Qualcomm earnings beat estimates across the board

Key Points
  • Qualcomm reported adjusted earnings of 98 cents per share and revenue of $6 billion, beating street estimates of 91 cents per share and $5.93 billion in revenue.
  • Qualcomm's results are likely being overshadowed by Broadcom's hostile takeover bid and its on-going litigation with Apple over royalty payments.
Qualcomm and Samsung amend long-term, cross-license agreement

Qualcomm beat street estimates across the board for its first quarter earnings on Wednesday. But its stock remained nearly unchanged in after hours as investors are still on wait-and-see mode over external issues affecting the company.

Here are the most important numbers:

  • Revenue: $6.04 billion vs. $5.93 billion, as expected, according to Thomson Reuters
  • EPS (adjusted): 98 cents per share vs. 91 cents per share, as expected, according to Thomson Reuters

Qualcomm's operating profit dropped 96 percent year-over-year to break even as Apple and its partners continued to withhold royalty payments. The company noted that it didn't record any license revenues from Apple in the first quarter because of its continued dispute with the iPhone maker. In the first quarter of last year, Qualcomm generated $740 million in royalty fees from Apple-related products.

The chipmaker also highlighted a $6 billion charge related to the recent change in U.S. tax code, and an additional $1.2 billion fine charged by the European Commission over illegal payments made to Apple.

Qualcomm was able to offset some of those losses by growing its wireless chip business and diversifying into new areas, like connected devices and automotives. Its chip unit's revenue grew 13 percent to $4.6 billion, while earnings before tax jumped 32 percent year-over-year to $955 million.

"The quarter was good even though Apple isn't paying royalties, a testament to the company's diversification," said Patrick Moorhead, analyst from Moor Insights & Strategy.

Second quarter revenue guidance came in the range of $4.8 billion to $5.6 billion, slightly below average street estimate of $5.6 billion.

Qualcomm also disclosed that it's expanding its cross-license agreement with Samsung over mobile devices and infrastructure equipment. As part of the deal, Samsung agreed to withdraw its interventions in Qualcomm's appeal against a $868 million fine in South Korea.

Qualcomm's recent financial results have largely been overshadowed by two major events: Broadcom's hostile takeover bid and Apple's litigation over royalty payments.

Broadcom wants to buy Qualcomm for $105 billion, but the chipmaker has refused the offer and has urged shareholders earlier this month to reject the takeover bid. In December, Broadcom unveiled a slate of 11 director nominees for Qualcomm's board.

Apple, meanwhile, is claiming that Qualcomm charges unfairly high royalties for its patented technologies, and has sued the chipmaker for roughly $1 billion. The complaint has led other Taiwanese partners to withhold royalty payments, further hampering Qualcomm's lucrative licensing business.

As a result, in the first quarter, Qualcomm's licensing business generated $887 million in earnings before tax, down 42 percent year-over-year. Its licensing business, which typically generates the bulk of its revenue, is now making less profit than its chip business.

On top of that, some investors have questions about Qualcomm's $39 billion bid to buy NXP, which is still waiting for regulatory approval. The company said Wednesday that it expects to close the deal in early 2018.

To address those concerns, Qualcomm said in a recent investor presentation that its adjusted earnings per share for fiscal year 2019 could jump to the range of $6.75 to $7.50 if the royalty dispute settles and the NXP deal goes through.