Qualcomm offers sunny financial outlook while promising to battle Apple, FTC lawsuits

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Qualcomm’s top executives spent virtually all of their time during their quarterly call with investors defending Qualcomm’s licensing business and its overall position in the market.

Qualcomm reported increases in its revenues and profits in its quarterly report yesterday, but the company’s top executives spent virtually all of their time during their quarterly call with investors defending Qualcomm’s licensing business and its overall position in the market. Importantly, Qualcomm’s management spoke out aggressively against Apple’s recent $1 billion lawsuit against the company.

“Our preference is always to resolve customer disputes through negotiations, instead of litigation. So it is regrettable that Apple has chosen to take this path. We are well prepared and confident in our ability to successfully defend against Apple's claims,” Qualcomm CEO Steve Mollenkopf said during the company’s fiscal first-quarter earnings conference call with investors, according to a Seeking Alpha transcript of the event. “Apple's complaint contains a lot of assertions. But in the end, this is a commercial dispute over the price of intellectual property. They want to pay less than the fair value that Qualcomm has established in the marketplace for our technology, even though Apple has generated billions in profits from using that technology.”

In follow-up comments, Qualcomm President Derek Aberle explained that Apple’s complaints center on whether Apple’s iPhone manufacturers should pay patent royalties based on the cost of Qualcomm’s chips or on the actual selling price of the iPhone. Aberle argued that Qualcomm’s patent licensing business goes beyond just Qualcomm’s silicon and should therefore be based on the full cost of a phone rather than just the chips inside it.

While they didn’t disclose their overall legal strategy, Qualcomm executives hinted that the company may countersue Apple.

However, while offering a staunch defense of Qualcomm’s licensing business, company executives also sought to allay investor fears of a protracted battle between the world’s largest supplier of smartphone chips and the world’s second largest smartphone vendor. “Let me say that, historically, we’ve had a strong relationship with Apple, and they have been a long-standing and valued customer,” Mollenkopf said. “We intend to remain a good supplier to Apple, even while this dispute continues, and believe there is no better long-term partner for Apple than Qualcomm and our industry-leading technology. We believe that our strong and highly differentiated product roadmap will continue to be the foundation for our relationship, and covers a broad range of technologies that will be fundamental to new products for years to come.”

Fortune noted that Apple declined to respond to Mollenkopf’s comments.

To be clear, Apple’s lawsuit against Qualcomm is just one of several major legal actions ongoing against the silicon vendor. The American and Korean governments have also taken legal action against Qualcomm, with the U.S. Federal Trade Commission arguing that it has used anticompetitive tactics to “maintain its monopoly” as the dominant vendor of semiconductors for phones and other mobile gadgets. The agency said Qualcomm imposed “onerous and anticompetitive supply and licensing terms” on hardware manufacturers, violating the FTC Act on several fronts.

As a result, Qualcomm’s stock has fallen from around $65 per share at the beginning of January to around $54 today.

“We have a long history of successfully defending our licensing practices and business model, which have been tested around the globe,” Mollenkopf noted. “The resilience of our practices reflects both the fundamental and differentiated contributions we make to the core technology, enabling the smartphone platform and the mobile industry as a whole. We invest heavily to push the technology boundaries for the benefit of our licenses and their customers, and the industry as a whole. And their licenses become more valuable and comprehensive over time.”

Indeed, Qualcomm has successfully fought back against Chinese efforts to alter the company’s patent-licensing business, as well as investor efforts to separate Qualcomm’s chipset business from its intellectual property assets.

Qualcomm’s vigorous defense of its licensing business—which Fortune noted accounted for fully three-quarters of Qualcomm’s profits during its last fiscal year—comes amid expectations by Qualcomm that its financial situation is improving. As the Wall Street Journal noted, Qualcomm’s revenues in its most recent quarter increased 6.2%, and its net income would have risen 21% if it were not for the $868 million charge levied in December by the Korean Fair Trade Commission.

Further, Qualcomm said it expects its adjusted earnings per share will grow between 11% and 20% and its revenue would grow 13% in the coming year. The company pointed to growth opportunities including its pending acquisition of NXP for the automotive industry and its recent announcement that Microsoft will use its Snapdragon processors in some of its devices, including PCs.

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