Qualcomm to get over $4.5B in Apple Settlement

by Ike Obudulu Last updated on May 22nd, 2019,

Qualcomm Inc. will receive at least $4.5 billion as part of a legal settlement with Apple Inc. that ended more than two years of wrangling over the chip maker’s patent-licensing fees, the company said Wednesday.

The payment—part of a three-pronged settlement between the companies last month—would range from $4.5 billion to $4.7 billion, based on how the accounting ultimately works out, Qualcomm Chief Executive Steve Mollenkopf said.

How much is an apology worth? Well, if you’re Apple, it turns out the number is at least $4.5 billion, which is the amount that Qualcomm revealed in its Q2 earnings it will get from the settlement agreement between the companies, which had previously been embroiled in an ugly patent dispute for the past few years.

The Apple / Qualcomm settlement was an unexpected shift that came early in the trial between the two companies. Apple had reportedly decided that Intel’s modems (which Apple had been exclusively using in the interim due to its fight with Qualcomm) wouldn’t be ready in time for a 5G iPhone, leading Apple to pony up the newly revealed sum of between $4.5 to $4.7 billion to make up with Qualcomm. That amount of money is separate from any future royalties that Apple will pay for using Qualcomm chips in its devices going forward, too.

As for Apple, its billions have bought the company a six-year global patent licensing agreement with Qualcomm, with an option to extend it for another two years after that, ending the legal fights with the chip company around the world and gaining Qualcomm’s services as a parts supplier for future devices. That’s critical for Apple, given that with Intel’s withdrawal from the 5G modem market for phones, Qualcomm is essentially the only game in town — until or unless Apple begins producing its own.

“We are also pleased to have reached multi-year agreements with Apple and look forward to continuing to support them as a customer,” reads a statement from Qualcomm CEO Steve Mollenkopf.

In case you’re wondering how much $4.5 billion really is to Apple, Apple now has roughly 50 times that amount — $225.4 billion — of cash on hand alone.

Excluding that payment, Qualcomm estimated $4.7 billion to $5.5 billion in revenue, generally below the $5.29 billion analysts were expecting, according to IBES data from Refinitiv.

The shortfall was driven by a weak Chinese smartphone market, where Qualcomm believes consumers are holding off on buying new phones until new 5G networks roll out later this year.

“We’re looking forward to having a 5G Christmas as the year ends,” Cristiano Amon, Qualcomm’s chip chief, said on a conference call with investors.

Qualcomm estimated $1.23 billion to $1.33 billion in revenue for its licensing business in the third quarter, above analysts’ consensus forecast of $1.22 billion.

The licensing revenue outlook includes royalties from sales of Apple products. Apple on Tuesday said its gross margin guidance, which was largely unchanged from previous quarters, included the Qualcomm settlement. The two disclosures suggest little short-term financial impact from the patent licensing deal.

It’s not certain how much Apple is paying in ongoing fees, but that could become more apparent when Apple resumes using Qualcomm chips in iPhones and iPads (possibly this fall). It’s safe to say Qualcomm’s success won’t hinge on iPhone revenue, then — it’s more of a bonus on top of the company’s existing dominance in the wireless world.

Qualcomm Inc shares fell about 3.5% on Wednesday as investors got their first look at the bottom line impact of a patent fight settlement with Apple Inc, including a multibillion dollar one-time payment and more modest future patent fees.

The stock kept most of the 50%-plus gains of the past few weeks, reflecting investor relief that Qualcomm had found a path to resume supplying chips to the iPhone. But Qualcomm’s forecasts suggested Apple’s licensing fees were not a big enough revenue boost to offset a weakening smartphone market.

Qualcomm executives cited economic weakness in China as a reason for the lower-than-expected sales forecast. Apple said on Tuesday it saw a slight uptick in China sales toward the end of its fiscal second quarter, following cuts in iPhone prices and other factors.

Qualcomm remains in a license dispute with Huawei Technologies Co Ltd, but the Chinese company has been making interim payments as negotiations continue. Qualcomm resolved a dispute with Samsung Electronics Co Ltd last year.

“We feel that the Apple resolution enhances our ability to resolve issues with Huawei,” Alex Rogers, Qualcomm’s patent licensing chief, said on a conference call with investors.

Qualcomm is awaiting a federal judge’s decision in a U.S. Federal Trade Commission lawsuit alleging antitrust violations that mirrored Apple’s claims. The outcome remains unclear after Apple, the major source of witnesses in the case, dismissed similar lawsuits of its own.

Net income attributable to Qualcomm rose to $663 million, or 55 cents per share, in the quarter ended March 31, from $330 million, or 22 cents per share, a year earlier.

Revenue fell to $4.88 billion, but beat analysts’ estimates of $4.80 billion.

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