QCOM QUALCOMM Inc

By Dan Gallagher 

For two companies in the phone business, Qualcomm and Apple didn't communicate very well.

A week ago, Qualcomm left out of its fiscal third quarter forecast the possibility that Apple, a huge customer, would withhold more royalty payments while the two were battling in court. On Friday, Qualcomm said it was later informed by Apple that it effectively would withhold the payments by not paying its manufacturers for Qualcomm's royalties.

This adds up to a 22% reduction in earnings per share for the June quarter. Having formally recognized its worst-case scenario, Qualcomm's main challenge now will be convincing investors there is nowhere to go but up.

Apple's move should have come as no surprise. Apple has a strong interest in lowering its costs and protecting its high iPhone margins. And its financial contribution to Qualcomm is substantial -- giving the company a lot of near-term leverage to bring to bear.

Note that Qualcomm reduced its June quarter revenue forecast by $500 million, which would be based on Apple devices sold during the March quarter. IDC estimates that Apple sold 51.6 million iPhones during the period. That works out to a bit under $10 per iPhone.

It also indicates Apple is responsible for a little over one-quarter of Qualcomm's entire royalty business, which in turn accounts for the vast majority of the company's operating profit. The mid-point of Qualcomm's adjusted per-share earnings forecast for the June quarter came down by 22% compared with a 9% reduction in its revenue outlook. Stacy Rasgon of Bernstein estimates that Apple accounts for more than $1 of Qualcomm's annual per-share earnings. Last year Qualcomm made $4.44 in adjusted earnings per share.

The gamble now -- even with Qualcomm's stock now near a 52-week low -- is that things can't get worse. But these cases are highly unpredictable, and can take years to resolve. And the timing on Qualcomm completing its merger with NXP is also uncertain. Apple has shown that it can bite down hard. Qualcomm will need to show it can bite back.

Write to Dan Gallagher at dan.gallagher@wsj.com

(END) Dow Jones Newswires

April 28, 2017 13:12 ET (17:12 GMT)

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