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Qualcomm profits sink as it hands over nearly a BEEELLION dollars in fines to China

Antitrust claims settled, but rough seas ahead

Qualcomm showed encouraging signs of growth in the second quarter of its fiscal 2015, even as a hefty payout to China bit deeply into its bottom line.

The mobile chipmaker's revenue for the quarter was $6.89bn, which was down slightly from the previous sequential quarter but up by 8.3 per cent from the year-ago period, beating analysts' estimates.

Solid sales led Qualcomm to post quarterly earnings of $1.40 per diluted share, which was on the high end of what Wall Street was expecting.

Net income, though, was down by 46.3 per cent from a year ago, at just $1.05bn. But that was mainly due to the impact of the $975,000,000 fine that Qualcomm agreed to pay the Chinese government to settle a long-running antitrust investigation, all of which was written down in the second quarter.

China's National Development and Reform Commission (NDRC) had accused Qualcomm of abusing its monopoly position in the Chinese mobile chip market by charging customers unfair and discriminatory prices, a claim the chipmaker disputed.

The one-time payment settles the matter, along with an agreement by Qualcomm to modify some of its business practices in China, including licensing its patents on 3G and 4G phone technologies separately from the rest of its portfolio.

Qualcomm, meanwhile, has complained that not all of its Chinese customers report sales of devices containing Qualcomm-licensed technologies accurately, resulting in lower-than-expected revenue. Further, it has claimed that other Chinese companies have held off on buying licenses to Qualcomm patents because of the uncertainty of the chipmaker's legal position in the country.

"We believe that the conclusion of the NDRC investigation will accelerate the resolution of these issues, although the outcome and timing of any resolutions are uncertain," Qualcomm said in a statement [PDF] accompanying its Q2 earnings release.

There were some signs of good news there, though. Qualcomm's second-quarter licensing revenues were $2.49bn, up 16.5 per cent year-on-year. Total reported device sales were also up 14 per cent, to 75.8 million.

Licensing only made up 36 per cent of Qualcomm's business in the quarter, however. The bulk of the firm's revenue comes from the Equipment and Services reporting segment. And while that group's total chip shipments were up 24 per cent for the quarter at 233 million, its $4.4bn in revenue was just a modest 4.1 per cent gain over the year-ago period, and was down 15.5 per cent sequentially.

Moreover, Qualcomm isn't optimistic about its near-term prospects. It now projects its third-quarter revenue to be in the range of $5.4bn to $6.2bn, which would be a year-on-year decline of anywhere from 9 per cent to 21 per cent.

That gloomy outlook – along with ongoing pressure from activist investor outfit Jana partners to have Qualcomm split off its patent-licensing operations from the rest of its business – gave investors little cause to celebrate, and its share price was down slightly in after-hours trading on the news. ®

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