Qualcomm warns of dings to sales and profit in 2015 from China probe

Qualcomm (NASDAQ:QCOM) warned that its 2015 sales and profit could be hurt by the outcome of an anti-monopoly investigation into the company's licensing practices in China, the world's largest smartphone market. The chipset giant also disclosed that it is facing probes from the Federal Trade Commission and European Commission.

For nearly a year the Chinese National Development and Reform Commission has been looking into Qualcomm's licensing fees from companies that use its patented technologies, mainly CDMA. Qualcomm derives most of its profit from licensing fees and most of its revenue from sales of chipsets and modems.

Qualcomm CEO Steve Mollenkopf said the company's fiscal 2015 outlook takes into account its leadership position in the chipset market but "is tempered by the issues we are facing in China related to our licensing business."

For fiscal 2015, which ends next September, Qualcomm predicted net income of $4.33 to $4.63 a share on sales of $26.8 billion to $28.8 billion. According to Bloomberg, those figures are below average analyst projections of $4.89 a share in earnings with revenue of $29.1 billion.

"In 2015 a lot of it is about the uncertainty in China, and that's affected our guidance range," Mollenkopf told Bloomberg.

Qualcomm could be hit with a fine as high as $1 billion related to the Chinese probe, and could also be forced to make concessions that would negatively impact its licensing business. Qualcomm has been struggling to secure licensing revenue from some China device makers, including locally-based OEMs and ODMs, according to Reuters. That's particularly troubling for Qualcomm at a time when Chinese carriers are rolling out LTE networks and more device makers are selling LTE devices.

Qualcomm estimates globally it isn't receiving licensing revenue on more than 200 million handsets as a result of delays in licensing negotiations and unreported sales out of about 1.3 billion total phones it thinks will be shipped in 2014.

Investors fear any concessions Qualcomm gives could spread to other device makers in other markets. "What people are most worried about is the ability to fence in this issue to Chinese vendors if there's a reduced royalty rate, or does it spread to other geographies," Standard Life portfolio manager Brian Fox told Reuters.

Qualcomm said it is continuing to cooperate with the Chinese authorities. "We're continuing to cooperate with the NDRC. We've continued to meet with them regularly, exchange some ideas for potential ways to resolve it," Qualcomm President Derek Aberle told Reuters. "But we don't have an ability to update in terms of expectations and timing."

For its most recent quarter, its fiscal fourth quarter, Qualcomm said its net income jumped to $1.89 billion, up 26 percent year-over-year but down 15 percent sequentially. Total revenues grew to $6.69 billion, up 3 percent year-over-year but down 2 percent sequentially.

Meanwhile, in a filing with the Securities and Exchange Commission, Qualcomm said that the FTC started in September to look into its licensing business, including potential breaches in commitments to license standards-essential patents on fair, reasonable, and non-discriminatory terms. Qualcomm said that if the FTC finds Qualcomm violated the law it could impose fines or require changes to the firm's licensing practices. "Given that this investigation is in its early stages, it is difficult to predict the outcome of this matter or what remedies, if any, may be imposed by the FTC," the company said. "We continue to cooperate with the FTC as it conducts its investigation."

Additionally, the European Commission is probing the sale or marketing of Qualcomm's baseband chipsets, "including alleged conditions relating to the provision by us of rebates and/or other financial incentives." The company said that in all the investigations "with the exception of the NDRC matter, losses, while possible, are not probable."

For more:
- see this release
- see this SEC filing
- see this Reuters article
- see this Bloomberg article
- see this WSJ article (sub. req.)
- see this ZDNet article

Special Report: Wireless in the third quarter of 2014

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