SAN FRANCISCO—Facing ongoing legal battles on multiple fronts, fabless chip giant Qualcomm Inc. turned in mixed results for its fiscal first quarter, as a year-over-year sales increase that exceeded consensus analysts' expectations was accompanied by a precipitous decline in profit.
Qualcomm CEO Steve Mollenkopf told analysts after the quarterly report that Qualcomm has "more opportunities ahead of it than at any time in the company's history" but has had "a series of legal and regulatory challenges that have unfortunately overshadowed otherwise strong operating performance."
Qualcomm executives elaborated on the company's high-profile $1 billion dispute with Apple Inc., saying contract manufacturers involved in the dispute are contractually obligated to make royalty payments owed to Qualcomm despite pressure from Apple.
Executives also touched on a recent arbitration ruling that Qualcomm must repay nearly $815 million to Blackberry and another ongoing royalty payment dispute with an unnamed customer. They also provided updates on regulatory investigations in multiple jourastications around the globe, including South Korea, the U.S., Taiwan and Europe.
Qualcomm is no stranger to legal disputes, but the squabble with Apple has been among the most unusual in the company's history. Qualcomm last week filed a cross complaint accusing Apple of pressuring Taiwan ODMs Compal, Foxconn, Pegatron and Wistron not to honor royalty agreements with Qualcomm in an effort to collect nearly $1 billion that Apple says Qualcomm owes it.
NEXT PAGE: Apple Told Suppliers Not to Pay Royalties
Derek Aberle, Qualcomm's president, told analysts that Apple induced the ODMs to underpay royalties owed to Qualcomm for sales during the calendar fourth quarter of 2016. Apple withheld part of its payments to these suppliers of close to $1 billion, an amount equal to what Apple claims that Qualcomm owes Apple in rebate payments under a separate cooperation agreement between the two companies, Aberle said.
Most of these suppliers have already reported royalties owed to Qualcomm in their financials and Qualcomm expects that they will ultimately make the payments, Aberle said. All have contracts with Qualcomm, many of which date back to before Apple sold the first iPhone, Aberle added.
"Despite Apple's claims against Qualcomm, Apple suppliers remain contractually obligated to pay royalties to Qualcomm under their license agreements with us, including for sales of iPhones to Apple," Aberle said.
Apple filed suit against Qualcomm in U.S. District Court in January, claiming, among other things, that "after years of disagreement over what constitutes a fair and reasonable royalty we have no choice left but to turn to the courts.” Qualcomm countersued last week, saying Apple refused to pay royalties, pressured contract manufacturers not to pay them, instigated regulatory investigations and throttled performance of an LTE modem chip.
NEXT PAGE: Q'Comm to Continue Supplying Apple
Mollenkopf said Wednesday that the litigation with Apple is ultimately about a contract dispute and business negotiation and that Qualcomm would continue to sell products to Apple going forward.
"Considering the strength of both our product roadmap in R&D investments, we expect to continue to be an important supplier to Apple now and into the future," Mollenkopf said.
Mollenkopf said Qualcomm's $39 billion acquisition of NXP Semiconductors, which received regulatory clearance in the U.S. earlier this month, remains on track to close in 2017.
Aberle said the recent arbitration ruling that it had to repay nearly $815 million to Blackberry for royalties would ultimately cost Qualcomm about $974 million including interest and attorney's fees.
"We strongly disagree with the [BlackBerry] ruling, but it is binding and not appealable," Aberle said. "It is worth noting that this was a specific contract provision that was unique to BlackBerry’s agreement, so this outcome has no impact on agreements with any other licensee."
Aberle added that Qualcomm has begun the legal process to appeal and request a stay for the $873 million in fines levied against the company by the Korea Fair Trade Commission last year for alleged antitrust violations. Aberle said Qualcomm has also filed a motion to dismiss a complaint filed in January by the U.S. FTC that accuses Qualcomm of anticompetitive behavior. He also said Qualcomm is continuing to cooperate with an ongoing Taiwan FTC investigation to work toward a resolution and that there are certain pending regulatory investigations against the company in Europe.
NEXT PAGE: Overall Quarterly Breakdown
Overall, Qualcomm's fiscal second quarter was characterized by declines in revenue and profit based on generally accepted accounting principles (GAAP), but strong results on a pro-forma basis.
Qualcomm reported total sales of $5 billion for the quarter, which closed March 26, a decline of 16 percent compared with the fourth quarter of 2016 and 10 percent compared with the first quarter of 2016. The company's GAAP quarterly profit, $700 million, was up 10 percent sequentially and down 36 percent year-over-year.
On a pro forma basis, excluding charges such as the $974 million reduction in revenue related to the BlackBerry ruling, Qualcomm reported sales of $6 billion, flat compared to the fiscal first quarter and up 8 percent year-over-year. The company reported a pro-forma net income of $2 billion, up 12 percent sequentially and up 28 percent year-over-year.
For the current quarter, which closes in June, Qualcomm expects sales to be between $5.3 billion and $6.1 billion, a range that would represent between a 12 percent year-over-year decrease and a 1 percent increase.
"We are very focused on resolving the challenges to our licensing business and business model and we are confident we will be able to successfully navigate through this environment," Mollenkopf said. "At the same time, this is an extremely exciting and transformative time for our company as the technologies and products are well positioned to expand into a growing set of opportunities and will be further enhanced with the completion of our pending acquisition of NXP."
—Dylan McGrath is the editor-in-chief of EE Times.