Qualcomm (NASDQ:QCOM) finally struck a blow against Apple (NASDAQ:AAPL) and managed to settle all of the court cases that have been going on between the two companies. This has been a bigger victory for Qualcomm than Apple, as Apple would be paying Qualcomm an undisclosed sum of money and agreed to a six-year license agreement and a two-year option to extend. Apple and Qualcomm will be stuck together for quite a while diminishing speculation over Apple’s willingness to develop mobile modems in-house given the length of the licensing deal with Qualcomm. Since the settlement news broke, Qualcomm stock skyrocketed nearly 40%.
With Qualcomm positioned to sell meaningful modem volumes in FY’20 tied to Apple’s shipments of 5G capable iPhone’s, the business narrative has improved considerably, as Qualcomm went through a dry-period from 2017 to 2018 as Apple transitioned to Intel 4G LTE chips while the lawsuits continued.
Wedbush Securities analyst Daniel Ives mentions in a report on Tuesday:
“While Qualcomm expects a more meaningful financial impact ($2 of incremental EPS as shipments ramp) and thus the stock was up 23% after the announcement hit the tape, Apple (and its investors) can also rest a little easier as the risks of 5G and settling with Qualcomm take an overhang away from the name.
The only financial details we are aware of is Qualcomm’s expected $2 EPS impact from the Apple settlement. Consensus expectations for Qualcomm’s 2020 fiscal year hover at $4.35 dil. EPS, so an additional $2 impact on FY’20 estimates during iPhone shipment ramp represents a 46% increase to current consensus estimates. When Qualcomm reports Q2’19 earnings on May 1st, 2019 we will have more details relating to financial impact, but initial indications sound good for Qualcomm shareholders.
Given Tuesday’s announcement of Apple settling with Qualcomm, Intel has officially exited the mobile modem market. Intel’s public statement on April 16th, 2019: “Intel Corporation today announced its intention to exit the 5G smartphone modem business and complete an assessment of the opportunities for 4G and 5G modems in PCs, internet of things devices and other data-centric devices.” Bob Swan (Interim CEO of Intel) goes onto mention, “We are very excited about the opportunity in 5G and the ‘cloudification’ of the network, but in the smartphone modem business it has become apparent that there is no clear path to profitability and positive returns.”
Since Intel’s only customer i.e. Apple bailed and settled the lawsuit with Qualcomm, the sudden exit from mobile modems makes sense for Intel. It was a money losing business, hence Intel’s stock rallied by as much as 4.34% in the after-hours session, as it implies that Intel’s going to announce a major restructuring tied to its mobile division, which should lead to some cost leverage in the near-term.
Apple, on the other hand had a flat session following the announcement of settling with Qualcomm. Mainly because, it was broadly anticipated that Apple wouldn’t have a 5G device made available by 2020, and the cost to develop a modem in-house wouldn’t be as economical as sourcing the technology from a successful 3rd-party like Qualcomm. It’s certainly not bad news for Apple, as it diminishes the worries or concerns of a delayed 5G iPhone, and with so much pent-up upgrades anticipated in the next two-year window, the release of a 5G iPhone might move the needle to make the Qualcomm settlement worthwhile for Apple shareholders.
The smartphone market is more mature, so losing market share in the high-end due to the absence of a key upgrade or feature like 5G versus other handset makers didn’t seem all that worthwhile. For Apple shareholders, it’s still a good scenario as it increases upgrades intentions among Apple’s installed base of near 1B iPhone users when 5G eventually gets released next year.
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