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Qualcomm Seeks Stay in Anti-Trust Ruling, Contemplates Appeal

Zacks Equity Research

Qualcomm Incorporated QCOM recently sought a stay on the adverse anti-trust ruling by federal judge Lucy Koh. The strategic move is aimed to safeguard its business interests and maintain seamless operations, which would otherwise go haywire if the decision is implemented.

Overseeing the Federal Trade Commission's litigation against Qualcomm, the U.S. District Court Judge 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.

In its reply, Qualcomm cited that the judge had narrowed down the window for evidence to March 2018 and has not considered vital facts beyond that date. The company argued that Apple Inc. AAPL had earlier discarded its chips and selected rival firm Intel Corporation INTC instead for iPhones, thereby refuting charges of having a stranglehold on the market. Furthermore, 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. Although Qualcomm is yet to file an appeal in a higher court, it has sought to buy time to prevent any knee-jerk reaction to such adverse ruling.

Notably, in April this year, Qualcomm had reached a surprise settlement with Apple to end the bitter patent battle that threatened to jeopardize their businesses. Drawing curtains on prolonged patent litigations, the former allies turned antagonists decided to call a truce, with Apple paying about $4.5 billion to $4.7 billion to Qualcomm. The agreement also included 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.

Even such exclusive supply agreements are potentially at risk. Qualcomm’s shares, which were up more than 23% on the trade truce (the biggest gain ever recorded in more than 19 years), have taken a beating on the adverse federal judge decision and reportedly lost about 15%. Over the past year, the stock has recorded an average return of 13.4% while the industry has rallied 6.7%.


 

Whether the company can secure stay on the decision and subsequently get it overturned through higher appeal or government intervention remain to be seen.

Qualcomm currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the industry is Harris Corporation HRS, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.    

Harris has a long-term earnings growth expectation of 8%. It beat earnings estimates in each of the trailing four quarters, the average being 3%.   

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