Widget counting has become a rarefied art. Analysts canvas customers and suppliers for clues about the next quarter’s results. So when a tech company misses expectations despite this, markets get jumpy. On Wednesday, when Qualcomm announced fourth-quarter earnings per share that, at $1.26, missed by a mere nickel, the stock fell 6 per cent in the after-market session. There is more to this than widgets, though.
The numbers were weak. But one came in above expectations: antitrust investigations. The company revealed that since September, the US Federal Trade Commission has been looking into its intellectual property licensing business. And the European Commission joined the fray last month.
Qualcomm’s patents are essential to the CDMA and LTE wireless standards. In the US, companies whose IP contributes to an industry standard must license it on “fair, reasonable and non-discriminatory” terms. This prevents, among other things, price gouging or giving preferential treatment of some customers to limit competition. Europe is similarly worried about price-fixing and market manipulation. And Qualcomm’s licensing practices have been under investigation in China for a year.
Qualcomm’s licences are hugely valuable. The licensing arm, QTL, contributed $8bn in revenues, nearly a third of the total, in 2014. The QTL pre-tax margin is 87 per cent. The margin on Qualcomm’s wireless chip business is 20 per cent. But the chip business is growing, while licensing revenues were flat for the year. These grew by nearly 20 per cent in 2013 (The company attributes the slowdown to licensees under-reporting sales and unlicensed product sales in China).
If Qualcomm is found to have abused its market position in China, the fine could be 10 per cent of the prior year’s revenues earned there. This year, China accounted for half of total revenues, or $13.2bn. One-tenth of that would wipe out 15 per cent of earnings. That is a lot of widgets.
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