not pay while they were locked a legal dispute.

Excluding that payment, Qualcomm estimated $4.7 billion to $5.5 billion in revenue, generally below the $5.29 billion analysts were expecting, according to IBES data from Refinitiv.

The shortfall was driven by a weak Chinese smartphone market, where Qualcomm believes consumers are holding off on buying new phones until new 5G networks roll out later this year.

"We're looking forward to having a 5G Christmas as the year ends," Cristiano Amon, Qualcomm's chip chief, said on a conference call with investors.

The Apple settlement, which includes a six-year patent license and a chip supply agreement, is expected to generate $2 per share in additional earnings, Qualcomm has said. Financial details have not been disclosed but the deal is expected to help Qualcomm regain the preeminent mobile chip position it held in the early 2010s.

Qualcomm estimated $1.23 billion to $1.33 billion in revenue for its licensing business in the third quarter, above analysts' consensus forecast of $1.22 billion.

The licensing revenue outlook includes royalties from sales of Apple products. Apple on Tuesday said its gross margin guidance, which was largely unchanged from previous quarters, included the Qualcomm settlement. The two disclosures suggest little short-term financial impact from the patent licensing deal.

Stacy Rasgon, an analyst with Bernstein, said the Apple settlement was in line with expectations but the revenue outlook was disappointing.

"That tells me that either Apple isn't giving them all that much, or it says the core market is horrendous, or maybe a little bit of both," Rasgon said.

But shareholders welcomed the Apple deal.

"I'm just pleased to have Apple back in the fold," said Hal Eddins, chief economist at Capital Investment Counsel, which holds both Apple and Qualcomm shares. "I think they both came out well in the deal and am very impressed (Apple Chief Executive Tim) Cook agreed to it."

Qualcomm shares dipped 3.5% to $83.35 in after-hours trading. They shares closed at $57.18 on April 15, the day before the Apple settlement was announced.

Qualcomm executives cited economic weakness in China as a reason for the lower-than-expected sales forecast. Apple said on Tuesday it saw a slight uptick in China sales toward the end of its fiscal second quarter, following cuts in iPhone prices and other factors.

Qualcomm remains in a license dispute with Huawei Technologies, but the Chinese company has been making interim payments as negotiations continue. Qualcomm resolved a dispute with Samsung Electronics last year.

"We feel that the Apple resolution enhances our ability to resolve issues with Huawei," Alex Rogers, Qualcomm's patent licensing chief, said on a conference call with investors.

Qualcomm is awaiting a federal judge's decision in a US Federal Trade Commission lawsuit alleging antitrust violations that mirrored Apple's claims. The outcome remains unclear after Apple, the major source of witnesses in the case, dismissed similar lawsuits of its own.

Net income attributable to Qualcomm rose to $663 million, or 55 cents per share, in the quarter ended March 31, from $330 million, or 22 cents per share, a year earlier.

Revenue fell to $4.88 billion, but beat analysts' estimates of $4.80 billion.

© Thomson Reuters 2019