Qualcomm (NASDAQ:QCOM) continued to chug along in the first quarter, posting gains in revenue and profit, but the company could face significant challenges in China, one of its growth markets, as consumers wait to buy smartphones equipped with faster TD-LTE technology.
Additionally, Qualcomm disclosed that it may face Securities and Exchange Commission enforcement proceedings related to a bribery investigation into its dealings in China. The bribery allegations relate to benefits offered or provided to individuals associated with Chinese state-owned companies or agencies, Qualcomm said. For its part, Qualcomm said it did not break anti-bribery rules and therefore the enforcement action is not warranted. Qualcomm said it continues to cooperate with the SEC and the Department of Justice, "but is unable to predict the outcome of their investigations or any action that the SEC may decide to file."
Meanwhile, China's National Development and Reform Commission has been investigating price-fixing by Qualcomm in China. That investigation concerns the company's licensing business and certain interactions between Qualcomm's licensing business and its chipset business. Qualcomm said it is continuing to cooperate with the Chinese authorities.
China is the world's largest smartphone market by volume and is a major target of growth for Qualcomm.
In its most recent quarter, its fiscal second quarter, Qualcomm said revenue increased 4 percent year-over-year to $6.37 billion. The company's net income was up 5 percent year-over-year to $1.96 billion. Qualcomm makes money both from selling chips and collecting royalty payments and licensing revenues from companies that use wireless technologies like CDMA and LTE.
Despite the company's solid quarterly results, Qualcomm's outlook for the current quarter was slightly less rosy than some analysts had expected. Qualcomm forecasted that revenue in the three months ending in June will be $6.2 billion to $6.8 billion; that compares with an average analyst estimate of $6.6 billion, according to data compiled by Bloomberg. Analysts surveyed by Thomson Reuters expected $6.59 billion in revenue for the June quarter.
Further, the sluggish rollout of TD-LTE in China is cutting into Qualcomm's licensing revenue, Qualcomm CEO Steve Mollenkopf told Bloomberg. As China Unicom and China Telecom aim to catch up to market leader China Mobile in TD-LTE deployments, customers are holding onto their existing phones as they wait for newer TD-LTE phones.
"The launch of LTE in China is very important to Qualcomm, and it's difficult to predict," Mollenkopf said. He added that demand for the company's chips indicates that adoption of TD-LTE will accelerate toward the end of 2014.
Mollenkopf told the Wall Street Journal he is optimistic about sales of LTE chips and additional royalty revenue from China. However, he noted that revenue from the company's licensing business--which Qualcomm records one quarter later--may come late in the second half of this year. "You are seeing some change in the shape of the year," he said.
Still, others had doubts. "The company's guidance is becoming harder to achieve given the apparent delays in the rollout of LTE in China," Bill Kreher, an analyst at Edward Jones & Co., told Bloomberg.
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