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Qualcomm to Pay $975 Million Fine and Change Licensing Terms to Settle China Probe

The settlement removes a cloud that has been weighing on the company for months, but some uncertainties remain.

Asa Mathat

Qualcomm said on Monday that it had settled a long-running antitrust probe in China, agreeing to pay $975 million in fines and make changes to its licensing programs there.

As part of the settlement, Qualcomm is offering new licensing terms for its 3G and 4G standards-essential patents, and existing licensees will have the opportunity to use the new terms, effective retroactively to the start of the year.

While the percentage royalty Qualcomm gets will remain the same, it will now receive that royalty on 65 percent of the net selling price, rather than on the full price. Qualcomm also agreed to not require companies that want its chips to adhere to terms of its contract that Chinese regulators found unfair, though the company can still require chip customers to also license Qualcomm’s technology.

“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,” CEO Steve Mollenkopf said in a statement.

The fine is expected to dent this year’s per-share earnings by 58 cents, Qualcomm said. The company still expects revenue to be approximately the same for the year, though it slightly raised the low end of its guidance, putting the range between $26.3 billion and $28 billion. While Qualcomm gets the bulk of revenue from its chip sales, the company still gets more than half of its profits from the licensing of its technology.

Though costly, to be sure, the move settles a key uncertainty for Qualcomm. In addition to the prospects of a government fine looming over its head, Qualcomm has been having trouble getting customers in China to pay contractually owed royalties amid the ongoing inquiry.

However, what remains to be seen is to what extent the China settlement affects Qualcomm’s licensing business globally.

The company is holding a conference call at 2:30 pm PT to discuss the settlement.

In a presentation prepared ahead of the call, Qualcomm said that the deal “requires no licensing changes outside China with limited exceptions” and that it does “not believe it is likely that other competition agencies will interpret their laws to reach conclusions similar to” Chinese authorities.

Qualcomm indicated on last month’s earnings conference call that it thought resolution might be near.

Update, 2:33 p.m. PT: During a conference call with the analysts and media, Mollenkopf and Qualcomm president Derek Aberle said they was disappointed with the outcome, but glad to have resolution of the probe and a more certain path when it comes to licensing in the biggest wireless market.

Aberle also went into a bit more detail on the terms of the agreement with regulators, stressing that the new licensing terms apply largely to products both made and sold in China. Looking at last year’s results, Aberle said that had the new terms been in effect, they probably could have been applied to 10 percent to 12 percent of device sales for the past fiscal year.

With the settlement, Aberle said that the agreement should help the company reduce the issues Qualcomm had faced with Chinese customers either balking at licensing Qualcomm’s technology or under-reporting their sales of licensed products.

“That risk is substantially eliminated,” Aberle said.

3:55 p.m. PT: Moor Insights analyst Patrick Moorhead notes that the fine is a big one, but said that the company and investors should feel good about the result.

“One important piece of the settlement is that it only applies to products sold into the Chinese market by Chinese-based companies,” Moorhead said. That, he said, means that American, Korean or Japanese companies who ship products into China have to pay standard license fees, as do Chinese companies shipping products to most other markets.


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