Shares of Qualcomm (QCOM) were down about 1.6% in morning trading on Thursday, as the company's top and bottom line beat for the 2017 second quarter was somewhat overshadowed by confirmation that original design manufacturers associated with Apple (AAPL) are withholding royalty payments to Qualcomm.
For the past quarter, Qualcomm reported earnings of $1.34 per share, topping analyst expectations for $1.19 per share. Revenue came in at $5.99 billion for the quarter, also topping consensus estimates for $5.89 billion.
During the earnings call, the chip maker revealed that Apple's suppliers have withheld about $1 billion from the company as part of the ongoing legal dispute that started in January when Apple filed a $1 billion lawsuit against Qualcomm for anticompetitive behavior. Apple filed the complaint after the Federal Trade Commission filed its own lawsuit against Qualcomm for making Apple use its baseband chips that require higher patent royalties. Analysts see the legal dispute as creating uncertainty for the company's future in the near-term.
For the third quarter, Qualcomm sees earnings coming in between $0.90 and $1.15 per share, vs. expectations for $1.09 per share. Revenue for the third quarter is expected by Qualcomm to come in between $5.3 billion and $6.1 billion, vs. consensus estimates for $5.94 billion.
To hear how analysts are interpreting a winning quarter weighed down by uncertainty over Apple suppliers withholding payments, keep reading.
Pacific Crest Securities, Michael McConnell (Overweight, price target lowered to $77 from $81)
"Strong Results and Lower Guidance; Apple Payment Uncertainty Lingers: We remain buyers because of (1) significant EPS accretion and end-market diversification away from mobile from the pending NXP acquisition, and (2) an attractive dividend yield of 4.3%. . . Apple CMs have withheld ~$1 billion from QCOM. Apple withheld the funds from its CMs, and now they have cut payments to QUALCOMM by the same amount. However, CMs acknowledge that the underpaid amount is still due, QUALCOMM has already received royalty reports for the March quarter (for QTL's FQ3), and it says Apple has no further basis to withhold payments since the BCPA expired. . . Lower QTL guidance (due to payment uncertainty) prompts lower estimates and target."
BMO Capital Markets, Tim Long (Market Perform, price target lowered to $54 from $60)
"QCOM reported mostly positive headline numbers, but our concerns with the stock remain grounded in a number of new and persistent issues. In QTL, the Apple dispute adds uncertainty, but we learned of another OEM withholding payments (likely Samsung) just a few days after the loss to Blackberry in arbitration. Chip share deterioration continues, and we see risk of further loss at AAPL. Our estimates do go higher owing to some better items in the model, but we expect the stock to remain in a trading range. . . As we expected, ODMs withheld what AAPL held back from them. QCOM recorded the $1B in revenues anyway. We expect and model a $1B annual tailwind from QCOM no longer having to pay the rebate, and we do not assume more underpayment from AAPL for the time being. However, given the rocky relationship, AAPL could withhold further payments from its ODMs, forcing their hand again on underpaying QCOM. Neither we nor management expect AAPL to withhold the entirety of royalty payments."