Amid Broadcom Hostile Takeover, Qualcomm Earnings Are Mixed
Qualcomm posted mixed financial results on Wednesday as it makes its case to shareholders to reject a hostile takeover bid from rival Broadcom.
The San Diego smartphone chip giant beat Wall Street analysts' estimates for adjusted sales and earnings for its fiscal first quarter ended Dec. 24.
But its forecast for the current March quarter lagged analysts' projections -- as a sluggish smartphone market weighed on guidance.
It's unclear how these results will be viewed by Qualcomm's shareholders -- particularly big mutual and hedge funds that own 78 percent of its stock -- as the company tries to fend off Broadcom's efforts to take control of its board of directors.
Stockholders will vote to support either Broadcom's 11 alternative board candidates or Qualcomm's existing directors by the San Diego company's March 6 annual meeting.
Broadcom is attempting to gain control of Qualcomm's board after it rejected a $103 billion buyout offer -- the largest ever in tech.
Broadcom offered $70 per share in cash and stock for Qualcomm, which its board declined for being too low.
There was a lot to unpack from Qualcomm earning call -- including a new patent licensing deal with Samsung and an update on its slow moving acquisition of automotive chip maker NXP Semiconductors.
For its first quarter, Qualcomm reported sales of $6 billion and adjusted earnings of $1.5 billion, or 98 cents a share, on the strength of its chip business.
That beat Wall Street analysts' estimates of $4.66 billion in revenue and adjusted earnings of 86 cents per share.
"Our first quarter results reflect continued strong performance in our semiconductor business, as well as continued strength in 3G/4G handset average selling prices," said Chief Executive Steve Mollenkopf in a statement.
For the March quarter, Qualcomm predicts sales of $5.2 billion and adjusted earnings of 70 cents per share at the midpoint.
Analysts were looking for earnings of 84 cents per share on sales of $4.2 billion in the March quarter.
The weak March quarter stems from a slowdown in smartphone sales in China, as well as Apple reportedly cutting production of iPhone X amid soft demand for the $1,000 smartphone.
Meanwhile, Broadcom said Wednesday that it expects to continue to hit its financial targets -- with strong demand in data center and storage chips offsetting weakness in its wireless business.
"Our first quarter results are tracking towards the higher end of our expectations as we continue to execute on our business model," said Broadcom Chief Executive Hock Tan.
Broadcom has not increased its offer for Qualcomm. But Wall Street analysts say Broadcom has the flexibility to boost the price and still book an increase in profits.
"We won't be surprised to see Broadcom raise its Qualcomm offer and believe that a Qualcomm deal will be meaningfully accretive even at $80 a share," said Macquarie Research Analyst Srini Pajjuri in a research report.
Qualcomm's share price has been under pressure as lawsuits from Apple and fines from global antitrust regulators. Since 2015, the company has been fined a total of nearly $4 billion by regulators in China, South Korea, Taiwan and Europe.
In addition, Apple has stopped paying patent royalties to Qualcomm, which has trimmed revenue by roughly $500 million a quarter.
Qualcomm argues that its patent licensing battles are temporary. Legal hearings slated this year could help spark negotiations between Apple and Qualcomm.
"We value Apple as a customer and would like to continue that relationship into the future, but it is in our stockholders best interest that we ensure Apple pay a fair and reasonable royalty and operate on a level playing field with other" smartphone makers," said Mollenkopf in a conference call with analysts.
In a rare bit of good news for its patent licensing business, Qualcomm said Wednesday that it reached a new royalty agreement with Samsung.
While exact terms weren't disclosed, Qualcomm said the deal calls for charging royalties based on the total price of the smartphone, rather than the price of the chip that Qualcomm supplies.
The Korea Fair Trade Commission called for Qualcomm to institute chip level patent licensing when it fined the company more than $850 million in October 2016. Qualcomm is appealing. As part of the new agreement, Samsung will withdraw its objections to Qualcomm's appeal in the Seoul High Court.
Mollenkopf said the Samsung agreement "provides a good indication that we are headed in the right direction" with its licensing business.
The fines and a one-time tax charge related to repatriation of Qualcomm's offshore cash stockpile resulted in the company posting a loss for the quarter under Generally Accepted Accounting Principles.
Qualcomm's $38 billion pending acquisition of Dutch chip maker NXP Semiconductors -- a key piece of its strategy to diversify beyond smartphones -- has gained global regulatory approval everywhere but China.
As soon as the deal is cleared there, Qualcomm could wrap up a tender offer in as little as three weeks, said Chief Financial Officer George Davis.
Qualcomm may have to pay more than the current $110 per share price, however. Elliott Capital, a large NXP shareholder, contends the company is worth $135 per share. The fund is lobbying other shareholders to refuse to pledge their shares at the current price.
Under Generally Accepted Accounting Principles, Qualcomm reported a $4.03 per share loss for the quarter. It stemmed from a $6 billion tax charge related to repatriation of billions of offshore cash following recent tax reform. The company also booked a $1.2 billion accrual for a fine imposed last week by the European Commission over an expired exclusive chip supply deal with Apple. Qualcomm is appealing.
The company released results Wednesday after markets closed. Its shares ended trading up nearly 2 percent at $68.25 on the Nasdaq. The stock dipped 7 cents in early after-hours trading.
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