What Does The Settlement With Apple Mean For Qualcomm?

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Qualcomm (NASDAQ:QCOM)and Apple (NASDAQ:AAPL) reached a surprise settlement on their two-year long licensing dispute, in what we believe is a win-win for both companies. Below we take a look at some of the developments and what it could mean for the companies.

View our interactive dashboard analysis on What is Qualcomm’s expected performance over 2019? We note that our model for Qualcomm has not been updated for the settlement with Apple. You can modify our forecasts to arrive at your own estimates for the business, and see all of our Technology company data here.

What does the settlement entail?

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While all of the details of the deal have not been made public, below are some highlights:

  • Apple and Qualcomm will dismiss all litigation worldwide.
  • Apple has forged a six-year agreement to license Qualcomm’s patents, effective from April 1, 2019, with a two-year option to extend.
  • The companies have also signed a multiyear chipset supply agreement.

How does Qualcomm benefit from the deal? 

The litigation was taking a meaningful financial toll on Qualcomm, with its adjusted EPS down 14% over the last fiscal year due to a lack of high-margin royalty payments from Apple. Apple is estimated to have withheld over $7.5 billion in royalties owed to Qualcomm, via its contract manufacturers, and a settlement could possibly address these payments.

Qualcomm’s new deal to supply Apple with baseband chips will help the chipset business, which saw revenues drop 20% in Q1’19 following Apple’s shift to Intel modems on the latest iPhones. Apple is the largest mobile vendor by value with ~$160 billion in annual iPhone revenues, and having Apple as a customer will be crucial for Qualcomm’s growth in the 5G era. Moreover, a potential loss against Apple in the patent dispute could have set a precedent, jeopardizing Qualcomm’s lucrative licensing model.

How does Apple benefit from the deal? 

Qualcomm has been a leader in the 5G space, enabling Android vendors such as Samsung to launch their first 5G devices this year. Apple’s current modem vendor, Intel, was believed to be at least a year behind in this race, meaning that a 5G iPhone was only likely around 2021. With the new deal, Apple should be able to launch a 5G device sooner.

A long-term licensing and chip supply agreement may also enable Apple to get more competitive pricing from Qualcomm (although this has not been disclosed). Apple was previously paying roughly $7.50 per iPhone in licensing fees to Qualcomm.

What are the financial implications for Qualcomm?

  • Apple will make a one-time payment to Qualcomm, although the amount was not disclosed. It’s also not clear whether this relates to the unpaid royalties over the last two years.
  • Qualcomm indicated that annual EPS could rise by $2 as modem-chip shipments begin
  • Qualcomm stock soared by 23% to over $70 in Tuesday’s trading, reflecting the more positive outlook.

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