Qualcomm warns of profit hit as Apple battle intensifies

(Reuters) - Qualcomm Inc slashed its current-quarter profit and revenue forecasts on Friday, amid an escalating legal battle between the chipmaker and Apple Inc.

A Qualcomm sign is pictured at one of its many campus buildings in San Diego, California, U.S. April 18, 2017. REUTERS/Mike Blake

Apple said it had decided to withhold royalty payments to its contract manufacturers until the dispute is resolved in court.

The payments made by Apple to its contract manufacturers are, in turn, owed by the contractors to Qualcomm in royalties, according to the chipmaker’s licensing business model.

The iPhone maker sued Qualcomm in January, accusing it of overcharging for chips and refusing to pay some $1 billion in promised rebates.

Qualcomm, the largest maker of chips used in smartphones, is a major supplier to Apple and Samsung Electronics Co Ltd for modem chips that connect phones to wireless networks. The two companies together accounted for 40 percent of Qualcomm’s revenue in its latest fiscal year.

“Without an agreed-upon rate to determine how much is owed, we have suspended payments until the correct amount can be determined by the court,” an Apple spokesman said on Friday.

Apple also noted it had been trying to reach a licensing agreement with Qualcomm for more than five years, but said Qualcomm had refused to negotiate “fair terms”.

“Apple has now unilaterally declared the contract terms unacceptable; the same terms that have applied to iPhones and cellular-enabled iPads for a decade,” Don Rosenberg, Qualcomm’s general counsel, said in a statement.

Qualcomm said it will not receive royalties from Apple’s contract manufacturers for sales during the quarter ended March 31, and that its forecast for the third fiscal quarter now excludes that revenue.

“Even if one believed this was a worst case scenario (for Qualcomm), we struggle to see a resolution anytime soon as the parties entrench,” Bernstein analyst Stacy Rasgon said.

“We suspect this is going to continue to get uglier,” he added.

Qualcomm now expects revenue of $4.8 billion-$5.6 billion for its third fiscal quarter, down from the $5.3 billion-$6.1 billion it had previously expected.

The company lowered its forecast for current-quarter adjusted profit to 75-85 cents per share, from 90 cents-$1.15 per share.

“(Apple’s) contract manufacturers may make some form of partial payment, but initial indications are that any payment would likely be insignificant,” Qualcomm said.

Through Thursday, Qualcomm’s shares had fallen 17 percent since Apple’s lawsuit. The stock — the worst performer this year on the Philadelphia semiconductor index — was down 0.7 percent at $52.86 in midday trading.

Reporting by Anya George Tharakan in Bengaluru; Editing by Sai Sachin Ravikumar