QCOM QUALCOMM Inc

By Ted Greenwald 

Qualcomm Inc. said its profit plunged 52% from a year earlier as it dealt with a tangle of challenges, including Apple Inc. and Huawei Technologies Co. continuing to withhold royalties for using the company's patents.

The San Diego-based chip maker reported a profit of $363 million in its fiscal second quarter. Revenue rose 4.9% to $5.26 billion.

The chip maker's shares jumped 3.8% in after-hours trading. The stock finished Wednesday's session down 0.4% at $49.75, below its price of $53 a year ago and well below the $79 a share offered by Broadcom Inc. in an unsuccessful takeover effort that ended in March.

Qualcomm reported per-share earnings of 80 cents on an adjusted basis, omitting share-based compensation and other items. Analysts had expected 70 cents a share on $5.19 billion in revenue, according to a survey by Thomson Reuters.

The results included a $310 million charge resulting from the company's efforts to save $1 billion in expenses by 2019. That program recently resulted in 1,500 layoffs in California.

Further cost cuts will be made "over the next few months," Qualcomm finance chief George Davis said in an interview.

Qualcomm said revenue from the sales of chips used in mobile devices rose 6% to $3.9 billion, continuing their steady growth in recent quarters.

Qualcomm's revenue from licensing patents, though, tumbled 44% to $1.26 billion, amid fallout from the company's lengthy disputes with Apple and Huawei, which have withheld billions of dollars in royalty payments. That part of the business typically contributes more than half of Qualcomm's pretax earnings.

Qualcomm leads the market in chips used in smartphones. Its products manage communications in some iPhones and they form the heart of many Android devices. As a holder of key patents on cellular technology, Qualcomm collects a royalty on nearly every smartphone sold world-wide, regardless of whether they include Qualcomm chips.

But the company in recent years has been beset by one challenge after another, capped by Broadcom's $117 billion hostile bid in November that was to become a relentless distraction throughout the first quarter. The Trump administration in March ultimately scuttled Broadcom's overture to protect Qualcomm's leadership in the next-generation cellular technology known as 5G.

Now Qualcomm faces several tough tasks: Complete its purchase of Dutch automotive chip maker NXP Semiconductors NV, a deal that is stalled in China's regulatory approval process; slash $1 billion in expenses to meet its profit goals; and settle its disputes with Apple and Huawei.

Even as Qualcomm grapples with those challenges, the company's former executive chairman has stated his intention to take Qualcomm private.

Many analysts are skeptical. Paul Jacobs, the son of a Qualcomm co-founder and the company's chief executive from 2005 to 2014, can raise the necessary funds. But his effort looms as a further test to Qualcomm's leadership, which received notably weak support from shareholders in a recent vote.

"We're executing on the plan we laid out that leads to our 2019 target" of between $6.75 and $7.50 in adjusted per-share earnings for that fiscal year, Chief Executive Steve Mollenkopf said in an interview.

Qualcomm is banking on its acquisition of NXP to immediately contribute $1.50 to its adjusted per-share earnings and broaden its product line, potentially reducing its dependence on royalties. The deal has passed muster in eight countries, but Chinese authorities are giving it a close look amid escalating trade tensions between the U.S. and China.

Should the deal fall through, Qualcomm has pledged to buy back enough of its own shares to boost earnings by an equivalent amount. But that wouldn't address the strategic reasons for buying the automotive specialist, which Qualcomm has said would open a path to markets it expects to be worth $77 billion by 2020.

"Obviously, Plan A is to close," Mr. Mollenkopf said in the interview. "If we can't close, we'll have a lot of ways to drive value. We're lucky to have a strong position organically in the key technologies necessary to do that."

In a conference call with analysts, the CEO said Qualcomm has a backlog of $4 billion in automotive contracts with companies gearing up for cars enabled for next-generation 5G cellular technology in 2021.

Qualcomm is appealing fines in several countries that have alleged it uses its dominant position in chips to thwart competitors and charge exorbitant royalties.

The company said it would provide guarantees by the end of the month to the European Commission for a $1.2 billion fine imposed in January. It is appealing that decision, as well as fines in South Korea and Taiwan. A U.S. Federal Trade Commission case against Qualcomm is pending.

Write to Ted Greenwald at Ted.Greenwald@wsj.com

(END) Dow Jones Newswires

April 25, 2018 17:50 ET (21:50 GMT)

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