Qualcomm Easing Licencing Terms in Bid to Strike Deals

Qualcomm's earnings call on Wednesday showed just how far the company is willing to go to preserve one of its core business practices of taking a cut of the selling price of phones.

The San Diego-based chipmaker posted quarterly profit and revenue that topped Wall Street forecasts, suggesting that a slowdown in the global smartphone business might be less severe than feared after a string of weak forecasts from other industry suppliers.

But Qualcomm's other line of business - licencing a trove of patents that help make smartphones work - has traditionally driven most of its profits. And that business has dropped sharply over the past year, as revenue attributable to Apple iPhones is withheld amid a legal dispute.

Qualcomm gave two indications on Wednesday it was prepared to accept lower revenue in exchange for maintaining the business structure and avoiding future customer disputes.

Most Qualcomm licencing revenue is calculated as a percentage of the selling price of a smartphone. That so-called device-level licencing model has been at the centre of regulatory disputes in China, Korea and the United States and also in its disputes with Apple.

On Wednesday, Qualcomm said it would cap the phone price that is the basis of the revenue calculation at $400 (roughly Rs. 26,700). More expensive phones, which can sell for $1,000 (roughly Rs. 66,800), would still be treated as $400 for the purpose of the Qualcomm licence fee.

That move follows a Qualcomm decision in November to licence some patents that are required for connecting to so-called 5G networks, the next generation of mobile data networks, at a rate of 3.25 percent.

The net effect is that Qualcomm keeps its device-level licencing model and likely accepts less revenue, said Summit Insights Group analyst Kinngai Chan.

"It's cheaper for most people," Chan said. "What Qualcomm is trying to do is ... get everyone to sign a licencing agreement with them so they don't have to worry too much."

When Qualcomm executives were asked directly by an analyst on the post-earnings conference call whether the company would receive less revenue from 5G patents, they disputed the notion.

"We're not getting paid less for it," said Alex Rogers, Qualcomm's licencing chief. "I think the best way to think about this is building a foundation for long-term stability" for Qualcomm's licencing business.

Chan said that a recent deal with Samsung Electronics Co Ltd also appeared to show that the rate was lower. In February, Qualcomm said it had amended a 2009 Samsung agreement with a new licencing rate as part of a deal to settle a regulatory dispute in Korea.

Qualcomm cut its licencing forecast by $300 million (roughly Rs. 2,000 crores) for the third quarter and Chief Financial Officer George Davis said just under half of the change was due to changes in arrangements with Samsung and other moves. That, said Chan, indicated a cheaper deal for Samsung.

Samsung mentioned the late-January cross-licencing deal amendment with Qualcomm in earnings call on Thursday Asian time, but said it could not reveal any monetary figures due to confidential agreement. Samsung said that "the effect will be limited to future revenue, and there were no one-off reversals of provisioning (during the first quarter)."

© Thomson Reuters 2018