Qualcomm to reportedly pay $1B fine to end Chinese licensing probe

Qualcomm (NASDAQ:QCOM) will likely pay a fine of up to $1 billion and cut its royalty rates by around a third on patents used in China to settle an investigation into the company's licensing practices there, according to a Reuters report.

The report, citing unnamed sources, said that the deal could be announced imminently. The report said senior Qualcomm executives held discussions over the probe on Friday with officials from China's National Development and Reform Commission (NDRC), which has been investigating Qualcomm since November 2013.

Meanwhile, China's state-run Securities Times newspaper reported the fine could be as much as $1.6 billion. Qualcomm will likely be punished in the next few days, the newspaper said, citing unnamed sources. The Securities Times also cited Xu Kunlin, head of the NDRC's antitrust division, as saying that the penalty may be several times larger than all similar fines the agency imposed last year.

Qualcomm declined to comment, according to Reuters.

The fine would likely be the largest paid by any company in China. Qualcomm would also agree to make changes to its licensing practices--but the company is not expected to change its business model, according to Reuters.

Qualcomm has been struggling to secure licensing revenue from some China device makers, according to Reuters. That's particularly troubling for Qualcomm at a time when Chinese carriers are rolling out LTE networks and more device makers are selling LTE devices. Qualcomm derives most of its profit from licensing fees and most of its revenue from sales of chipsets and modems.

In a statement in late January accompanying its latest quarterly earnings, Qualcomm said that despite settling one dispute with a licensee in China, it still believes some customers in China are underreporting sales of licensed chips amid the NDRC probe. "We are taking steps to address these issues, although the outcome and timing of any resolutions are uncertain," Qualcomm said.

Investors fear any concessions Qualcomm gives on licensing fees could spread to other device makers in other markets.

The implications for Qualcomm are profound, especially because 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, if Qualcomm were to resolve the investigation in China, it would at least provide investors with clarity and give the company a better sense of how to proceed with its business in China. "If true, this would be very positive news for Qualcomm as it has been the 'monkey on their back' for the last year," Patrick Moorhead, president of Moor Insights and Strategy, told CNET. "Investors don't like uncertainty and this would remove most of uncertainty of the stock."

For more:
- see this Reuters article
- see this Bloomberg article
- see this CNET article

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