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Qualcomm expects to lose a large customer's flagship device

The world's largest mobile-chips company cut its guidance Wednesday, suggesting that Samsung won't use its latest processor for its next Galaxy S smartphone.

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Qualcomm has faced challenges recently, but it remains the leader in mobile chips. Ben Fox Rubin/CNET

Qualcomm is losing its spot in one of the industry's marquee smartphones.

The company cut its guidance for the year on Wednesday, saying it expects a large customer to opt not to use its new Snapdragon 810 chip in its flagship device.

The disclosure comes just days after Bloomberg reported that Samsung plans to drop the 810 and use its own Exynos chip for its next Galaxy S smartphone, which is widely expected to be unveiled at the Mobile World Congress show in March. Samsung's decision, Bloomberg said, resulted from Samsung tests that showed the chip overheated -- an alleged problem that's been rumored about the chip in recent weeks.

Qualcomm's report Wednesday provides a strong indication that the next Galaxy S won't include an 810 chip, although it's not yet clear whether Qualcomm will end up with a second-place prize by getting its modem chip in the phone instead.

Shares of Qualcomm, the world's largest maker of mobile chips, dropped 8 percent after hours to $65.22 -- below its 52-week low -- despite the company beating market expectations for its fiscal first quarter, which also were reported Wednesday.

Qualcomm executives offered a strong defense of the 810 chip during a call with analysts, saying there were no design concerns with the chip, except for the issues brought up by that one customer. They said the 810 will be used in over 60 devices coming out. It's already being used in the new LG G Flex 2 and Xiaomi Mi Note Pro.

"The device is working the way we expected it to work and we have design traction that reflects that," CEO Steven Mollenkopf said on the call. "If you look at the number of designs -- over 60 -- it's essentially won all the premium designs across multiple ecosystems...So, we're quite pleased with how that is performing."

Mollenkopf added that Qualcomm plans to go back to using its own customized Krait processors for its next Snapdragon, instead of a licensed design from British chips company ARM, to make sure its offering is different than the competition. Qualcomm turned to an ARM design for the 810 to ensure it could come to market quickly with more robust 64-bit computing technology.

Qualcomm has been going through a rough patch during the past year, with a string of negative news weighing on its quarterly results and stock. It's had to deal with a long-standing anti-monopoly investigation in China and the report last week that it may lose some business from Samsung, the biggest smartphone maker in the world. Qualcomm also has to fight off new challenges from rivals Intel, MediaTek and Marvell, after it had managed to keep the high-end phone market essentially for itself.

Despite these difficulties, Qualcomm maintains a strong leading position in mobile chips, so that dominance can't easily be eroded. Its chips are used in just about every major flagship smartphone, including Apple's iPhone 6 and Samsung's Galaxy Note 4. Its leading technology for processors, which handle computing, and for radio chips, which connect devices to wireless networks, allowed it to control more than 40 percent of the mobile chips market in 2013, according to Gartner -- more than the next eight vendors combined.

Along with losing the large customer, Qualcomm also blamed its lower guidance on more intense pricing competition in China and its shift to selling more modem chips, instead of its more expensive integrated processor and modem chips, to top-tier device makers. That shift points to Apple, which posted surging iPhone sales Tuesday. Apple uses only Qualcomm's modem chips and an Apple processor.

Qualcomm now expects its per-share profit for the year to drop by 7 percent to 13 percent, from its previous estimate of break-even to a drop of 7 percent. The revenue outlook was also trimmed by $800 million, to $26 billion to $28 billion.

Qualcomm on Wednesday reported net income of $2 billion, or $1.17 a share, for the quarter ended Dec. 28. That was up from $1.9 billion, or $1.09 a share, a year earlier. Profit, excluding some special items, grew to $1.34 from $1.26. Revenue rose 7 percent to $7.1 billion.

Analysts polled by Thomson Reuters expected $1.25 a share in adjusted profit and sales of $6.94 billion.

The equipment and services segment, which includes chipset sales, reported 12 percent higher revenue at $5.2 billion. Licensing revenue was down 4 percent to $1.9 billion.

Qualcomm's highly profitable licensing business has been the focus of an antimonopoly investigation in China -- one of the company's biggest markets -- since November 2013. The investigation could result in a hefty fine and the company being forced to accept lower royalty payments from licensees. Still, many Wall Street analysts expect that just about any resolution, save a worst-case scenario, will drive Qualcomm's stock higher, since a deal will remove uncertainty about Qualcomm's future.

The company said Wednesday it resolved a recent dispute with a large Chinese licensee and is making progress toward a resolution in the anti-monopoly investigation.

US and European regulators are also looking into Qualcomm's business practices, though most attention has been focused on the China investigation, since a major change there could have a big impact on Qualcomm.

Updated, 3:45 p.m. PT: Adds more details from executives' call with analysts.