Qualcomm said that it has resolved a prolonged legal dispute with Huawei and hammered out a global patent licensing agreement with the world's largest smartphone manufacturer, dispelling uncertainty as it looks to tap growth from the latest 5G handsets.
In a settlement, Huawei will pay Qualcomm $1.8 billion to cover royalty payments owed in 2019—based on its former global licensing agreement—and the first six months of calendar 2020—based on the new patent license. While details of the deal are confidential, Qualcomm said the pact includes a cross license agreement granting rights to certain Huawei patents.
Steve Mollenkopf, Qualcomm's chief executive officer, said on Wednesday he was pleased with the Huawei truce, and he said the patent deals would bolster its business by bringing in more royalty fees in the future. The deals also dissipated the legal uncertainty hanging over the company, which is trying to translate its early lead in 5G into stronger sales growth.
The company also gave a better-than-expected forecast for the fourth quarter, signaling a bump from the rollout of new 5G handsets. “We are anticipating the next inflection point in our 5G ramp to start in the fiscal fourth quarter with strong year-over-year growth in revenue and earnings per share, leaving us well-positioned for continued growth," said Mollenkopf.
The announcement came as the world's largest vendor of smartphone chips reported its results for the three months ending in June. Overall sales—not accounting for the billions of dollars in legal payments from Apple last year—slipped slightly to $4.89 billion over the last year. Profit plunged to $845 million year over year, down from $2.15 billion. The company's earnings declined to 74 cents per share, from $1.75 per share around a year ago.
The company said it shipped out 130 million chips over the last quarter, a decline of more than 15% compared to the same quarter last year but within its guidance of 125 million to 145 million. Qualcomm foresees shipments of 145 million to 165 million units in the fourth quarter. But it warned the total would depend on the pace of the economic recovery in the wake of the coronavirus, which has led to more than 150,000 fatalities in the US to date.
The company's sales of baseband modems and other chips came to $3.80 billion, up from $3.60 billion over the last year. The licensing business fell by 20% to $1.04 billion in revenue.
Qualcomm said it expects global shipments of smartphones falling 15% year over year in the current quarter, weighed down by fallout from the global crisis surrounding the coronavirus. The outlook reflects an impact from the delayed launch of a global flagship 5G smartphone. The company did not name the customer encountering the delays. But Apple is reportedly pushing out the launch of its latest iPhone due to complications related to the pandemic.
The company is looking to take advantage of its early lead in 5G technology, which it hopes will breathe new life into the global smartphone market that has stagnated in recent years.
Qualcomm forecast sales in the current quarter of $7.3 billion to $8.1 billion, up from around $4.3 billion in the fourth quarter of last year, bolstered by the Huawei pact. Profit is projected to be roughly $2.12 to $2.32 per share in the final quarter of its fiscal year. "Looking forward, we have a strong foundation of growth across our product and licensing businesses," chief financial officer Akash Palkhiwala said on an conference call with analysts on Wednesday.
Palkhiwala said it was keeping its 2020 estimate for 5G global phone shipments unchanged. Last year, it forecast between 175 million and 225 million shipments of 5G handsets in 2020.
“As 5G continues to roll out, we are realizing the benefits of the investments we have made," Mollenkopf said. There are more than 660 devices currently on the market or development based on its 5G platforms or X55 modem paired with a separate Snapdragon processor, the company said. He said its customers have a “strong pipeline” of products headed into 2021. Around 60% of all smartphones sold in China last quarter contained 5G modems, he said.
Qualcomm sells more baseband modems and other chips for use in smartphones than any other vendor in the world. But the company makes more than 50% of its overall profit from licensing patents that are essential to 3G, 4G, and 5G technology and then collecting royalty fees from major smartphone makers—whether or not it sells semiconductors to them. The firm said that it has amassed a vast portfolio of more than 130,000 patents over the years.
But the licensing business has been besieged over the last couple of years. Apple and other customers have revolted against Qualcomm, complaining that it overcharges for its patents.
Qualcomm resolved its prolonged legal battle with Apple over its royalty rates last year. As part of the deal, Apple said it would pay at least $4.5 billion to Qualcomm to cover royalties it refused to pay during the dispute. Apple also agreed to new licensing terms with Qualcomm and hammered out a long-term supply deal covering the modem chips used in the iPhone .
Huawei halted royalty payments to Qualcomm in 2018 as part of a dispute over its patent fees. Last year, Qualcomm said that it hammered out a short-term deal with Huawei, which agreed to pay some of its backed royalty fees while it worked through negotiations. Huawei became the world's largest smartphone maker last quarter overtaking Samsung and Apple.
They hammered out the new agreement despite trade tensions between the US and China, which have added tariffs to billions of dollars of goods between them, including electronics. Huawei has also been in the middle of an ongoing political battle between Washington and China for global leadership in advanced technologies, including 5G and artificial intelligence.
The US government last year blacklisted Huawei to block it from buying chips designed by American firms, including Qualcomm's, for use in smartphones and networking hardware.
The US has moved in recent months to curb Huawei's supply of chips by forcing all non-US chip manufacturers that use intellectual property, development tools or fab equipment from American companies to apply for a license before shipping chips to Huawei. While Huawei is restricted from buying Qualcomm chips, it can resume paying royalty fees to the company.
Mollenkopf said that now it has hammered out patent agreements with every major phone manufacturers in the world, including more than 100 agreements covering 5G technologies.
Qualcomm is also fighting the US Federal Trade Commission, which sued the company last year alleging it abused its monopoly in modem chips to hurt phone manufacturers and rival chip vendors. Last year, a federal court ruled in favor of the commission, ordering Qualcomm to change the way it licenses its patent portfolio to others in the global smartphone sector.
The company has been trying to overturn the verdict, which could shake its business to the core and force it to change some of its most profitable practices, in a federal appeals court.