Apple Inc. (Nasdaq: AAPL) recently sued Qualcomm Inc. (Nasdaq: QCOM) in the US for roughly $1 billion for overcharging on licensing fees, and on Wednesday piled on with two more suits, both filed in China, one charging Qualcomm under anti-monopoly laws, another over patent licensing. At today's exchange rate for Chinese currency, those two suits are worth roughly $145 million. (See Qualcomm, Apple Trade Blows Over Licensing.)
Apple feels Qualcomm has been abusing its market power for years. Its stance is bolstered by government actions around the world. Two years ago, China charged Qualcomm with abusing its market power, and elicited a 2015 settlement from the company of $975 million. Recently, the US Federal Trade Commission accused Qualcomm of abusing its market power (FTC commissioners are split on the subject). South Korea has leveled similar accusations against Qualcomm, and recently said it will fine the company.
Qualcomm executives dismissed Apple's charges as without merit, accusing Apple of trying to use the courts to lower its costs. Company president Derek Aberle explained that Qualcomm follows common, long-standing licensing principles (specifically, licensing at the device level), and noted the company has been continuing to sign up licensees -- over 200 in the past year -- with the same terms and royalty amounts it's been negotiating for years.
Apple has led other companies trying to change licensing practice around the world, Aberle observed, noting those efforts have thus far all failed. (Apple does not pay royalties directly to Qualcomm; royalties are paid instead by Apple's contract manufacturers.)
He also said Qualcomm expects to see South Korea's decision to fine the company reversed.
Might Qualcomm suffer from its spat with such a huge customer?
There's plenty of suspicion that Apple might ditch Qualcomm for another supplier. Qualcomm executives forcefully quashed those fears.
The company is continuing to fulfill its contracts with Apple today, and fully intended to "remain a good supplier to Apple," chief executive Steve Mollenkopf said. He added he expects the two will maintain a long-term relationship because the technologies that Qualcomm currently has under development and on its roadmap "will be fundamental to new products for years to come." Qualcomm, not coincidentally, is one of the leading developers of 5G chip technologies.
Qualcomm is also in the process of buying NXP; there is some speculation among analysts and other market watchers that regulators will consider the dispute with Apple as a factor in the decision to approve or disapprove that deal. Qualcomm did not comment specifically on the approval processes, but did say that it is moving forward with the acquisition.
During the call with analysts, Qualcomm executives mentioned "non-payment of disputed costs." They did not specify which companies are not making expected payments, nor the value of those funds, but they did say the amounts will remain on the balance sheet until the dispute with Apple is resolved, at which point the company will adjust its financials based on the outcome.
Though quarterly revenue was up a bit year-over-year, income was significantly lower -- $681 million in the quarter just completed compared to $1.4 billion in the like period a year ago. Much of the difference was represented by an accumulation of accounting charges taken in the most recent quarter.
Shipments of 3G/4G devices -- the company's bread and butter -- continued to rise. The company shipped about 1.55 billion units in 2015, somewhere between 1.65 billion and 1.7 billion in 2016, and thus far in 2017 it's on track to deliver somewhere between 1.75 billion and 1.85 billion. Growth, the company said, is coming from developing markets.
Qualcomm reported having spent $1.3 billion on R&D in the first quarter. On the conference call, company execs identified the two areas where Qualcomm is focusing its development efforts as data center and 5G technologies. Confusingly, the company provided Q2 guidance for R&D plus SG&A (selling, general and administrative); Qualcomm said it expects those combined expenses to grow 6% to 8% in Q2.
Looking ahead, the company reminded analysts it has a number of growth opportunities:
- The joint venture formed early in 2016 with TDK, in which Qualcomm will provide RF front-end modules and filters for drones, the automotive market, and other IoT applications.
- Microsoft plans to include Qualcomm's Snapdragon processors in its mobile compute devices, including PCs. Qualcomm predicts the mobile compute business could be worth $6 billion by 2020.
- The joint venture it has in China to develop data center servers. Qualcomm said it is getting positive feedback on the first samples of its Centriq processor, and that its Chinese JV partner is making progress with a custom server design using the Centriq. (See Qualcomm Challenges Intel With New ARM Chip.)
— Brian Santo, Senior Editor, Components, T&M, Light Reading