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Qualcomm's China troubles dampen earnings

Adding to its antitrust problems in China, the chipmaker says it's now under investigation by US and European government agencies.

Qualcomm Steve Mollenkopf, who took over as CEO of the mobile chipmaker in March, now faces a handful of government investigations. CNET

Qualcomm's legal headaches keep growing.

The leading maker of mobile chips that power top-selling smartphones from Apple's iPhone to Samsung's Galaxy S5, Qualcomm is facing two new government probes, adding to the pressure from an investigation launched last year in China over whether it violated the country's anti-monopoly laws.

The U.S. Federal Trade Commission notified the San Diego-based company of an investigation on September 17, while the European Union told Qualcomm of its own probe on October 15, Qualcomm said Wednesday. The news was delivered as part of Qualcomm's earnings report. The company delivered a 26 percent jump in profit, but earnings trailed market estimates after its licensing business dragged on results for the second straight quarter.

Investors weren't happy, sending the shares down 6 percent in after hours trading to $72.60. Qualcomm's guidance for the new year was also not as high as Wall Street was expecting.

Qualcomm is the No. 1 provider of wireless processors and communication chips, with its technology used by most of the world's smartphones makers. CEO Steve Mollenkompf, who took over in March, is working to expand into wearables, automotive and connected devices. He's made a big bet on those technologies with the $2.5 billion acquisition agreement last month of British chipmaker CSR. The deal, set to close next year, is expected to turn up the heat on chip rivals Broadcom, which has a big stake in connectivity chips, and Intel, which has struggled for years to break into the mobile space.

But Qualcomm remains vulnerable in China, the biggest mobile phone market in the world. The investigation there could result in a hefty fine and the company being forced to accept lower royalty payments in its highly profitable licensing business, which generally accounts for about a third of sales and two-thirds of profit.

The licensing business has been the focus of an anti-monopoly investigation by Chinese authorities since November 2013. At the same time, Qualcomm said some Chinese licensees were under-reporting their sales and that it's in a licensing dispute with another Chinese firm, situations which have cut into Qualcomm's royalty payments. Qualcomm said the under-reporting was dragging down its estimates for the reported number of devices being shipped with its chips.

Asked why the licensee problems were happening during the investigation in China, Qualcomm President Derek Aberle said the uncertainty of the probe was causing "a little bit of licensees pushing the envelope." Licensees appeared to think "they can get away with" under-reporting their royalty payments to Qualcomm, he said during a call with analysts Wednesday. He added that the company has dealt with such problems before and is working to resolve them.

The new probes just add to those woes. Qualcomm said the FTC is also looking into its licensing business, while the EU is looking into Qualcomm's sale of some of its chipsets.

The investigations, as well as a lawsuit filed in September from chip rival Nvidia, may become a distraction for Mollenkopf as he works to stay ahead of competitors in the fast-paced mobile industry. While the licensing business has taken a hit, though, Qualcomm's profits overall have kept rising.

"These are very preliminary," Qualcomm's general counsel, Donald Rosenberg, said on the analyst call when asked about the FTC and EU probes. "They're in the information-gathering stages, in both cases."

Qualcomm executives said the result of the new investigations are unclear, but they signaled that neither was likely to end anytime soon. The company said it plans to spend more on legal costs next year.

Overall, Qualcomm reported net income of $1.9 billion, or $1.11 a share, for the fourth quarter ended September 28, up from $1.5 billion, or 86 cents a share, a year earlier.

Profit, minus some costs, rose to $1.26 from $1.05. Sales were up 3 percent to $6.69 billion. Analysts polled by Thomson Reuters expected $1.31 a share in profit and sales of $7.02 billion.

The equipment and services segment, which includes chipset sales, saw 6.9 percent higher revenue at $4.8 billion during the quarter. Licensing revenue was down 4.9 percent to $1.9 billion.

For the new fiscal year, Qualcomm predicted profit, minus some costs, of $5.05 to $5.35 a share on sales of $26.8 billion to $28.8 billion. Wall Street was looking for $5.58 a share and $28.9 billion in revenue.

Updated, 4:43 p.m. PT: Adds more context throughout and executive comments from analyst call.