Qualcomm delivers blowout Q3, but cuts outlook over China woes

Qualcomm delivered strong fiscal third quarter sales as the mobile processor player rode smartphone and tablet shipments, but cut its outlook due licensees in China who "are not fully complying with their contractual obligations to report their sales of licensed products to us."

The company reported third quarter earnings of $2.24 billion, or $1.31 a share, on revenue of $6.81 billion, up 9 percent from a year ago. Non-GAAP earnings for the quarter ware $1.44 a share.

Wall Street was looking for non-GAAP earnings of $1.22 a share on revenue of $6.52 billion.

That strong quarter won't repeat. Qualcomm cut its outlook for the fourth quarter over issues in China. For instance, the China National Development and Reform Commission (NDRC) is investigating Qualcomm's business practices. Then there are licensees in China not reporting sales that would give Qualcomm revenue.

Regarding that flap, Qualcomm said:

We also believe that certain licensees in China currently are not fully complying with their contractual obligations to report their sales of licensed products to us (which includes certain licensees underreporting a portion of their 3G/4G device sales and a dispute with a licensee) and that unlicensed companies may seek to delay execution of new licenses while the NDRC investigation is ongoing. We expect calendar year 2014 3G/4G device shipments to be approximately 1.3 billion globally. However, our estimate of calendar year 2014 3G/4G device shipments that we currently expect to be reported to us is approximately 1.04 billion to 1.13 billion, which is adjusted for units that we believe may not be reported to us, are in dispute or are currently unlicensed. We are taking steps to address these issues, although the timing of any resolution is uncertain.

That uncertainty has resulted in a serious revenue hit. 

On a conference call with analysts, Qualcomm president Derek Aberle said the company hopes to resolve the licensing issue with the customer. As for the regulatory probe in China, Aberle said Qualcomm is cooperating with the government.

Executives reiterated that China was a key growth market and Qualcomm is working to sign LTE licenses with various OEMs.

Here's Qualcomm's outlook and its previous guidance.

Fortunately for Qualcomm, its blowout third quarter minimizes the hit for the fiscal year.