QCOM QUALCOMM Inc

By Asa Fitch 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 6, 2020).

Qualcomm Inc. said revenue rose 5% in its first fiscal quarter, as stronger sales of smartphones bolstered its technology-licensing business, though the spread of the coronavirus could take some shine away from a year that includes many high-end phone launches.

The San Diego-based company, which designs and markets semiconductors mostly for mobile-communications equipment, on Wednesday said sales were $5.08 billion in the quarter ended in December, up from $4.84 billion a year ago.

Profit fell 13% to $925 million, or 80 cents a share. The previous year's first quarter included a more than half-billion-dollar tax benefit recorded from U.S. tax law changes.

On an adjusted basis, earnings fell to 99 cents, though that figure came in higher than analysts surveyed by FactSet had expected.

Like its peers in the cellphone supply chain, Qualcomm grappled with lower global smartphone sales last year.

Many consumers are waiting to purchase new handsets to take advantage of superfast fifth-generation cell networks that operators are building out. But Chief Executive Steve Mollenkopf said Qualcomm was reaping early gains from the rollout of 5G networks.

Even though the company forecasts selling fewer cellphone chips this quarter, partly as the result of seasonal fluctuations, it is expecting to make more money per chip as the year progresses.

Finance chief Akash Palkhiwala said cellphone makers are dedicating resources to introducing new high-end phones, including 5G smartphones for which Qualcomm makes more expensive chips.

Part of that upswing will likely come from Apple Inc., which Qualcomm reached a chip-supply agreement with last year after settling a long-running licensing dispute. Qualcomm chips are widely expected to go into Apple's first 5G-capable phones when they are introduced, likely in September.

Apple also provided a boost to Qualcomm during the last three months of 2019, when it reported bumper sales of its latest iPhones. Qualcomm collects royalties from patents it licenses to Apple and other handset makers.

Qualcomm's licensing arm generated $1.4 billion in sales in the quarter, up 38% from a year ago as Apple resumed royalty payments following their legal settlement. Qualcomm's chip division's sales fell 3%.

Risks lie on the horizon, however. Qualcomm has yet to resolve a licensing dispute with Huawei Technologies Co., after it reached an interim agreement with the Chinese telecom giant in late 2018 under which Huawei made $150 million quarterly payments to Qualcomm. That agreement has since expired, with no indication that it will be renewed.

Qualcomm has also started to see a decrease in orders of chips from customers in China as a result of the outbreak of coronavirus there, Mr. Palkhiwala said in an interview. Manufacturers have been bracing for supply-chain disruption as the virus spreads, with the number of confirmed cases rising above 24,000 as of Tuesday.

China accounts for around a quarter of global smartphone demand, UBS analysts estimate, and Qualcomm is a key supplier of chips to many Chinese handset makers.

The company cut the low-end of its earnings guidance out of an abundance of caution, Mr. Palkhiwala said, although there has only been a small decline in its orders so far. Qualcomm expects adjusted earnings to be between 80 cents and 95 cents a share in the current quarter, with Wall Street analysts forecasting 86 cents a share.

Qualcomm said chip shipments could fall to between 125 million and 145 million in the second fiscal quarter, from 155 million in the first quarter.

The company forecast sales of $4.9 billion to $5.7 billion, compared with Wall Street expectations of $5.1 billion.

Qualcomm also disclosed it is under investigation in the European Union over whether it engaged in anticompetitive behavior related to its 5G radio-frequency technologies. The company received a request for information from the European Commission on Dec. 3, the company said in a regulatory filing. Qualcomm said it didn't believe it was violating EU competition rules.

Qualcomm has been caught in a legal tangle for years over allegations that it leveraged its dominance as a supplier of cellphone chips that manage communications with cell towers to extract unfair patent-licensing terms. While the company resolved its licensing dispute with Apple, it is appealing antitrust decisions against it in the U.S., where a court hearing is scheduled this month. It also is appealing an EU fine, issued in 2018, of almost a billion euros.

Shares in the company fell slightly in after-hours trading. The chip maker's stock has gained 79% over the past 12 months through Wednesday's close.

Write to Asa Fitch at asa.fitch@wsj.com

(END) Dow Jones Newswires

February 06, 2020 02:47 ET (07:47 GMT)

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