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Qualcomm, fined $975M in China, prepares to move forward

The chipmaker won't contest the record fine as part of the resolution, and agrees to make several changes to its patent-licensing business in China.

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Qualcomm President Derek Aberle has served as a point person in the China investigation. David Becker/Getty Images

Qualcomm agreed Monday to pay $975 million to resolve a long-standing antimonopoly investigation in China, opting to settle the matter and move on rather than fight the enormous penalty.

The country's National Development and Reform Commission found that Qualcomm, the world's biggest smartphone chipmaker, had violated local antitrust laws in how it runs its patent-licensing business there. Qualcomm said it won't contest the findings and agreed to start offering certain communications licenses for use in China at a significant discount than what it offers elsewhere.

"We're pleased to have concluded this matter, which we think removes a major uncertainty clouding our business, and we will now focus on the sizable opportunities in China," CEO Steve Mollenkopf said on a call with analysts Monday, though he added that the company is "disappointed" with the investigation's results.

Earlier Monday, several news outlets reported that a resolution was coming soon, with a roughly $1 billion fine expected. The penalty dwarfs just about every past fine imposed in China, including a nearly $500 million bribery fine on British pharmaceutical giant GlaxoSmithKline in September.

The resolution should bring some measure of stability -- albeit at a high price -- for Qualcomm, with investors relieved the investigation will be behind the company. The NDRC spent the past 14 months looking into Qualcomm's business in China, the biggest smartphone market in the world by users and the country where the company generates half its revenue. Additionally, Qualcomm should be able to pay the fine without much pain, thanks to its total cash and marketable securities of $31.6 billion, as of December.

Shares rose 2.5 percent after-hours to $68.80, after rising about 1 percent during regular trading Monday.

The huge fine may serve as a cautionary tale for some foreign companies looking to take advantage of China's massive consumer market, but are worried about the country's strict and sometimes opaque government oversight. Qualcomm, based in San Diego, Calif., has been one of the highest-profile targets of China's 2008 antimonopoly laws, but several other major companies, including Microsoft and Daimler, are facing similar investigations. These antitrust laws have been criticized by some businesses for being used unfairly against foreign companies there.

Qualcomm has for years been the top dog in mobile chips, providing the processors or radio chips, or both, inside most major smartphones, including Apple's iPhone, Samsung's Galaxy line, and some of Chinese handset maker Xiaomi's phones. That dominance in mobile may have ultimately made it a target for competition agencies, including China's NDRC. Along with Chinese regulators, European and US officials are also looking into Qualcomm's business practices.

The end of the China probe should allow Qualcomm to refocus on fighting fast-growing competitors in China, such as MediaTek and Spreadtrum. Also, the resolution lifts a cloud over Qualcomm's lucrative licensing business. Qualcomm makes its revenue both by selling chipsets to manufacturers, and taking in royalties for its patents through its licensing segment. The licensing unit provides about a third of revenue but two-thirds of profit for the company.

Among a handful of modifications to Qualcomm's licensing practices, the company agreed to change how its royalties are calculated for mobile devices, which should result in lower royalties in some cases. The company will also now offer licenses to essential 3G and 4G mobile patents for China separately from other patents. Qualcomm said the agreement will, for the most part, only affect its licensing deals in China for customers in that country, and only in certain situations. That should be seen as a win, since many analysts feared that a significant change to the company's practices in China might cause a domino effect for the company's business in other countries.

Overall, Qualcomm President Derek Aberle said on the call that the new terms would apply to about 10 percent to 12 percent of its total estimated device sales.

However, some see Qualcomm as still facing many other foundational problems that the China resolution won't solve. For the past few months the company has had a string of bad news, including layoffs, weak financial guidance, and the US and European investigations. Most recently, the company revealed that a major customer likely wasn't using its latest Snapdragon chip in a flagship phone. That device is expected to be the next Samsung Galaxy S smartphone.

"They've got fundamental issues that have nothing to do with China regulatory issues," Bernstein analyst Stacy Rasgon said earlier Monday, adding that the company is struggling with lower prices and the loss of Samsung's next Galaxy S.

Qualcomm also raised the low end of its annual guidance for revenue and adjusted profit, adding $300 million to the floor of its revenue outlook, just a few weeks after trimming revenue expectations by $800 million. Revenue is now predicted at $26.3 billion to $28 billion.