Qualcomm Incorporated QCOM recently secured a partial stay on the adverse anti-trust ruling by federal judge Lucy Koh from the United States Court of Appeals for the Ninth Circuit. The temporary relief, pending appeal, is likely to offer a lifeline to the chipmaker in safeguarding its business interests and maintain seamless operations, which would otherwise go haywire if the decision was implemented.
In its appeal, the government stated that Qualcomm used anti-competitive policies to drive sales of its smartphone chips. It alleged that the company followed “no license, no chips” trade policy, under which chips were only sold to those manufacturers that agreed to inflated patent licensing terms.
Overseeing the Federal Trade Commission's (“FTC”) litigation against Qualcomm, Lucy Koh issued a ruling in favor of the former, and observed that the chip manufacturer had violated anti-trust regulations through monopolistic trade practices. In order to encourage fair competition, the ruling ordered Qualcomm to renegotiate licensing contracts with customers to ensure that both buyers and other chip makers are not forced to pay exorbitant licensing fees on its patents. It also directed the company to end any exclusive agreement with customers, which prevented other chip makers from making a production bid.
Qualcomm pointed out that if the decision is put into force, it would have to rework all its patent deals and scramble its business, which would be virtually impossible to unwind if the decision is later overturned on appeal. The company also reasoned that offering patent licenses to rival firms like Mediatek Inc. would rob royalty revenues of as much as $20 per phone, jeopardizing the sustainability of its revenue model.
Refuting all the charges, Qualcomm reasoned that its licensing business was started decades ago before it began selling chips. The company stressed that it assumed technology leadership through continued R&D efforts and hard bargaining with smartphone manufacturers throughout the world. Moreover, the licensing rates were mostly kept unchanged once it started selling chips and had been market driven, contrary to the allegations.
The trial seemed to invoke mixed responses from within the government as the Department of Justice – the other primary antitrust regulator in the country – disagreed with FTC's legal theory and viewed the decision as anti-consumer. The Pentagon and the Department of Energy also observed that enforceability of the decision would harm national security interests.
It remains to be seen what the final verdict has in store for Qualcomm after it formally files an appeal against the decision.
Qualcomm currently carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the industry are Nokia Corporation NOK, Sonim Technologies, Inc. SONM and Viasat Inc. VSAT, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Nokia beat earnings estimates thrice in the trailing four quarters, the average being 89.3%.
Sonim has a long-term earnings growth expectation of 25%.
Viasat beat earnings estimates in each of the trailing four quarters, the average positive surprise being 230.6%.
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