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Qualcomm’s Dispute with LG Could Keep Dragging Down the Stock

Inside The 2016 Consumer Electronics ShowInside The 2016 Consumer Electronics Show
Qualcomm CEO Steven Mollenkopf at the 2016 CES technology trade show in Las Vegas.Photograph by Patrick T. Fallon — Bloomberg/Getty Images

Qualcomm’s latest quarterly earnings on Wednesday disappointed investors, who sent the chipmaker’s shares falling by as much as 1.9% in aftermarket trading to $46.60. Indeed, good news was in short supply.

Qualcomm’s main problem was softening of demand in the premium smartphone market, which also hit Apple. However, a dispute with smartphone maker LG, plus those premium market problems, means that Qualcomm’s current forecast annual revenue for 2016 may be off by more than $100 million. During the earnings call with analysts, Qualcomm president Derek Aberle said that a dispute over a royalty agreement with LG has gone to arbitration, and that it was unclear how any decision may affect the chipmaker’s revenue for the rest of the fiscal year.

Aberle tried to downplay the dispute to analysts, who repeatedly asked about the topic, telling them that this sort of disagreement had happened before with other companies that licensed Qualcomm’s technology. “This is a contract dispute … similar to the ones we’ve had in the past,” he said.

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Qualcomm (QCOM) is also still dealing with a few Chinese manufacturers that are not paying licensing fees as part of a series of ongoing renegotiations. The shortfall has dogged Qualcomm’s earnings for the last year.

However, Qualcomm is also seeing its customers continue to defect to other chipmakers. It hopes it will get some of those customers back with the newest version of its high-end smartphone chip, the 820. Samsung, which Qualcomm recently contracted to help fabricate the chips, is particularly coveted as a customer.

At CES, the consumer electronics show in Las Vegas, Qualcomm announced one small smartphone customer using its 820 chip. But on the earnings call, Aberle said the company would see most of the revenue gains from the chip in the second half of the year. Hopefully, at the upcoming Mobile World Congress show in Barcelona next month, when the telecommunications companies and phone makers typically premiere new products, Qualcomm will have a few new designs to crow over.

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Analysts on the earnings call were curious about when Qualcomm might see results from its newly signed agreement to produce server chips in China. But Aberle said that the timeline to production might be within a year, although it would take a “few years” before they make any contribution to the company’s earnings.

Wall Street may be frustrated by the wait. But Qualcomm restructured last year, completed a $15 billion stock buyback, and narrowed its focus. Now everyone just has to hope that the narrowed focus and fiscal discipline pays off.