Qualcomm agrees to $975M fine to end China dispute

Qualcomm (NASDAQ:QCOM) announced a "resolution" with China's National Development and Reform Commission, which has been investigating Qualcomm's patent-licensing business in the country. Under the agreement, Qualcomm will pay a $975 million fine and will modify some of its business and licensing practices. The company also updated its revenue and earnings expectations due to the resolution.

While the fine represents an obvious dent in Qualcomm's business, the company's stock rose slightly on the news as Wall Street investors breathed a sigh of relief that the issue is now behind the company. Reports had indicated that Qualcomm was nearing a settlement and a $1 billion fine, though reports had indicated the fine could reach as high as $1.6 billion.

"We are pleased that the resolution has removed the uncertainty surrounding our business in China, and we will now focus our full attention and resources on supporting our customers and partners in China and pursuing the many opportunities ahead," Qualcomm CEO Steve Mollenkopf said in a release.

Aside from the fine, Qualcomm laid out some specific changes to its business it will make as a result of the resolution. Interestingly, the company revealed its patent-licensing rates--a figure the company generally doesn't make public. The company said:

  • It will offer licenses to its current 3G and 4G essential Chinese patents separately from licenses to its other patents.
  • Qualcomm will charge a 5 percent royalty rate for most 3G devices in China and 3.5 percent for most 4G devices. The company's existing licensees will be able to move to the new rates now. As Bloomberg pointed out, the new rates will likely funnel more profits to Chinese smartphone makers like Xiaomi and Lenovo.
  • And "Qualcomm will not condition the sale of baseband chips on the chip customer signing a license agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in its license agreement," the company said. However, Qualcomm noted this doesn't require it to sell chips to any entity that is not a Qualcomm licensee, and does not apply to a chip customer that refuses to report its sales of licensed devices as required by its patent license agreement.

Qualcomm said it "disappointed" with the results of the resolution but that it will not pursue further legal proceedings contesting the results. 

As a result of the resolution, Qualcomm said it now expects revenues in its fiscal year ending Sept. 27, 2015, of between $26.3 billion and $28 billion, up slightly from its previous range of $26 billion to $28 billion. But the company said earnings per share will clock in between $3.56 to $3.76, down from prior guidance range of $4.04 to $4.34, largely due to the fine.

Qualcomm has been struggling to put its patent-licensing problems in China behind it: Chinese carriers are rolling out LTE networks and more device makers are selling LTE devices, creating a major opportunity for Qualcomm and other smartphone and silicon vendors. Qualcomm derives most of its profit from licensing fees and most of its revenue from sales of chipsets and modems.

Indeed, China is the world's largest smartphone market. For the fiscal year that ended Sept. 28, Qualcomm earned about half its global sales of $26.5 billion in China.

However, Qualcomm continues to face increasing challenges across the globe and in China specifically. As Reuters pointed out, China's MediaTek and other silicon vendors are working to encroach on Qualcomm's turf. Citing data from Strategy Analytics, Reuters reported that Qualcomm's global share of LTE baseband chips slipped to 89 percent in the second quarter, from 95 percent a year before, mainly due to challenges from Chinese competitors.

For more:
- see this release
- see this Reuters article
- see this separate Reuters article

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Article updated Feb. 10 with additional commentary.

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