Qualcomm pays huge fine to settle dispute
Cuts royalty rates on patents used in China
SAN FRANCISCO/BEIJING: Qualcomm Inc has agreed to pay a fine of $975 million, the largest in China’s corporate history, ending a 14-month government investigation into anti-competitive practices.
The deal — the details of which were first reported by Reuters on Monday — also requires Qualcomm to lower its royalty rates on patents used in China, likely helping local smartphone makers such as Xiaomi Technology Co Ltd and Huawei Technologies Co Ltd.
Qualcomm said the agreement removed a major source of concern for its investors, sending shares of the San Diegobased chipmaker up 2.8% to $69 in afterhours trading.
China’s expanding high-speed 4G network is driving demand for smartphones with leading-edge technology, but Qualcomm’s opportunities have been clouded by the anti-trust probe, which has also contributed to problems in collecting royalty payments from device makers.
Qualcomm said in a statement on Monday that it would not contest the National Development and Reform Commission’s (NDRC) finding that it violated an anti-trust law.
Asked whether the resolution in China could affect the outcome of ongoing antitrust probes into Qualcomm in Europe and the United States, Qualcomm president Derek Aberle said, “We fully respect their authority, but we don’t believe it’s likely that other agencies will necessarily meet similar conclusions.”
The US firm cut its full-year earnings estimate, putting the cost of the fine at about 58 cents per share, but it raised the lower end of its revenue forecast slightly.
“It removes a significant source of uncertainly from our business and positions our licensing group to really participate in the full growth of the wireless market in China,” CEO Steve Mollenkopf said. “It’s something we’re happy is over.”
Discussions in Beijing over one of the most contentious cases under China’s 2008 anti-monopoly law had intensified in recent weeks, culminating in meetings between Qualcomm senior executives and the NDRC on Friday.
Xu Kunlin, head of the NDRC’s antimonopoly bureau, said the $975 million fine — equal to 8% of Qualcomm’s 2013 sales in China — was less than the 10% of sales maximum allowed under Chinese law because Qualcomm fully co-operated with investigators.
“Issuing the fine was not our primary purpose,” Xu told reporters yesterday, according to a Sina.com live-blog of his remarks. “Our purpose was to restore orderly, free-market competition. Qualcomm’s practices had stifled innovation.”
Under the terms of the agreement, Qualcomm will offer licences to its current 3G and 4G essential Chinese patents, widely used by Chinese device makers, separately from other patents.
For companies opting for the new agreement, which applies to phones sold for use in China, Qualcomm will calculate royalties based on 65% of the phone’s selling price, instead of on the whole price.
Some on Wall Street have speculated that even limited concessions made to Qualcomm’s licensing business in China could affect the technology company’s licensing deals elsewhere.
“That’s the first time I’ve ever seen them in writing agree to that and it begs the question of why 65% is the right number in China and it’s not the right number everywhere,” said Sanford C. Bernstein analyst Stacy Rasgon.
As a result of the fine, Qualcomm said it now expects full-year earnings per share of $3.56-$3.76 for fiscal 2015, compared with a prior forecast of $4.04-$4.34. It raised its fiscal 2015 revenue forecast to $26.3-$28 billion, slightly raising the lower end of its previous forecast of $26-$28 billion.
Excluding the cost of the fine and other one-time items, Qualcomm forecast earnings of $4.85-$5.05 per share, raising the lower end of its previous forecast of $4.75$5.05. On that basis, analysts had expected $4.96 per share, on average, according to Thomson Reuters I/B/E/S.
Qualcomm is one of several overseas companies, including Microsoft Corp, to come under investigation in China for allegedly anti-competitive practises.