By Don Clark and John Kell
Qualcomm Inc. is facing some short-term turbulence as it waits
for faster cellphone service to take off in China.
The San Diego-based chip maker reported Wednesday that
second-quarter profit grew 5%. But its projections about the
current quarter were less rosy than some analysts had expected amid
signs that royalty payments associated with sales in China may be
delayed.
Qualcomm's shares slid 5% in after-hours trading on the
news.
Separately, Qualcomm disclosed that it may face Securities and
Exchange Commission enforcement proceedings stemming from a bribery
investigation into its dealings in China. The company said it
doesn't believe it violated anti-bribery laws.
Qualcomm makes both processors and wireless communication chips
used in smartphones, but it gets much of its profit from charging
patent royalties to handset makers. The company has a commanding
lead in products that communicate using speedy networks known by
the designation LTE, a technology being rolled out this year by
China Mobile Ltd., the nation's largest carrier.
Steve Mollenkopf, Qualcomm's chief executive, said he is
optimistic about sales of LTE chips and additional royalty revenue
from China. But he said proceeds from the licensing business--which
Qualcomm records one quarter later--may come late in the 2014
second half.
"You are seeing some change in the shape of the year," he said
in an interview.
Bill Kreher, an analyst at Edward Jones, agreed that Qualcomm
should ultimately reap substantial rewards in China. But he added
that the fact its revenue is "back-end loaded may cause some
skepticism."
For the quarter ended March 30, Qualcomm posted a profit of
$1.96 billion, or $1.14 a share, up from $1.87 billion, or $1.06 a
share, a year ago. Revenue climbed 4% to $6.37 billion.
The company projected current-quarter adjusted profit of $1.15
to $1.25 a share on revenue of $6.2 billion to $6.8 billion.
Analysts surveyed by Thomson Reuters expected $1.25 and $6.59
billion, respectively.
Qualcomm also raised its fiscal-year profit target, now seeing
per-share earnings between $5.05 and $5.25, five cents above the
earlier view. It reaffirmed its revenue outlook for the year.
In January 2012 the company disclosed a federal investigation
into the company's compliance with the Foreign Corrupt Practices
Act. It later said an internal investigation discovered instances
in which special hiring consideration, gifts or other benefits were
provided to several individuals associated with Chinese state-owned
companies or agencies.
Qualcomm disclosed Wednesday that it received a Wells Notice in
March from the SEC's Los Angeles regional office that indicates the
staff has made a preliminary determination to recommend that the
SEC file an enforcement action against the company.
A Wells Notice is not a formal allegation or finding by the SEC
of wrongdoing or violation of the law, Qualcomm said, but it offers
a chance for a company to offer reasons why no enforcement action
is warranted. The company said it made such a submission to the SEC
April 4.
Qualcomm, meanwhile, also faces an investigation in China for
potential violations of anti-monopoly laws. The company, which
disclosed that investigation in November, said it continues to
cooperate with government authorities there conducting the
probe.
Qualcomm has faced antitrust scrutiny before in countries that
include South Korea and Japan. It is appealing adverse rulings in
both countries.
In its regulatory filing Wednesday, Qualcomm said it understands
that the investigation in China primarily concerns its licensing
business and that unit's interactions with Qualcomm's chip
business.
The company said the China National Development and Reform
Commission, which is heading the investigation, could impose a
broad range of remedies with respect to any business practices
deemed to violate laws in China. Among other things, the agency
could impose a fine in the range of 1% to 10% of the company's
prior year's revenue, Qualcomm said.
Write to Don Clark at don.clark@wsj.com and John Kell at
john.kell@wsj.com
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