Qualcomm gains on earnings beat

Steven Mollenkopf, CEO of Qualcomm

Qualcomm reported quarterly earnings and revenue that beat analysts' expectations on Wednesday. Shares of the semiconductor company gained close to 2 percent after the announcement.

Here's how the company did compared with what Wall Street expected:

• Earnings: 80 cents per share vs. 70 cents per share forecast by Thomson Reuters

• Revenue: $5.23 billion vs. $5.19 billion expected in the Thomson Reuters survey

Qualcomm also reported strong third-quarter earnings and revenue guidance that pleased Wall Street. The semiconductor company projected EPS of 83 cents on revenue of $5.4 billion, versus the 75 cents on $5.3 billion in revenue expected.

Compared with the year-ago quarter, Qualcomm revenue fell by about 13 percent, from $6 billion to $5.2 billion, due in part to litigation and expenses associated with an ongoing patent dispute with Apple and others.

Qualcomm relies on its many patents for its licensing program, which accounts for a large portion of its revenue. But the company noted that it didn't record any license revenues from Apple in the last three quarters, which contributed to a 40 percent drop in operating income and a 44 percent drop in licensing revenue year-over-year. In the year-ago quarter, Qualcomm generated $970 million in royalty fees from Apple-related products.

Despite those losses, Qualcomm grew its wireless chip business in the second quarter, increasing revenue by 6 percent to $3.9 billion. Chip sales for 3G and 4G devices rose by about 3 percent in the second quarter, which fell on the low end of projections. In response, Qualcomm adjusted full-year device shipment guidance down to between 1.8 billion and 1.9 billion from the 1.85 billion to 1.95 billion projected in the first quarter. This adjustment was made in response to increasing smartphone life and decreased demand in China.

Qualcomm CFO George Davis emphasized on a call with investors he expected those losses to be more than offset by stronger selling prices.

Merger and acquisition activities may have dominated Qualcomm's narrative in the past few months, but investors and analysts consider smartphone chip sales to be among the most important metrics of strength for semiconductor companies, particularly as the global technology industry races toward 5G.

Qualcomm has been under pressure in the wake of growing Chinese-U.S. trade tensions and a high-profile fight to resist takeover efforts from rival Broadcom.

In part to rally investor support against the since-aborted merger talks, the semiconductor company in January said it would take steps to reduce annual costs by $1 billion. The plan includes cutting 1,500 jobs from offices in California, which sent shares plunging after it was announced last week.

Qualcomm took steps to refile a takeover bid for Dutch semiconductor company NXP Semiconductors. The U.S. chipmaker has already received approval from eight of nine required global regulators to finalize the acquisition, with Chinese clearance the only one pending. While Qualcomm is said to be "very concerned" about the fate of the deal, Chinese regulators still harbor concerns the merger might have a negative impact on market competition.

In the event that China blocks the NXP merger, the action would trigger a huge buyback program, in the neighborhood of $20 to $30 billion dollars, according to executives. It wouldn't necessarily prove the end of merger activity for Qualcomm, but the company would likely take some time to increase cash-flow before considering other acquisition prospects.

Qualcomm's moves to increase margins and expand its portfolio may prove essential should Trump move forward with proposed tariffs on Chinese products, prompting a reaction from China. Qualcomm, whichtallies 64 percent of sales in China, could stand to lose a lot.

"We like our position overall in China, but...the trade issues in China are an intangible, we'll have to see how that plays out," Davis said.