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Why Qualcomm is facing under-reporting in China

Puneet Sikka

Overview: Qualcomm benefits from China's LTE adoption progress (Part 5 of 7)

(Continued from Part 4)

Qualcomm is facing under-reporting in China

In the prior parts of the series, we have been discussing Qualcomm’s (QCOM) issues in China regarding delays in signing licensing agreements with the Chinese smartphone and tablet vendors. There’s another major problem that Qualcomm is facing in China, which is companies under-reporting their device sales. Qualcomm levies royalty charges to these smartphone and tablet vendors for each device that they sell that use its 3G and 4G technology. Qualcomm reports the revenues earned from royalty charges in its technology licensing (or QTL) division.

Qualcomm now expects lower 3G and 4G device shipments to be reported to it

Clearly, some of the Chinese companies who are under-reporting their device sales to Qualcomm are doing it with a motive to pay less royalty charges. According to Qualcomm and as the previous chart shows, it expected 1.3 billion 3G and 4G devices to be shipped worldwide in 2014—up from about 1.08 billion in 2013. However, the problem of under-reporting means Qualcomm now expects only 1.04–1.13 billion 3G and 4G device shipments to be reported to it. This would mean a significant amount of revenue loss for its QTL division.

Revenue loss for Qualcomm also wouldn’t be good news for exchange-traded funds (or ETFs) such as the PowerShares QQQ Trust (QQQ), the iShares Morningstar Large-Cap Value ETF (JKE), the Large Cap Growth ETF (RPX), and the Mega Cap 300 Growth (MGK) that have decent exposure to Qualcomm.

Continue to Part 6

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