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Qualcomm Facing China-Related Challenges

China continues to hold both opportunity and peril for Qualcomm Inc.

The country of 1.3 billion people loomed in the background again April 23 as the San Diego tech company released second-quarter revenue figures well north of $6 billion.

China’s huge market might be a blessing for Qualcomm (Nasdaq: QCOM) and its shareholders. The introduction of fourth-generation wireless service in that country is “an important near-term growth catalyst for our business,” CEO Steve Mollenkopf told securities analysts, though he also said that fourth-generation technology is not taking hold as fast as expected.

At the same time, China seems to be a curse for Qualcomm — and not just because Chinese authorities allege that Qualcomm has been acting like a monopoly, something that has been previously reported. This month, Qualcomm revealed that U.S. regulators may sanction the business for allegedly violating anti-bribery laws in China, though the business is quick to say that it has done nothing wrong.

Specifically, Qualcomm said in a securities filing that on March 13 it received a Wells Notice from securities regulators, indicating that the regulators might take enforcement action against the company. Qualcomm responded April 4 with documents explaining why the company believes it has not violated the law and added that it will continue to work with the regulators and the Justice Department.

At the center of the issue are benefits provided to Chinese officials at state-owned companies or agencies. The benefits were worth less than $250,000 and excluded employment compensation, Qualcomm said in the filing.

Still ‘Best-Positioned’ for LTE

On the earnings front, it was a familiar story: Demand for Qualcomm’s microchips drove earnings, and revenue from companies eager to license Qualcomm’s patented technology hit an all-time high, company officials said. The business’ second quarter ended March 30.

The quarter saw Qualcomm ship 188 million chips, up 9 percent from the same quarter last year, but down 12 percent from the first quarter.

Qualcomm reported net income of $1.96 billion on revenue of $6.37 billion in the second quarter. Revenue was slightly lower than the consensus view of analysts polled by Reuters, whose forecasts averaged $6.48 billion.

“While these results were certainly not stellar, Qualcomm remains the best-positioned name in a year when we believe LTE volumes around the world will grow significantly,” wrote Deutsche Bank analyst Brian Modoff, who rates the stock as a buy. LTE is a term for fast, fourth-generation wireless data service.

As for the Wells Notice, Modoff wrote that he thinks the situation “will not result in meaningful penalties.”

At midmorning April 24, shares were at $77.65, down 3.8 percent from the previous day’s closing price. Qualcomm reported earnings after the market closed on April 23.

For the half, Qualcomm reported net income of $3.84 billion on revenue of almost $13 billion, up from net income of $3.77 billion on revenue of $12.1 billion in the first half of fiscal 2013.

Qualcomm said it expects to finish fiscal 2014 with $26 billion to $27.5 billion in revenue, which would be a gain of 5 to 11 percent over 2013.

The business said it had $32.1 billion in cash, cash equivalents and marketable securities as of March 30. Looking to the second half of the year, Qualcomm said its plans include buying back $2 billion of stock.

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