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More trouble ahead for Qualcomm?

Posted: 10 Nov 2014 ?? ?Print Version ?Bookmark and Share

Keywords:Qualcomm? revenue? China? phone? chip?

Qualcomm's fourth quarter earnings and revenues may have fallen below expectations, but it remains confident that it will bounce back next quarter. Still, the mobile chip vendor's share price plunged after the announcement, and EE Times' technology writer John Walko tells us why.

If Qualcomm reported a good fourth quarter and cheery guidance for the next quarter and fiscal year, why did its share price plummet?

Qualcomm reported earnings and revenues slightly below Wall Street expectations for its fourth quarter this week, and it gave cheery guidance for its next quarter and next fiscal year. So why did the chip maker's share price fall immediately after the announcement by 6 per cent?

One reason is clearly because the company said it believes phone makers in China are not reporting hundreds of millions in cell phone unit sales to avoid royalty payments. The news was part of the company's one sore spot as it reported another quarter of solid growth and upbeat guidance for its coming fiscal year. (See also: Sore spot: Qualcomm goes after China)

But it was the triple whammy admitted by the company that was the problem. It said that, in addition to its legal issues in China, it faces antitrust investigations by the European Commission and by the U.S. Federal Trade Commission. This really was not what investors wanted to hear, especially since Qualcomm said it was difficult to predict the outcome of these investigations.

At least the company admitted it could take a hit of $1 billion from the China National Development and Reform (NRDC) into the ongoing investigations into its business practices. The FTC investigation focuses on patent licensing arrangements, which the regulator suggested may have breached requirements to give other chip makers access to its technology on a fair and non-discriminating basis.

The European Commission opened a new front in its investigations concerning its base band chip business in Europe. The crux of the problem here seems to be that other companies, notably the British base band chip specialist Icera (acquired more than three years ago by Nvidia Corp.) have complained that Qualcomm may have used patent-related incentives and exclusionary pricing of base band chips to discourage potential customers from doing business with Icera.

The complaint seems to have been lodged almost four years ago but was never made public. For it to surface now is not necessarily a surprise in view of the way European bureaucrats sometimes treat such allegations. Perhaps it came on to the agenda again once the EC regulatory division had dealt successfully (from its perspective) with the case against Intel. That, of course, led to a $1.1 billion fine for abusing its dominant market position.

Hardly surprisingly, a bevy of rivals, including Broadcom, Nokia, Texas Instruments, NEC and Panasonic, welcomed the continuing investigation into anticompetitive practices. The companies said in press release they believe "these practices are harmful to the mobile telecommunications industry globally and... undermine confidence in standards-setting processes, threaten the supply of WCDMA chipsets, impede innovation, and raise the costs of third-generation (3G) technology and handsets."

The "practices" alleged to have to breached EU competition rules are that Qualcomm charged disproportionate and discriminatory royalties for its WCDA essential patents. Not only that, but the allegations suggest that Qualcomm broke its commitments to standard-setting bodies.

Again, it is no surprise that the San Diego chipmaker denied these allegations. "We are fully cooperating with these agencies and believe our practices comply with the laws of these countries," CEO Steve Mollenkopf said Wednesday. The company also stressed the latest inquiries were very preliminary and in the information-gathering stages.

Though Mollenkopf bundled together the company's stance on the allegations in the three antitrust probes and said Qualcomm would "vigorously defend" itself in all of them, it should be stressed they are separate investigations relating to different aspects of Qualcomm's business. The fear, of course, is that, as with some other regulatory investigations within the chip sector in the past, they could overlap down the line. The fines relating to the European investigation alone could be huge. Companies in the sector previously found to have breached antitrust rules had to surrender up to 10 per cent of their global revenue.

In an SEC filing on its earnings, Qualcomm said, "If a violation is found, a broad range of remedies is potentially available [to the FTC], including imposing a fine or requiring modifications to our ing practices."

So, not everything is rosy in the House of Qualcomm. However, in the near term, the company is unlikely to be relegated from its position as the largest supplier of chips for the mobile sector, with fewer competitors as the years go by.

The company is probably most concerned about the outcome of the Chinese probes. It suggested in its earning statement that activity there represents "significant opportunities," notably because of the rapid rollout of 3G/LTE multi-mode throughout the country, as well as the seemingly unstoppable entrants in the handset business. And it is the one place where Qualcomm is most unlikely to defend itself successfully.

- John Walko
??EE Times

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