Qualcomm Inc., the world’s largest maker of mobile-phone chips, forecast fiscal third-quarter sales and profit that may miss analysts’ estimates as handset makers sell fewer phones based on older technology.
Revenue in the three months ending in June will be $6.2 billion to $6.8 billion, the San Diego-based company said Wednesday in a statement. That compares with an average analyst estimate of $6.6 billion, according to data compiled by Bloomberg. Profit will be $1.15 to $1.25 a share, compared with an average projection of $1.25.
Licensing revenue has fallen short of Qualcomm’s (Nasdaq: QCOM) forecasts as customers pare inventory of older handsets before the introduction of faster, long-term evolution networks in China, which will make those older devices obsolete, Chief Executive Officer Steve Mollenkopf said. That rollout is taking longer than the company expected, he said.
“The launch of LTE in China is very important to Qualcomm, and it’s difficult to predict,” Mollenkopf said in an interview.
Qualcomm shares dropped as much as 5.5 percent to $76.25 in extended trading after the report. The stock had earlier gained less than 1 percent to $80.71 at the close, leaving it up 8.7 percent this year.
While the company is counting on LTE smartphone sales in China to fuel growth, it has faced challenges in doing business there. In a filing Wednesday, Qualcomm said it received a Wells notice from the U.S. Securities and Exchange Commission last month that the agency recommended enforcement action related to bribery allegations in China.
Qualcomm said it first became aware of the investigation in 2012 and started its own inquiry. The company discovered that it had provided employment considerations, gifts and other benefits to “individuals associated with Chinese state-owned companies or agencies,” according to the filing. The total value of the gifts was less than $250,000, Qualcomm said, and it’s cooperating with inquiries at the SEC and the U.S. Department of Justice.
In November, the company disclosed that China’s National Development and Reform Commission had begun an investigation related to an anti-monopoly law.
Second-quarter net income rose to $1.96 billion, or $1.14 a share, from $1.87 billion, or $1.06 a share, the company said. Sales in the period that ended March 30 rose 4 percent to $6.37 billion, the slowest increase since 2010. Analysts on average had predicted earnings of $1.05 a share on revenue of $6.48 billion.
In the second quarter, Qualcomm was paid licensing revenue on phones that were sold at the end of last year. Consumers, particularly in China, are putting off purchases as they wait for the new faster data services to be switched on before upgrading their handsets, Chief Financial Officer George Davis said on a conference call.
Qualcomm benefits from the sale of handsets even when they don’t use its chips. The company’s ownership of code-division multiple-access technology, or CDMA, allows it to charge royalties on most phones connected to modern data networks.
As a greater number of phone-service subscribers in emerging markets shift from call-only handsets to more expensive devices that surf the Internet, the number of people using Qualcomm’s technology is increasing. Licensing provides the company with most of its profit, while sales of modems and processors contribute the largest portion of its revenue.
“It might be ugly for another quarter or two, but China Mobile will make it happen one way or another,” said Alex Gauna, an analyst at JMP Securities LLC in San Francisco, who rates the shares the equivalent of a “buy.” “We are depending on China, and China can be difficult to predict.”
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