Qualcomm inks license deal with China's Xiaomi

Licensing patents provide more than half of Qualcomm’s profit. Photo: Reuters

Qualcomm Inc. said it reached a patent-licensing deal with Xiaomi Corp., one of China’s largest smartphone makers, a sign of progress in easing the chip maker’s struggles in the country.

The San Diego-based company’s stock jumped 5.6% to $52.03 in afternoon trading on Wednesday in response to the announcement.

Qualcomm gets more than half its profit from licensing patents, and customers in China accounted for more than half of total revenue during the fiscal year ended in September.

The company on Nov. 4 cited delays in convincing Chinese handset makers to sign licensing agreements in projecting lower profit than expected in its first fiscal quarter. Those bearish comments caused Qualcomm’s shares to fall 15% in the next trading session.

The deal with Xiaomi follows announcements of agreements with China’s Huawei Technologies Co., TCL Communication Technology Holdings Ltd and ZTE Corp. Qualcomm was in negotiations with Lenovo Group Ltd. as recently as last month, people familiar with the matter said.

Derek Aberle, Qualcomm’s president, said the company has agreements with four of the top five handset makers in China.

“This agreement is just another proof point in the overall plan that we have,” he said in an interview. “We are definitely pleased with the progress we are making.”

Financial terms weren’t disclosed.

Qualcomm’s licensing business generated $6.6 billion in profit last year, compared with $3.8 billion for its chip business.

A pioneer in cellular technology, the company has long charged handset makers royalties to use patents associated with the third-generation cellular technology dubbed 3G. It also licenses patents on 4G technology, a field where it scooped rivals in delivering chips based on a widely used technology called LTE.

The company’s dominant position prompted an antitrust investigation in China that began in November 2013. During the probe, Qualcomm said some companies in the country began dragging their heels on signing licensing deals. Qualcomm also said some companies that were licensees underreported their hardware sales, negatively impacting Qualcomm’s licensing revenue.

Both problems were expected to ease after the announcement of an antitrust settlement with Chinese antitrust authorities in February, which came with a $975 million fine and set new licensing formulas. But Qualcomm said in November that it was still struggling to close deals with some vendors.

Investors greeted the deal with Xiaomi enthusiastically. Qualcomm said the Chinese company—among the world’s fastest-growing smartphone makers and most valuable startups—agreed to license both 3G and 4G patents.

The closely held Chinese company has, by some estimates, a valuation of $46 billion and has risen to challenge Apple Inc. and Samsung Electronics Co. in China by selling full-featured phones at near cost.

“The exact impact of the latest licensing deals on Qualcomm’s finances is not clear,” said Stacy Rasgon, an analyst with Sanford C. Bernstein. Some handset makers that were holding out on licensing deals are expected to make catch-up payments once those agreements are reached, he noted.

But the new royalty formula in China is also expected to result in lower revenue than deals Qualcomm has reached in other countries.

“For me the broad controversy is not whether China is going to pay but how much is China going to pay,” Mr. Rasgon said.

Qualcomm still faces antitrust issues. The company last month disclosed that the staff of South Korea’s antitrust agency had alleged that the company’s practices in seeking royalties from handset makers violated anticompetition laws there. The company said it would fight the allegations.

Qualcomm faces pending investigations by the U.S. Federal Trade Commission, which is also focusing on its patent licensing practices, and European regulators, who are studying its chip sales tactics.

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