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China Owes Us, Qualcomm Says

By   11.05.2014 0

SAN JOSE, Calif. — The world’s largest maker of cellphone chips and the China government appear to be eyeball-to-eyeball in a patent dispute, waiting for someone to blink.

Qualcomm turned up the heat in its quarterly financial report today, saying it believes phone makers in China are not reporting hundreds of millions in cellphone unit sales to avoid royalty payments. The news was part of the company’s one sore spot as it reported another quarter of solid growth and upbeat guidance for its coming fiscal year.

Qualcomm believes 1.3 billion handsets were sold using its intellectual property this year and 1.5 billion will be sold next year. But handset makers are on track only to report sales of 1.04 to 1.13 billion devices this year, leaving a gap of 170 to 260 million devices unreported, the company claims.

Meanwhile the China National Development and Reform Commission (NDRC) continues to investigate Qualcomm’s business practices.

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“Certain licensees in China currently are not fully complying with their contractual obligations to report their sales of licensed products to us (which includes certain licensees underreporting a portion of their 3G/4G device sales and a dispute with a licensee)…[and] unlicensed companies may seek to delay execution of new licenses while the NDRC investigation is ongoing,” Qualcomm said in a statement.

Qualcomm has long made a significant share of its revenues in patent licensing, a fact that has drawn it into numerous patent disputes but none with a party as powerful as the China government. Time will tell whether its strategy to air charges of significant non-compliance among China’s mobile OEMs will help resolve the dispute.

Meanwhile, the company continues on a steady growth path despite the dispute. Sales for the next quarter and the next fiscal year could be up as much as 9%, Qualcomm said.

Chip set sales next quarter are expected to be up 17% to 27% next quarter, implying a decline in average selling prices. For the next fiscal year, Qualcomm expects chip set sales up 1% to 11%, implying the ASP declines will level out.

Qualcomm expects earnings per share for the coming fiscal year could be up 3% to 12%. it added.

The guidance for the coming quarter and fiscal year “does not include sales that we believe may not be reported to us or may be in dispute but does include an estimate for some prior period activity that may be reported to us during fiscal 2015,” Qualcomm said. “We are taking steps to address these issues, although the outcome and timing of any resolutions are uncertain,” it added.

The guidance also did not take into account details of its pending acquisition of CSR.

The company reported revenues of $6.69 billion and net income of 1.89 billion for its latest quarter in which it sold 213 million of its MSM chip sets. The numbers fell well within Qualcomm’s guidance.

Qualcomm forecasts significant growth for its coming fiscal year (above) and solid results in its past one (below).

— Rick Merritt, Silicon Valley Bureau Chief, EE Times Circle me on Google+

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rick merritt   2014-11-06 01:24:43

As I read the situation, the China government is stepping in to suggest Qualcomm is overcharging for its patents and the big Q is retorting that China's OEMs are cheating on royalty contracts. Is this sort of constructive confrontation a good approach? Q is certainly risking China's wrath.

docdivakar   2014-11-06 02:34:27

@Rick: this is quite a quandary for Q to be in! If indeed the licensees are not reporting all of the sales, isn't that in the best interest of Govt of China to collect taxes it is missing? It seems to me that it should join Q's efforts to collect royalties that is rightfully owed.

MP Divakar

GSMD   2014-11-06 02:46:27

This has already become a legal issue in India and I think Ericsson has been taken to court. India is even a greyer area since SW patents are not valid (unless it is part of a non-generic HW device) and a lot of comm. and media algorithms certainly fall purely in the SW area. So a lot of these patents may not be valid here especially when run on a GP CPU or GPU. I advise the govt. of such issues and so know for a fact that it is not a cut and dried issue as Qualcomm may think !

benhoopes   2014-11-06 11:37:38

@GSMD Whether or not the underlying patents are valid, this is a licensing situation governed by contract law. That is, the Chinese handset makers have entered into a licensing agreement whereby they agree to pay royalties to use QC's technology. QC's complaint is one of breach of contract, i.e., the Chinese handset manufacturers are not honoring the licensing agreement. 

docdivakar   2014-11-06 13:22:13

@benhoopes right you are! This is a clear case of breaching signed agreement where one side tries to obfuscate or not report sales at all and has nothing to do with patents. I have heard of stories where mobile companies justify not reporting (for royalty purposes) sales like replacing lost / stolen handsets and upgrades. I am sure these cases will have been addressed in the agreement but I suspect there are grey areas to skirt around.

