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Qualcomm will pocket almost $5 billion from Apple settlement this quarter

At the same time, Qualcomm warned the global handset business is weaker than earlier thought.

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Qualcomm will make nearly $5 billion from its settlement with Apple in the fiscal third quarter.

Angela Lang/CNET

Qualcomm will make nearly $5 billion in the current quarter from the settlement of its licensing dispute with Apple.

During its quarterly earnings report on Wednesday, the mobile chipmaker said it will record revenue of about $4.5 billion to $4.7 billion from Apple in its third fiscal quarter, which ends in June. That includes a cash payment from Apple and the release of money it had to reserve to pay or refund Apple and the contract manufacturers for certain customer-related liabilities.

Overall, Qualcomm's third-quarter revenue should total $9.2 billion to $10.2 billion, a 65% to 83% jump from the previous year when Apple wasn't paying Qualcomm's licensing fees. 

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"We believe the settlement is a win for both companies, and we are pleased with the result and pleased to have it behind us," Qualcomm CEO Steve Mollenkopf said during a call with analysts. "We are committed to a strong partnership with Apple."

Apple and Qualcomm last month settled their patent licensing battle, ending a two-year dispute the day after their trial kicked off in San Diego. The two sides announced the surprise agreement through a joint press release at the same time lawyers were presenting their opening arguments in a courthouse in Southern California. Apple and its contract manufacturers had given their statements, and Qualcomm's head lawyer had nearly finished his remarks when the courtroom buzzed with the unexpected news. 

Excluding that benefit from Apple, though, Qualcomm expects its third-quarter revenue to slide from the previous year's $5.6 billion by as much as 16%. It cited a slowdown in the handset market, especially China. Qualcomm expects third-quarter revenue, excluding the Apple payment, to total $4.7 billion to $5.5 billion. Analysts polled by Yahoo Finance expected sales of $5.08 billion.

Qualcomm's shares declined 3% to $83.75 in after-hours trading. 

Legal battle over

Apple, which initially filed suit against Qualcomm in January 2017, argued it essentially paid Qualcomm twice, first by purchasing processors and then by paying royalty fees. The Cupertino, California, company said it should pay fees based only on the cost of the wireless chip inside its iPhones. Apple partners Foxconn and Pegatron, which assemble its devices, agreed and joined the lawsuit. Qualcomm countered that it isn't a monopoly and said its technology is more than modems so it should be compensated based on the selling price of the phone itself.

Tens of billions of dollars were at stake in the case. Apple's manufacturing partners wanted a refund of $9 billion for allegedly overpaying royalties since 2013. Under antitrust law, that amount could be tripled. Qualcomm wanted damages of its own for breach of contract, though it hadn't detailed the amount before the settlement was announced. An even bigger concern for Qualcomm was whether it'd have to change its entire business model, collecting far lower royalties based on the price of its chips rather than the phones they're in.

The settlement was a boon for Qualcomm, but it also benefits iPhone buyers. Apple and Qualcomm previously were close partners, with Qualcomm supplying high-end modems for iPhones. None of its rivals in the mobile chip business -- like Intel -- could match Qualcomm's processor connection speeds, and it's currently the only company that makes 5G modems to sell to third-party handset makers. (Samsung and Huawei build 5G chips but only use them in their own devices.)

Now that Apple and Qualcomm have settled their disputes and have signed a multiyear chipset supply agreement, it's likely 5G will be coming to iPhones sooner than thought.

Apple CEO Tim Cook, during his company's earnings call Tuesday, said he would "punt" on a question about 5G in the iPhone. But he said Apple is "glad to put the litigation behind us."

"We're very happy to have a multi-year supply agreement, and we're happy that we have a direct license arrangement with Qualcomm, which was I know important for both companies, and so we feel good about the resolution," Cook said. 

Along with fighting Apple, Qualcomm also has battled Huawei over licensing terms. In January, Qualcomm said the two companies had reached a short-term pact. Now that the Apple dispute has settled, Qualcomm could soon reach a longer-term licensing agreement with Huawei. 

Qualcomm on Wednesday said its fiscal second quarter, which ended in March, included the third $150 million licensing payment from Huawei under their interim agreement. 

Handset weakness

Even though Qualcomm has been selling million of chips and has now settled with Apple, it's being impacted by a slowdown in the handset market. That echoed results earlier this week from Samsung and Apple, two of the biggest companies in the phone industry. 

It's become harder for handset vendors to make huge changes in their devices and differentiate from one another. Prices for the latest and greatest phones have actually increased at the same time US carriers have gotten rid of subsidies. All of that has meant people are waiting longer to upgrade. And China, one of the world's biggest markets, has been experiencing economic weakness, which has hurt the handset market there. 

Qualcomm on Wednesday again lowered it estimate for the number of 3G, 4G and 5G devices that will be sold this calendar year. It now expects companies to ship 1.8 billion to 1.9 billion devices, down 50 million units from its January forecast. At the midpoint, that's still up 3% from the previous year, but it's non-handset wireless devices like wearables and cars that are rising (Qualcomm doesn't actually specify what non-handsets are). Handset sales should drop this year, Qualcomm said.

Qualcomm interim CFO David Wise, during a call with analysts, attributed the handset slowdown to continued weakness in China, a longer handset replacement cycle and a possible pause on purchases in advance of 5G rollouts. 

Most 5G phones available this year (except for those from Huawei) will use Qualcomm's 5G modem. Mollenkopf said during Wednesday's call that the company now has over 75 5G design wins, more than double the number it disclosed in January at CES.

"We enter into the 5G era with strength in products, a favorable competitive dynamic and more customer diversity and technology breadth that in earlier generations of cellular," Mollenkopf said.

For the second quarter, Qualcomm's net income rose to $663 million, or 55 cents a share, from $330 million, or 22 cents a share, a year earlier. Excluding certain items, Qualcomm's earnings slid to 77 cents a share from 78 cents a share. Analysts had expected earnings excluding items of 71 cents, according to a Yahoo Finance poll.

Qualcomm's second-quarter revenue slid 5.9% to $4.9 billion. Wall Street had expected sales of $4.8 billion. 

Originally published May 1,1:52 p.m. PT
Update, 3:25 p.m. PT:  Adds details and comments from call.