Qualcomm warns of uncertainty due to Apple lawsuit

Qualcomm — which beat Wall Street’s sales and profit forecasts for its second quarter thanks to a boost from the launch of new smartphones including Samsung’s Galaxy S8 — warned of greater uncertainty in its outlook for the next quarter due to its legal battle with Apple.

The mobile chipmaker on Wednesday said that some of Apple’s contract manufacturers have withheld around $1bn in royalty payments to Qualcomm in recent months.

“It is unclear whether Apple’s contract manufacturers will underpay royalties owed under their contracts with us” in the third quarter, Qualcomm said, making its earnings guidance “wider than our typical practice” in response. “We have considered a variety of scenarios within this range, but have not included a scenario where no payment is made by the contract manufacturers,” Qualcomm said.

Its stock rose more than 2 per cent after hours, in part due to relief that there was not a greater financial impact from Apple’s litigation.

Under generally accepted accounting rules, Qualcomm’s revenues fell 10 per cent year-on-year to $5.0bn in its second quarter. However, after adjusting for certain items such as venture capital investments through its “Strategic Initiatives” division and stock-based compensation, sales grew 8 per cent to $6.0bn, better than analysts had predicted. Net income, as reported, was down 36 per cent to $0.7bn but up 28 per cent to $2.0bn after adjusting for those items.

Steve Mollenkopf, Qualcomm’s chief executive, saluted its “strong results” and “healthy” growth, as it expands from mobile into automotive applications and the “internet of things”.

In a nod to its lawsuit from Apple, Mr Mollenkopf added: “We will continue to protect the value of our technologies, which enables today’s robust mobile communications ecosystem, and invest in R&D that will drive the leading edge of mobile computing and connectivity for decades to come – focusing on areas where our technologies will have the most impact and generate the best returns.”

Apple contends that it has been “overcharged billions of dollars” over several years by Qualcomm. Its litigation includes a demand for $1bn that the iPhone maker claims Qualcomm owes it and withheld after Apple participated in an investigation by the Korean Fair Trade Commission.

In its response last week, Qualcomm accused Apple of trying to “pay far less than fair value for a licence” to its mobile patents and interfering with royalty payments it claims are owed by the manufacturers that product the iPhone.

Qualcomm said on Wednesday that Apple’s contract manufacturers “reported, but underpaid, royalties” in its second quarter but added that its revenues were “not negatively impacted” because the suppliers “acknowledged the amounts are due”.

“The underpayment was equal to the amounts that Qualcomm has not paid Apple under our Cooperation Agreement (that expired Dec 31, 2016) that are currently in dispute,” Qualcomm said, referring to the $1bn sum cited by the iPhone maker in its lawsuit.