QUALCOMM’S APPLE BILLS MAY PILE UP

Withheld royalty payments on Apple devices could cloud Qualcomm’s outlook this year

Call it the case of the missing billion(s).

That is the mystery facing Qualcomm ’s QCOM -1.12% shareholders heading into the company’s fiscal secondquarter report next week.

It stems from the company’s escalating dispute with Apple Inc., AAPL -0.53% in which the world’s most valuable company has accused Qualcomm of charging exorbitant licensing fees for the use of its intellectual property.

Qualcomm fired back with its own claims earlier this week, accusing Apple of building its blockbuster iPhone business on the back of Qualcomm’s technology, while trying to undermine the chip maker and gain access to that technology on the cheap.

The two sides, needless to say, remain far apart and are digging in for a battle that likely will take years. But for Qualcomm, a more near-term concern has arisen. In its counterclaim, Qualcomm says Apple and several contract manufacturers which assemble Apple’s products are withholding licensing payments to Qualcomm. The precise amount was redacted from the publicly available filing. And it should be noted that Apple claims Qualcomm is sitting on about $1 billion in “rebate” payments promised to the company.

So investors are left to wonder just how much could be missing. If the money withheld from Apple and its partners is equal to the amount Qualcomm is allegedly withholding, then the impact is limited. The worst-case scenario would be to have all royalty payments from Apple’s devices held in limbo. Srini Pajjuri of Macquarie Capital estimates that Apple royalties account for about 12% of Qualcomm’s total revenue and as much as 30% of its per-share earnings.

Whatever the impact, investors are right to wonder how the case will color Qualcomm’s outlook for this year and beyond. Licensing accounts for about one-third of the company’s total revenue—and a majority of its operating profit. Analysts were expecting Qualcomm to edge back to slight overall growth this year following two consecutive years of revenue declines. To do that, licensing will have to deliver. Wall Street expects Qualcomm’s licensing revenue to grow about 5% to about $8 billion for the fiscal year ending in September.

Qualcomm’s share price is down 19% so far this year, making it the worst-performing chip stock. At less than 9 times forward earnings excluding net cash, the market has already priced in a rather dim view of the company’s prospects. But Qualcomm’s recent run of bad luck—including an embarrassing loss to BlackBerry in an arbitration case earlier this week—have yet to give investors a good reason to brighten.