A vitriolic legal battle with Apple had a stark impact on chip maker Qualcomm’s results in 2018, its Q4 earnings showed late Wednesday, with net income tumbling 15 percent for the year versus 2017.
San Diego-headquartered semiconductor and telecommunications equipment maker Qualcomm claims Apple owes it $7 billion in royalties, after the latter stopped paying it iPhone royalties in 2017: litigation continues.
Fiscal Q1 guidance from Qualcomm “reflects lower Apple legacy shipments and zero share in the current flagship launch, lower demand from our China-based customers, the impact of a one-time estimated tax benefit [and] increased litigation expenses in our licensing business”, the company said.
Qualcomm Earnings: By the Numbers
“Resolving our two licensee disputes is a key driver for fiscal 2019 performance”, San Diego-headquartered Qualcomm’s CFO George Davis said in an earnings call.
In an amendment by Qualcomm to court filings last month Qualcomm alleged that “Apple has engaged in a years-long campaign of false promises, stealth and subterfuge”.
Apple meanwhile says Qualcomm is forcing it to pay for the same patents twice: once when Apple uses Qualcomm’s chip in iPhones and then again through patent royalties.
Qualcomm told analysts this week: “We have continued to have discussions with Apple to try and reach a resolution, and we remain focused on driving the appropriate value for our stockholders, either through settlement or litigation. Resolution of the outstanding licensing disputes represents significant value to our shareholders and provides the foundation for very strong earnings growth.”
Revenues for fiscal 2018 were $22.7 billion, down from $23.2 billion in 2017. Operating income was down 21 percent to $5.6 billion and net income down 15 percent to $5.4 billion, Qualcomm earnings showed [pdf].
As CEO Steven M. Mollenkopf told analysts: “The combined impact of Apple instructing their contract manufacturers to stop paying their contracted royalty payments and Apple’s decision to use a competitor’s modem for their latest device has had a significant impact to our financial performance. Notably, over 50 percent of the expected fiscal 2019 headwind related to Apple is reflected in our first fiscal quarter guidance and impacts our QCT business. As we progress through the year, this will become less impactful to our quarterly results.”
Qualcomm Earnings: Not All Bad News
Despite this, the company was bullish about the future, not least owing to the centrality of its portfolio when it comes to developing 5G products.
As Mollenkopf put it: “When the world is introduced to 5G early next year, we believe we will be the technology partner in nearly all the commercial launches around the world. This position is no small accomplishment.”
“Transitions in wireless like 3G, 4G, and 5G are unforgiving to companies and competitors that are late to these transitions, especially in the initial ramp years. Our focus and investment priorities over the last couple of years have enabled us to successfully establish a strong technology position and lead the 5G industry transition, which will represent a significant opportunity for Qualcomm to expand revenue and earnings as we exit fiscal 2019.”
The company said that it expects the first mobile 5G network launches will begin in the second calendar quarter next year, and there will be commercial launches occurring simultaneously across North America, Europe, China, Japan, South Korea, and Australia.
“In total, we are working with more than 18 OEMs who have committed to launch 5G handsets in 2019 based on our 5G and our X50 modems.”