MP Divakar

docdivakar   2014-11-06 17:33:30

It looks like the stock market reacted a bit too harsh on Q which missed the consensus estimate and took a beating in the market today! At close it was down $6.xx. The China woes were mentioned as one of the attributes!

MP Divakar

Gondalf   2014-11-06 17:39:35

Ummm depends.....it could be a right strategy to not collect all the taxation to help the China companies to better compete with estabilished giants. China wants to push hard on it's own industry, this is a long term investiment IMO.

About Qualcomm. It's crap single digit grown in 2014 says many things. The times are changing. Ask to Samsung.

Gondalf   2014-11-06 17:47:35

Qualcomm must do discounts on patents in China otherwise this market will become an incredible nightmare in future. 

Join with the enemy instead of to fight with it, Intel is doing this right now, Qualcomm must follow the same path.

rick merritt   2014-11-06 20:46:24

It looks like Intel and Qualcomm have opposing strategies in China.

Long before its $B investment in Spreadtrum, Intel plunked down big bucks for a fab in China, too.

Neo10   2014-11-07 01:38:01

Qualcomm should be happy that they are under reporting by only 25%. Of course it could be much higher but it can't get any better in China where goct is the big brother. Intel threw some small change in china to keep the researches well paid and keep working on x86..

cookiejar   2014-11-07 08:19:14

In the business world, might makes right.  Remember Armstrong, who invented FM radio and patented his invention.  The top name manufacturers went into production and never paid him royalties.  Armstrong sued, but the decades long court battle drained his funds and he committed suicide in the end. 

As long as it's cheaper for a large organization to fight a long drawn out legal battle than pay royalties, the law of economics rules that the way to go.  If you add a government who can change rules at will, it becomes a no brainer.

tpfj   2014-11-07 09:52:42

Rick, not sure this paragraph makes sense.

 

Qualcomm believes 1.3 billion handsets were sold with its chips this year and 1.5 billion will be sold next year. But handset makers are on track only to report sales of 1.04 to 1.13 billion devices this year, leaving a gap of 170 to 260 million devices unreported, the company claims.

 

I think you meant IP not chips? QC should absolutely know how many it has sold itself (you'd hope!).

rick merritt   2014-11-07 10:38:12

@tpfj: Good point. It should say intellectual property. Fixed.

rick merritt   2014-11-08 01:09:22

I know back in the CDMA days of 2G people were pretty miffed about how much Q'com demanded in royalties. How is it today for 3G/LTE royalties?

Gondalf   2014-11-08 15:41:00

Yes and in my knowledge Intel can shift the production on 32nm right now because officially is two node behind 14nm.....interesting solution to build cheap SOCs for industry automation and other devices even with integrated analog circuitry (this Intel node has a complex analog library if i remember correctly).  

lakehermit   2014-11-08 20:25:35

"As long as it's cheaper for a large organization to fight a long drawn out legal battle than pay royalties, the law of economics rules that the way to go."

Wait until the new Congress passes their latest so called "Patent Reform." The new bills likely will cost a patent holder like Qualcom a fortune and take years to sue an infringer, particularly if it is an offshore manufacturer. The last round of reforms which put the America Invents Act and its Inter Partes Review (IPR) Trials in place was bad enough for patent holders. Now a patent owner may have to pay hundreds of thousands of dollars when the infringer brings an IPR Trial, and that is before the patent holder ever has a chance to file an infringement claim. Even worse, the IPR is viewed by many patent attorneys as a patent killer. One recent study shows 79% of patent claims involved in an IPR being invalidated (http://www.senniger.com/article-details.aspx?article=3688&articlegroup=667). One has to wonder how the Patent Office manages to kill so many of the same patents that it issues. Are they truly bad patents or is the new IPR group just hostile to the work of their brethren?

 

Yaojian   2014-11-08 21:23:07

I think USPTO's intension to prevent company from abusing patents to block technology development since over 99% of patents are only ideas without any practice.  You can put huge numbers of ideas to patents, but you could not evaluate big numbers of ideas. Only practics create real products and move technology ahead.

krisi   2014-11-09 17:17:57

I think China will get Qualcomm out of that market there...royalty stream is just too high...Q has no choice, out or reduce royalties ...the former is probably better

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