One of the reasons why Broadcom has mounted its eye-watering bid for Qualcomm now is, of course, that the US firm’s value has been declining, hit by competitive challenges and, in particular, by the legal disputes with Apple.
Most legal or antitrust battles do not have a direct, short term impact on quarterly results, but instead meander through appeals processes and endless compromises. But Qualcomm has been hit by two disputes which have shaken its usually solid financial performance. First, there was the Chinese probe of its business practices, which led to a large settlement and a permanent reduction in royalty rates in the country. That onerous agreement was nevertheless better than prolonging the pain of seeing royalties withheld by Chinese handset makers and chip providers.
The Apple patent licensing rows are having a similar immediate impact because, as in China, they have led to multiple customers withholding payments until the matter is settled. Because Apple pays many of its licensing fees indirectly, via iDevice manufacturers, the payments strike has spread to major Qualcomm customers like Foxconn.
All this was clear in Qualcomm’s full year fiscal 2017 results. Revenues for the year, and for the fourth quarter, both fell by 5% year-on-year, on a GAAP basis, to $22.3bn and $5.9bn respectively. Within that, licensing revenues were down 36% to $1.2bn in the quarter and down 16% to $6.45bn in the year.
But licensing difficulties have the greatest effect on profits, since they contribute most of Qualcomm’s margin. Hit by the loss of licensing revenues from Apple and another unnamed customer, profits nosedived by 89%, to $200m, for the quarter and by 57%, to $2.5bn, for the year.
The chip giant expects flat revenues for its next quarter despite a 5% expected increase in its chip unit sales. For fiscal 2018 as a whole, cellular device unit sales could rise by 8%, said the firm, but it expects their average selling prices to drop as the market shifts to lower cost handsets, and to modems which are incorporated into cost-sensitive IoT or networking products.
Qualcomm’s CEO and CFO, on the analyst call, said they hoped that the NXP acquisition would be approved by four remaining regulators, but that might drag into early 2018, which would probably mean completion of the transaction (if approved) late in the year. They said they could see no immediate resolution for the legal disputes with Apple.
Qualcomm general counsel Donald Rosenberg said: “Litigation of this magnitude takes a while, you can’t focus on any particular short term event.” He refused to be drawn on the other dispute with the “unnamed customer”, saying it involves “unique issues to that licensee” and started before Apple filed its first legal action in January.
CEO Steve Mollenkopf said Qualcomm plans to appeal rulings of unfair licensing practices made earlier this year by antitrust authorities in South Korea and Taiwan. Fines from those decisions reduced 2017 revenues by $868m and $778m respectively.
Trying to inject some optimism by concentrating on the company’s latest product innovations, rather than its licensing woes, <ollenkopf said 41 operators are now supporting Qualcomm’s Gigabit LTE modems and these are being designed into 120 commercial or planned products. In addition, “there’s another LTE update after Gigabit” and the first commercial products for 5G could ship in 2019, he added, saying: “We think we will all be pleased by the speed people go to 5G.”
What Qualcomm called “strong growth trends for global 3G/4G device shipments” helped drive a 4% increase in chip unit shipments to 220m, though the full year figure was down 5% to 804m. The firm expects to ship between 220m and 240m chips in the current quarter and forecast total revenue for the period will drop by between 5% and 8% to a range of $5.5bn to $6.3bn.
Meanwhile, the latest shot fired by Qualcomm in its Apple battle came as part of a lawsuit filed in a California state court. This claims that Apple failed to comply with the terms of a software licensing contract by sharing proprietary code with Qualcomm’s arch-rival Intel.
The San Diego firm accuses Apple of emailing Qualcomm asking for “highly confidential” information about how its chips work in devices for an unnamed carrier’s network – and copying an Intel engineer on the email, according to Bloomberg. Apple started using Intel modem chips in some iPhone 7s, breaking a monopoly which Qualcomm had held since the third generation of the smartphones; and recent reports claimed that Apple was looking for ways to exclude Qualcomm completely from the iPhones and iPads over time, working with Intel and Mediatek.
Qualcomm’s chip sales to Apple are projected to be worth about $2.1bn this year, or about 13% of its total revenue, according to the Wall Street Journal. Apple paid Qualcomm about $2.8bn in royalties.
Milestones in the Qualcomm-Apple dispute:
January – Apple files a $1bn lawsuit, accusing Qualcomm of charging excessive royalties for its technologies and demanding fees for technologies it did not develop, such as Apple’s Touch ID. Apple claims it has been “overcharged billions of dollars on Qualcomm’s illegal scheme”. It withholds royalties and later says that its manufacturing partners, which pay many of the iPhone-related fees, will do so too.
April – Qualcomm countersues, claiming that Apple “breached” and “mischaracterized” agreements with the chipmaker and interfered in deals with Qualcomm licensees.
June – Apple claims Qualcomm’s business model is “illegal” and that some of the patents at issue are invalid.
July – Qualcomm files suit with the US International Trade Commission, asking it to block imports of iPhones and iPads accused of infringing its patents. It accuses Apple of illegally importing and selling iPhones “that infringe one or more claims of six Qualcomm patents covering key technologies that enable important features and functions in iPhones.” The company also files a second suit petitioning the ITC to block Apple’s imports of phones and tablets that do not include Qualcomm’s components.