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Qualcomm-Apple Truce: Is There More Than What Meets the Eye?

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Redefining industry dynamics, Qualcomm Incorporated (QCOM - Free Report) recently reached a surprise settlement with Apple Inc. (AAPL - Free Report) to end the bitter patent battle that threatened to jeopardize their businesses. Qualcomm appeared to be the breakaway winner on the surface with a resounding victory in the prolonged litigation fight.

Notably, several underlying factors were apparently at play behind this game-changing decision.

The Out of the Blue Settlement

Drawing curtains on lingering patent litigations, the former allies turned antagonists decided to call a truce, with Apple paying an undisclosed amount to Qualcomm. The agreement also includes a six-year license agreement effective Apr 1, 2019 along with a two-year extension option and a multi-year chipset supply agreement. Apple is expected to license the chips directly from Qualcomm instead of relying on OEMs to do it on its behalf. This will likely involve recurring payments to the mobile chip manufacturer.  

Buoyed by the sudden windfall, Qualcomm shares were up 23.2% in regular trading hours to close at $70.45 as on Apr 16, 2019 – the biggest gain ever recorded in more than 19 years. Management further expects incremental earnings of $2 per share in the future quarters as product shipments rise and revenues swell, scripting a turnaround for its dwindling licensing business that took toll on the company’s coffers.

What Drove the Settlement Process?

During the two years of litigation with Qualcomm, Intel Corporation (INTC - Free Report) had been the sole chip supplier to the iPhone manufacturer. However, Apple was reportedly falling behind its competitors with no significant headway in 5G enabled chips from Intel. Moreover, with lackluster iPhone sales, Apple needed to speed up its efforts on 5G enabled smartphones that are slowly on its way to the market.

With Intel announcing that it was dropping out of the 5G modem business, Apple was forced to reconcile with Qualcomm to establish its footprint in the emerging market. Qualcomm is reportedly working on a first-generation 5G chip platform that is likely to power the first 5G smartphones later this year, while it’s second-generation 5G chip will likely hit the shelf in the first half of 2020. It seems that Apple is betting big on 5G market as this was perhaps the most compelling factor behind the settlement process.

Moreover, with a large cash pile of around $45 billion, Apple had little reasons to worry about the hefty payment to Qualcomm and decided to make use of it to avoid tedious day-to-day coverage of a jury trial. This would probably help the company to focus more on its 5G initiatives rather than on intricate legal fights.

On its part, Intel decided to exit the 5G modem business as it represented a small part of its revenues and was not deemed profitable. It now intends to focus on the emerging market opportunities for 5G and ‘cloudification’ of the network.

Moving Forward

With the turn of events, Qualcomm is widely expected to redeem its lost glory within the chip market, while Apple and Intel benefit from their respective dispositions. Wedbush Securities analyst Dan Ives rightly observed, “A settlement is a surprise to investors as ultimately Apple realized this was more about two kids fighting in the sandbox and they have bigger issues ahead with 5G and iPhone softness rather than battling Qualcomm in court.”

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