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Qualcomm Wins Antitrust Respite -- WSJ

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08/24/2019 | 02:51am EDT

By Brent Kendall and Asa Fitch

A federal appeals court froze a ruling that Qualcomm Inc. had committed an array of antitrust violations, a boost for the chip maker that allows it to maintain its business practices for the time being.

The court decision Friday is a setback for the Federal Trade Commission, which had sued the company alleging it engaged in an illegal monopoly that harmed smartphone manufacturers and rival chip producers.

The San Francisco-based Ninth U.S. Circuit Court of Appeals granted a request by Qualcomm to stay the order by U.S. District Judge Lucy Koh that the company change the way it licenses its cellular technology.

Judge Koh's ruling, issued in May, found the company leveraged its dominance in smartphone chips to force device manufacturers to pay unreasonably high royalty rates for Qualcomm's intellectual property.

Qualcomm argued its business practices were justified and perfectly lawful and said a stay was necessary because Judge Koh's ruling would irreparably harm the company while it was appealing the case.

Shares of Qualcomm were down 4% at $74.04 in afternoon trading on the Nasdaq Stock Market.

Friday's court action isn't a definitive reading of the merits of Qualcomm's appeal, but it indicated the company has a fair shot at winning.

The appeals court's seven-page order said Qualcomm "has shown, at minimum, the presence of serious questions" about whether Judge Koh's ruling against the chip maker was correct.

Qualcomm said it welcomed the ruling and believed the case would ultimately go its way. The Ninth Circuit's stay "will allow Qualcomm to continue to invest in inventing the fundamental technologies at the heart of mobile communications at this critical time of transition to 5G, " said Don Rosenberg, executive vice president and general counsel for the company.

Qualcomm.shares spiked after the court's action then fell along with the much of the tech industry when U.S.-China trade tensions flared, with President Trump blasting Beijing's imposition of tariffs on $75 billion worth of U.S. products.

Qualcomm supplies China's biggest smartphone makers. Last month, the chip maker cut its full-year forecast for smartphone sales and warned that challenges emanating from China are hurting its business.

Bruce Hoffman, director of the FTC's bureau of competition, expressed disappointment in Friday's court ruling, but, he said, "We respect the decision and look forward to defending the district court's decision on the merits." He said some conditions imposed on Qualcomm remain in effect, including monitoring provisions and a requirement that the company not interfere with customers who might want to talk to the government about antitrust matters.

The stay means Qualcomm won't have to change its practices while the litigation runs its course, which could take at least another year. The appeals court said it will hear oral arguments in January.

The case dates back to the start of 2017, when antitrust officials at the FTC sued Qualcomm in the waning days of the Obama administration. The case has produced an unusual split between two federal antitrust agencies, with the Justice Department under the Trump administration stepping into the case to support Qualcomm.

The FTC had argued that staying Judge Koh's ruling would allow Qualcomm to perpetuate anticompetitive actions that have spurred higher prices and created roadblocks to innovation. The Justice Department, on the other hand, said the judge's ruling could deal a blow to Qualcomm's position as a leader in 5G wireless technology, potentially to the detriment of national security.

The appeals court said the rift within the government was another reason it delayed court-ordered changes to Qualcomm's business. "This case is unique, as the government itself is divided about the propriety of the judgment and its impact on the public interest," the court said.

As Qualcomm faced FTC scrutiny, Apple Inc. in 2017 sued the chip maker on similar grounds, alleging it charged above-market rates for licenses to its patents. The Apple-Qualcomm legal battle grew to encompass cases in China, Germany and other far-flung locales before the companies reached a global settlement in April.

That deal dissipated the uncertainty hanging over Qualcomm, but the FTC case could still shake the company to its core.

Judge Koh's ruling required the company to renegotiate its licensing deals with phone makers and allow chip-making rivals to use its intellectual property at reasonable rates.

Playing by those rules would cut into a licensing business that currently accounts for almost two-thirds of Qualcomm's earnings before taxes as of its fiscal third quarter. In court testimony, Qualcomm executives have warned that some licensees were already threatening to hold back payments as the court battle dragged on.

--Tripp Mickle contributed to this article.

Write to Brent Kendall at brent.kendall@wsj.com and Asa Fitch at asa.fitch@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
APPLE -0.81% 220.96 Delayed Quote.41.23%
LONDON BRENT OIL 2.03% 64.73 Delayed Quote.25.71%
NASDAQ COMP. 0.07% 8182.879231 Delayed Quote.23.37%
QUALCOMM -0.85% 78.23 Delayed Quote.38.64%
WTI 0.90% 58.6 Delayed Quote.36.21%
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Financials (USD)
Sales 2019 19 299 M
EBIT 2019 4 642 M
Net income 2019 4 494 M
Debt 2019 6 821 M
Yield 2019 3,12%
P/E ratio 2019 20,4x
P/E ratio 2020 23,2x
EV / Sales2019 5,32x
EV / Sales2020 4,42x
Capitalization 95 915 M
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Technical analysis trends QUALCOMM
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Number of Analysts 26
Average target price 80,78  $
Last Close Price 78,23  $
Spread / Highest target 47,0%
Spread / Average Target 3,26%
Spread / Lowest Target -27,1%
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Steven M. Mollenkopf Chief Executive Officer & Director
Cristiano R. Amon President
Jeffrey William Henderson Non-Executive Chairman
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Mary Gendron Chief Information Officer & Senior Vice President
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1st jan.Capitalization (M$)
QUALCOMM38.64%95 915
BROADCOM INC13.16%114 138