Burying the hatchet with Intel will result in a near-doubling of revenue in Q3, despite continuing weakness in smartphones, especially in China
Qualcomm will book a whopping $4.5-$4.7 billion in third quarter revenues as part of the litigation settlement it struck with Apple in mid-April. The funds include both past due patent royalties Apple will pay and Qualcomm’s release from obligations to the iPhone designer and its contract manufacturers.
The windfall will more than double third quarter revenues for the mobile chip giant amid a smartphone market where it sees continued weakness.
Qualcomm executives did not say how it will use the funds. In a quarterly conference call, they pointed to an on-going share buy-back program and a roughly $300 million increase in employee bonuses.
Separately, Qualcomm dialed back its 2019 handset forecast to about 1.85 billion units, shaving 50 million units off its projections due to weakness especially in China. It ratcheted its forecast back a similar amount in the previous quarter.
A judge in San Jose is still expected to rule in a suit against Qualcomm brought by the Federal Trade Commission. The FTC asked the court to prohibit Qualcomm from requiring a patent license as a condition of selling its chips, a key sticking point in the two-year dispute between Apple and Qualcomm.
The judge’s decision in the FTC case could force Qualcomm to renegotiate some of its licensing deals and rates. It also could force it to license rival chip vendors with its standard-essential patents.
Qualcomm expects increased employee bonuses this year will offset savings in litigation costs in the wake of the Apple settlement. Chief executive Steve Mollenkopf used the earnings call in part to thank employees “for staying focused during this period — you put the company in a great position,” he said.
Executives declined to answer several questions from analysts about terms of the Apple settlement that include a six-year patent license — the first Qualcomm struck directly with Apple — and a multi-year chip supply agreement. However, they expressed hopes Qualcomm could win an expanding set of sockets in Apple products.
The deal “provides a lot of stability for our business. There’s a lot of tension removed from the system…as we work on products [and] find and maintain a good relationship,” Mollenkopf said.
Qualcomm hopes the Apple deal encourages a licensing settlement with Huawei, the last big hold out among handset makers. Qualcomm is lobbying for a return to 2014 deal the two struck about the time regulators reset Qualcomm patent rates in China. In an interim deal, Huawei currently pays Apple $150 million per quarter in royalties.
Qualcomm claims 75 design wins for 5G modems
Besides weakness in China’s handset market, Qualcomm’s CFO pointed to “lengthening of handset replacement cycles and a possible pause before 5G” rollouts, explaining a decision to cut its 2019 handset forecast by 50 million units for the second time.
However, the company sees itself in a strong position with 75 design wins for 5G handsets. Most of those wins include use of Qualcomm’s RF front-end modules.
The company declined to give details on how many RF design wins it has secured or whether they are for its sub-6-GHz or millimeter wave modules. Overall 5G sales are expected to be relatively modest in 2019, becoming material in 2020 as Qualcomm rolls out integrated 5G SoCs and 5G handset prices decline.
China was expected to launch 5G services in September. But both China Unicom and China Telecom, the country's second and third largest carriers, turned on services only recently, said Crisitano Amon, head of the company’s chip set division.
Hours after the Apple deal, Intel exited the 5G modem market Qualcomm dominates. However, Huawei and Samsung make their own 5G modems and Mediatek is working on a merchant device.
Mollenkopf gave no fresh details on 5G markets beyond mobile, although he reiterated hopes the company has expressed for expanding its markets. He pointed to connected cars as a good business that’s “harder to get into but stickier — I think it’s going well,” followed by industrial markets, he said.
Qualcomm reported second quarter income of $5 billion down 5% from the same quarter last year. Net income for the quarter was $700 million up 101% from the same quarter in 2018. The results didn’t include the new Apple payments for past and ongoing patent royalties that start in its next quarter.