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Qualcomm earnings: $1.34 a share vs. $1.19 per share expected

  • Qualcomm reports better-than-expected earnings
  • Analysts expected EPS of $1.19 a share
  • Revenue was expected to hit $5.89 billion

Qualcomm reported earnings for the second fiscal quarter that beat analyst expectations on Wednesday, as well as revenue that topped estimates amid better-than-expected sales in its technology division.

Shares rose less than 2 percent after hours.

Earnings

  • Adjusted EPS: $1.34 a share, ex-items vs. $1.19 per share expected by Thomson Reuters consensus
  • Revenue: $5.99 billion vs. $5.89 billion expected by Thomson Reuters consensus

Adjusted earnings were up 29 percent from the $1.04 per share reported a year ago, while adjusted revenues were up 8 percent from the $5.5 billion reported this time last year.

  • Q3 adjusted EPS guidance: Range of 90 cents a share to $1.15 a share vs. $1.09 a share expected by Thomson Reuters consensus
  • Q3 revenue guidance: Range of $5.3 billion to $6.1 billion vs. $5.94 billion expected Thomson Reuters consensus

Legal disputes cast shadow over new technologies

Steve Mollenkopf, CEO of Qualcomm, at the Mobile World Congress in Barcelona on Feb. 23, 2016.
Brad Quick | CNBC
Steve Mollenkopf, CEO of Qualcomm, at the Mobile World Congress in Barcelona on Feb. 23, 2016.

Qualcomm's widely used chips and designs are getting beefed up for the adoption of new technology and 5G connections. The flagship Samsung Galaxy S8, for instance, used one of Qualcomm's most high-end chips, and the company benefitted from higher-than-expected average prices during the quarter, executives said during a conference call with analysts.

During the quarter, Qualcomm saw revenue in its licensing division grow 5 percent from a year ago, to $2.25 billion. Revenues for its technology division grew 10 percent from a year ago, to $3.68 billion. Analysts surveyed by StreetAccount expected the licensing division to report $2.24 billion in revenue, and the technology division to report $3.56 billion.

But the company's sales bump comes amid intense scrutiny of the semiconductor company's business model.

Qualcomm's earnings guidance range for next quarter fell around analyst expectations. But the company warned that a tiff with Apple could affect its outlook, as it expects underpayments from manufacturers:

Apple's contract manufacturers reported, but underpaid, royalties in the second quarter of fiscal 2017. However, our revenues were not negatively impacted as the contract manufacturers acknowledged the amounts are due and the underpayment was equal to the amounts that Qualcomm has not paid Apple under our Cooperation Agreement that are currently in dispute. The Cooperation Agreement expired December 31, 2016. It is not clear whether Apple's contract manufacturers will underpay royalties owed under their contracts with us in the third quarter of fiscal 2017, which could have a negative impact on our financial results. Our guidance range for fiscal third quarter EPS is wider than our typical practice primarily due to this uncertainty.

The remarks likely refer to $1 billion lawsuit from one of the world's most powerful companies, Apple, which argues that Qualcomm charges "at least five times more in payments than all the other cellular patent licensors we have agreements with combined." Qualcomm has filed a counterclaim against Apple for breaching agreements and throttling its processors in the iPhone 7.

The "Apple situation" is not the only battle for Qualcomm.

Qualcomm is fighting a fine of $868 million in South Korea, over high patent fees and refusing to offer licenses to some chip manufacturers. The earnings report also reflected a $974 million reduction to revenues over a dispute with BlackBerry.

New processors and wider internet "pipes" have the promise to push forward technologies like virtual reality, cloud computing and video streaming, Qualcomm CEO Steven Mollenkopf said earlier this year. Plus there's the burgeoning self-driving car industry, which Qualcomm hopes to enter with its $38 billion agreement to acquire NXP Semiconductors.

Qualcomm unveiled a new 835 Snapdragon processor, the first ever under 10 nanometers, earlier this year. The Snapdragon 820 and 821 are found in high-end Android smartphones like the Google Pixel, Samsung Galaxy S7 Edge, LGV20, HTC 10, and BlackBerry's Android device.

Executives told analysts that demand for 10 nanometer chips is exceeding supply.

"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," Mollenkopf said in a statement on Wednesday.

But up just 1.5 percent over the last year, Qualcomm shares have lagged the gains of rivals Intel and Nvidia. The company's China business also continues to be in focus, after softness in the region last quarter.

"The licensing business had a strong quarter ... the stronger market and improved licensing in China offset the impact of a new dispute with a licensee," Mollenkopf said during the conference call. President Derek Aberle added that the strength reflected "significantly increased" gains from a year ago in China.