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Qualcomm Shows It’s Still in the Fight

One year ago, everyone was down on Qualcomm Inc.

A phenomenal period of growth was at an end — that was evident. Large investor Jana Partners had a long list of issues it wanted Qualcomm (Nasdaq: QCOM) to change, including board oversight and business structure. The company had just paid a $975 million fine to Chinese regulators and many Chinese clients were not paying their license fees.

It looked as though Steve Mollenkopf, the company’s new CEO, had drawn one of the worst assignments in business.

But in April 2016, the company is still around — though it has cut about 1,300 full-time employees in San Diego and has gotten out of some of its leased real estate.

No, the company has not returned to its salad days. But Mollenkopf said the company had a stronger quarter than expected, on both the technology licensing side and the chip making side, in an April 20 earnings report.

The company reported net income of $1.2 billion, or 78 cents per share, on revenue of $5.6 billion in its second quarter, which ended March 27.

Revenue was down 19 percent from the same quarter of 2015, but was still within the company’s forecast.

Twenty-five analysts surveyed by Thomson/First Call collectively expected Qualcomm to post earnings of 96 cents per share, on a non-GAAP basis, during the recently ended quarter. Qualcomm did better, reporting earnings of $1.04 on a non-GAAP basis. (GAAP is an accounting term, short for generally accepted accounting principles.)

The 25 analysts had collectively expected revenue of $5.34 billion, below the $5.6 billion Qualcomm announced.

Looking ahead, Qualcomm said it expected revenue between $5.2 billion and $6 billion in the third quarter, which will end in June. Earnings per share, on a non-GAAP basis, are expected to fall in the range of 90 cents to $1.00. Qualcomm expects to ship 175 million to 195 million microchips in the quarter.

With business volume below previous highs, Qualcomm has been trying to reclaim some of its old glory by getting into adjacent markets. The company is also in the middle of a restructuring effort meant to save $1.4 billion per year. Chief Financial Officer George Davis told analysts that the company was “on track” to make those savings.

Executives said they expect to lose a certain amount of market share to a competitor, but even with that assumption they expect a strong second half.

Bantering with analysts during their second quarter investor conference call April 20, executives repeatedly said they drew up their forecasts assuming what they called “second sourcing.”

The competitor providing an alternative modem to Qualcomm’s could be Intel Corp., said Patrick Moorhead, president of Moor Insights & Strategy. Moorhead said competition in the modem space was one of several topics he was hoping to get insight on when he listened to the conference call. He was also hoping to get an update on patent licensing talks in China.

Separately, the company said that it had resolved its patent licensing dispute with South Korea-based LG Electronics. The company will start recording revenue from LG in the current quarter, President Derek Aberle said.

China Negotiations Continue

Qualcomm said that it was making progress negotiating with the Chinese electronics companies that use its patented technology under license. The San Diego company has had to rewrite all of its licensing agreements to adhere to terms negotiated with the Chinese government. Negotiations with Chinese authorities ended in February 2015 but negotiations with certain Chinese companies are far from over.

By now Qualcomm has signed more than 100 licensing deals with Chinese firms. The latest, announced in conjunction with the earnings call on April 20, was with Hisense Group Co. Ltd.

Delays in inking the agreements often mean that companies do not pay Qualcomm to use the San Diego company’s technology. In response to an analyst’s question, Aberle said that Qualcomm is still negotiating deals with about 25 percent of Chinese customers, and that is going to be “a long-term project.”

Aberle, who is an attorney, said the company was prepared to take the next step to enforce its rights, and that litigation is “always an option for us if we need it.”

The company said that it shipped 189 million microchips in the second quarter, down 19 percent from the same quarter in 2015 and down 22 percent from the first quarter of 2016.

Mollenkopf said the company returned $2.3 billion to shareholders during the quarter through dividends and stock repurchases. The business reported that it had $30 billion in cash at the end of the quarter, with $27.1 billion of that sum offshore.

Intel (Nasdaq: INTC) might be getting into the smartphone modem business, but that’s not the only thing that is making the relationship between the two companies complicated.

Intel appointed former Qualcomm executive Murthy Renduchintala as one of its top executives in November.

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