AAPL Apple Inc

By Ted Greenwald 

Qualcomm Inc. on Wednesday said profit plunged 40% in its latest quarter, the first in years that didn't include patent royalties on devices from Apple Inc.

The San Diego company reported profit in the three months through June 25 of $865 million, on total revenue of $5.37 billion, which fell 11% from a year earlier. In the patent-licensing division, revenue fell 42%, to $1.17 billion.

Qualcomm, the leading producer of smartphone chips, is embroiled in an escalating legal dispute with Apple, which has blocked licensing payments that previously flowed to Qualcomm for iPad and iPhone sales. Apple's manufacturing partners late on Tuesday sued the chip maker in U.S. court on allegations that it uses unlawful means to boost its royalty rate.

Qualcomm previously had warned that the Apple dispute would sharply reduce its earnings in the latest period. Its results on Wednesday came in above the expectations of analysts, with the company citing better-than-expected results in its semiconductor business.

The results excluded revenue from an unnamed customer that is withholding royalties, Qualcomm said, in a dispute first revealed along with last quarter's disclosure.

On an adjusted basis that excludes items including stock-based compensation, Qualcomm reported per-share profit of 83 cents, down 28% from the year-earlier quarter. Analysts polled by Thomson Reuters on that basis had expected earnings of 81 cents a share on revenue of $5.3 billion.

Shares fell 1.3% after hours Wednesday, following an advance of 0.9%, to $56.78, in regular trading. The stock price has fallen roughly 9.7% through Wednesday's close since Apple filed its initial suit in January against Qualcomm.

Results for the quarter shed little light on a point of major concern to investors: The place of Qualcomm chips in future versions of the iPhone. Apple puts Qualcomm's communications chips in roughly half of its iPhone 7 units, the other half of which use chips from Intel Corp. Anticipation is high for a coming, presumably a premium-priced iPhone celebrating the brand's 10th anniversary, but it is not clear whether Apple will choose Qualcomm for that model. Qualcomm's estimate of chip shipments in the fourth quarter exceeded the tally of Northland Securities Inc. analyst Tom Sepenzis by roughly 10 million units -- a good bump in expected chip shipments, but not enough to make a decisive call about Qualcomm's participation in next-generation iPhone models, he said.

Qualcomm declined to include information it usually provides regarding device sales, citing the litigation with Apple's manufacturing partners. "We currently do not believe total reported device sales and related estimated ranges of device shipment and average selling price are meaningful" in assessing Qualcomm's patent-licensing business in the quarter, the company said in a statement.

Qualcomm dominates the market for smartphone chips and collects patent royalties on nearly every smartphone globally, including those that don't use its chips. However, in recent years, Qualcomm has faced an international wave of opposition from regulators, customers, and competitors who say that it unfairly extracts exorbitant royalties. The company is also accused of violating its obligation, as an owner of patents deemed essential to cellular communications, to license its intellectual property widely.

Qualcomm has denied these allegations and has sued Apple and the contract manufacturers that assemble iPhones. It moved earlier this month to block imports of some Apple devices into the U.S., and today it took a similar action in Germany.

Another question that weighs heavily on Qualcomm's future is the fate of its $39 billion bid to buy NXP Semiconductors NV. Many investors are optimistic that the deal would bolster Qualcomm by combining its expertise in digital processing with NXP's in automotive chips -- a hedge against threats to the patent-licensing business and a welcome boost in the absence of royalties from Apple devices.

Regulators in four jurisdictions including the U.S. have approved the tie-up. But European Union authorities recently suspended their inquiry while waiting for Qualcomm to deliver information they had requested and may impose fines of $665,000 for every further day of delay. Meanwhile, rumors have surfaced that some NXP shareholders are pushing to raise the price.

Qualcomm on Wednesday reiterated that it expects the deal to close by the end of the year.

Over all, Qualcomm reported per-share earnings of 58 cents for the quarter, down from 97 cents a year ago.

On an adjusted basis that excludes items including stock-based compensation, Qualcomm reported per-share profit of 83 cents, down 28% from the year-earlier quarter. Analysts polled by Thomson Reuters on that basis had expected earnings of 81 cents a share on revenue of $5.3 billion.

For the fourth quarter ending in September, Qualcomm forecast adjusted earnings per share between 75 cents and 85 cents on revenue of between $5.4 billion and $6.2 billion.

Write to Ted Greenwald at Ted.Greenwald@wsj.com

(END) Dow Jones Newswires

July 19, 2017 18:22 ET (22:22 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.