Qualcomm’s earnings show cash flow under siege; selling out of Dividend Portfolio

The earnings Qualcomm (QCOM) reported yesterday, July 19, were okay. Earnings of 83 cents a share for the June quarter, in fact, beat the Wall Street consensus by two cents a share. Revenue of $5.37 billion was ahead of analyst projections of $5.25 billion, but still represented a drop of 11.1% year over year.
 
But boy, oh boy, did guidance paint a grim picture. For the September quarter the company forecast earnings per share of 75 to 85 cents, well below the 91 cents of analyst estimates for the quarter. Revenue would be $5.4 to $6,2 billion against the $5.48 billion Wall Street consensus.
 
The problem is that Qualcomm’s business model is under attack by the company’s customers. Apple (AAPL) and contract manufacturers who work for Apple have challenged the royalties they pay Qualcomm to use its chips in their phones. Qualcomm projects that sales in the company’s licensing division, which collects fees for use of its mobile technology, will sink as much as 47% to as little as $1 billion for the September quarter–if you exclude all the patent payments connected to Apple and other companies disputing the royalties.
Unfortunately for Qualcomm that isn’t the only problem facing the company and its royalty payments. The company, which uniquely for the chip sector gets the majority of its profits from royalties on its patents (and the company currently collects royalties on its technologies even from companies that don’t use Qualcomm chips in their phones), is facing multiple “inquiries” into those payments from government regulators around the world. Qualcomm has also seen its acquisition of NXP Semiconductor (NXPI) challenged on anti-trust grounds by European regulators. Qualcomm has cited that deal as a way for the company to expand into markets that are growing faster than the maturing smart phone sector.

There’s a good likelihood that Qualcomm will win some of these actions and that it will strike deals with many of its customers on royalty payments (and that it’s deal to acquire NXP Semiconductor will win approval.) Dividend income investors, however, have to weigh the possibility of an erosion in the company’s cash flow from the loss of revenue and income from those patents against the 4.01% yield paid by the shares. It’s a tough fact of the dividend investor’s life that it doesn’t take a much in the way of a downturn in the price of shares to more than offset a 4.01% yield.

At the moment, I think the potential continued downside–the shares are down 12.9% year to date in 2017 (as of the close on July 19) and down 5.39% for the last 12 months–outweighs that yield. I’m selling these shares as of July 20 out of my Dividend Portfolio. The shares are up 11.51% as of the close on July 19 since I added them to the portfolio on May 5, 2016.