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(Image courtesy of Qualcomm).

Qualcomm Wins Nearly $5 Billion in Accord With Apple

Qualcomm said it would make $4.5 billion to $4.7 billion in the current quarter as part of its settlement with Apple over the chip supplier's patent licensing practices. The legal agreement includes a payment from Apple for withheld licensing fees and releases the money it reserved during the dispute to repay or refund Apple or its contract manufacturers, Qualcomm said in a statement.

The announcement came as Qualcomm reported its second quarter results on Wednesday. Qualcomm is struggling amid an ongoing slowdown in smartphone sales and cooling consumer demand. Without Apple's payment, the company said its sales in the third quarter will total $4.7 billion to $5.5 billion, down from $5.6 billion a year ago. With it, Qualcomm projects sales in the range of $9.2 billion to $10.2 billion.

The San Diego, California-based company, previously Apple's primary modem supplier, said the deal will lead to more stability for its business. Licensing payments from Apple will restart in the third quarter of 2019. Qualcomm has also agreed to supply cellular modem chips to be used in future iPhones. With the legal conflict closed, the company expects its profits to swell by $2 per share as shipments of Apple devices ramp up. 

Qualcomm's business is bifurcated. Sales of the company's smartphone chips represent most of its revenue. But the biggest profits come from licensing patents it says cover all the fundamentals of 3G, 4G and 5G technology. Qualcomm charges fees to companies that tap into its vast patent portfolio. Apple's legal challenges centered on Qualcomm's licensing unit, which posted an operating profit of $674 million in the second quarter.

In early 2017, Apple accused Qualcomm of holding its chip supply hostage to inflate its patent royalty rates. During the legal dispute, Apple stopped paying royalties to Qualcomm, which countered by accusing Apple in court of patent infringement. By the end of 2018, Qualcomm said that Apple's unpaid licensing bills totaled more than $7 billion (less than Apple's impending $4.5 billion to $4.7 billion payment to Qualcomm).

Qualcomm declined to detail the terms of its licensing deal with Apple. Qualcomm has long required Apple and other customers tapping its portfolio of around 130,000 patents based on the total selling price of the end product. That was a point of contention with Apple, which asserted that the royalty rate should be based on the selling price of Qualcomm's chips, or a fraction of a premium phone today. Qualcomm disagreed.

The legal battle's resolution is a major boon for Qualcomm. Since the accord was announced last month, Qualcomm's share price has surged more than 50 percent. Not only does the deal preserve Qualcomm's licensing model, it also potentially paves the way for Apple to use Qualcomm's 5G modems in future iPhones. Qualcomm said its 5G sales will start ramping up in 2020 as more 5G services are introduced worldwide.

"We believe the settlement is a win for both companies, and we are pleased with the result and pleased to have it behind us," Steve Mollenkopf, the chief executive of Qualcomm, said on an analyst conference call.

TAGS: Supply Chain
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