Qualcomm Inc. (NASDAQ:QCOM) shares collapsed on this mornings’ market after the company released its earnings report for the three months through June on Wednesday afternoon. The big problem apparently inherent in the company’s figures was a fall off in licensing revenue it expected to be paid in the quarter. That’s not a problem that’s going away according to a report on the firm from BMO Capital Markets.

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Tim Long, who authored the report on Qualcomm Inc. (NASDAQ:QCOM) said “Chinese OEMs not paying royalties is not news to us, particularly after our last visit in June. However, the magnitude that QCOM is expecting is more material than we would have thought.” Investors are once again nervous about the ability of American companies to enforce their IP in China, and it’s no wonder.

Qualcomm loses 200 million units to China

The BMO analyst reckons that complete royalties were not, and will not be, paid on about 200 million units of 3G and 4G chips used in China this year. Qualcomm Inc. (NASDAQ:QCOM) is suffering as a result, but there’s no clear end to the problem according to Mr. Long. There is more than one problem at the root of the shortfall in licensing, and the problem could get much worse before it gets better.

According to his take on the company’s quarter, “The magnitude of the reduction to royalties is meaningful, and we have no visibility into whether or not these revenues will return, or if others will stop paying. We see the impact to EPS in the base case as $0.20-$0.25, and twice that amount if no Chinese vendors ever pay.”

The three problems, which the Qualcomm Inc. (NASDAQ:QCOM) executives spoke about in relation to the China issue, include a licensing dispute with a major OEM, some licensees not paying their entire obligations, and some licensees not paying anything at all, instead just shipping their phones without any license on the wireless chips whatsoever.

This, according to the report “presents a meaningful overhang for the stock. We have no visibility into when these companies will pay, how much they will pay, and if others will decide not to pay. However, QCOM is still a very important supplier to many of the Chinese vendors.”

Qualcomm marches on despite problems

Despite the discouraging problems in its Chinese business, Mr. Long thinks that Qualcomm Inc. (NASDAQ:QCOM) still has a strong future ahead of it. The analysts lowered their price target, down to $86 per share from $88, but raised their earnings estimates, but left a large amount of room to grow from this morning’s stock price. Shares in Qualcomm lost more than 6% of their value on today’s market after traders demonstrated their disappointment in the company’s results.

The China problem is a difficult one to map, as Mr. Long rightly concluded, and it leaves an overhang over the company in what is supposed to be one of its most vibrant markets. Qualcomm Inc. (NASDAQ:QCOM) will get over this problem eventually, but it won’t be easy. At this point there’s enough profit to be had in the Chinese wireless market to accept a certain theft-tax. The company will be looking for government officials to close the holes in its accounts, however.