Regs, Royalties Drag Down Qualcomm

　　Despite the company’s assurances to the contrary, Qualcomm’s increasingly public licensing dispute with Apple is dogging Qualcomm and costing it dearly.

　　Qualcomm announced fiscal third quarter revenues of $5.4 billion, an 11 percent decline from the $6 billion earned in the fiscal third quarter of 2016.

　　More significant, however, is Qualcomm’s profit. Non-payment of royalties by Apple iPhone contract manufacturers contributed to a staggering 40 percent drop in net income to $800 million, compared to $1.4 billion the company made the same period a year ago.

　　After Qualcomm’s Q3 financial call, Ross Seymore, financial analyst at Deutsche Bank, wrote in his research note, “Maintain Hold as uncertainties keep shares range-bound.” He noted that positives from Qualcomm’s chip business and the potential for timely closing of the NXP deal “are offset by litigation uncertainties.”

　　He added, “Surprisingly, these uncertainties appear to worsen as the second (unnamed) disputing licensee joined Apple in completely halting payments to Qualcomm” in the third quarter and fourth quarter estimate.

　　Indeed, much of Qualcomm’s financial call with analysts Wednesday (July 19) dwelt on legal and regulatory matters nagging Qualcomm and its pending acquisition of NXP.

　　“With Apple's contract manufacturers refusing to fully report their total reported device sales for Apple products and the licensee with which we have a dispute also with holding reporting,”  Derek Aberle, Qualcomm’s president, said. “We are not providing quarterly actuals or guidance for total reported device sales and related unit shipments and ASPs by our licensee. Because the significant portion of quarterly activity is not available and would not be included in those metric, making them incomplete in a limited value.”

　　The withholding of this information makes modeling quarterly forecasts for Qualcomm’s licensing group much tougher for the financial community.

　　With non-payments of royalty by Apple’s ODMs both public and getting worse, it has become reasonable to question whether Qualcomm’s licensing model itself might soon start collapsing.

　　One analyst asked, “How do we gain conviction that we don't see further contingent, further spreading of this to other customers, given this as soon as we bleeding out across the rest of your business?”

　　Aberle sternly denied such speculation. “No. That's not what's happening. We have a dispute with Apple and their contract manufacturers and we have a dispute with one other licensee.” He insisted that non-payments is limited to those specific cases he cited, and they’re not spreading.

　　Splitting Qualcomm?

　　The fact that Qualcomm continues to be at odds on licensing with one of its largest customers – Apple – is a major concern in the financial community. The big worry among investors is that Qualcomm is losing both its chip business and the licensing battle with Apple.

　　One analyst asked if it might make sense now to break Qualcomm into two pieces. (Qualcomm has been resisting the idea of splitting the company.) He asked, “I want to understand if you think there is any correlation between your ability to maximize the value of each segment separately in light of these disputes and these arguments with customers?”