By Asa Fitch
Qualcomm Inc.'s legal victory in a high-stakes battle with the U.S. government raises the opportunity for the smartphone chip giant to enjoy a period of relative calm and growth propelled by rising appetite for new 5G handsets.
The company is emerging from what, by most corporate standards, has been an unusually tumultuous five-year period. It has faced antitrust allegations, legal battles with its biggest customers, U.S.-China trade tensions, an activist shareholder advocating for the company to split up and a $117 billion hostile takeover attempt. An appeals court's decision Tuesday to vacate an antitrust ruling against the company resolved one of its last outstanding issues and sent shares close to a record high.
Rather than being damaged, the San Diego, Calif.-based company is emerging from the turmoil largely unscathed. It has also become a kind of national champion in the Trump administration's competition with China over technology, particularly in superfast 5G networking.
The appellate ruling was "the last domino to fall" after five years of uncertainty and shareholder anxiety, said Stacy Rasgon, an analyst at Sanford Bernstein & Co. The company can now move forward from a more stable position, he said.
Qualcomm executives see the company, a leading supplier of the chips powering 5G equipment, as being poised to benefit from wider global uptake of the technology as well as new product launches like Apple Inc.'s first 5G iPhone, which is due before the end of the year. Last month, Qualcomm Chief Executive Steve Mollenkopf said the company expects sales of 5G handsets will likely come in at the high end of a projection of between 175 million to 225 million units this year.
"We are anticipating the next inflection point in our 5G ramp to start in [the September quarter], with strong year-over-year growth in revenue and earnings per share, leaving us well positioned for continued growth in fiscal year 2021," he told analysts on an earnings call.
While Microsoft Corp., Facebook Inc., Amazon.com Inc. and other technology companies have faced their own periods of tumult due to issues like antitrust scrutiny, investor activism and political pressure, few, if any, have experienced so much in as compressed of a timeline as Qualcomm.
The upheaval for the chip maker began in earnest in 2015, when activist investor Jana Partners LLC bought more than $2 billion worth of shares and pushed for the company to be split into two: one that licenses technology patents and another that sells wireless communications chips. Qualcomm's board, which had previously considered a breakup, rejected Jana Partners' plan and the investor ultimately sold its shares in 2016.
Soon after, Qualcomm tried to buy Dutch chip-making rival NXP Semiconductors NV for $44 billion in 2016 only for the deal to fall apart two years later after Chinese authorities didn't give their approval. Rival Broadcom Inc. launched a hostile takeover bid for Qualcomm in 2017, while the NXP deal was hanging in the balance. The Trump administration blocked that deal, in 2018, after a national-security review determined Qualcomm shouldn't be sold to Broadcom, which was then based in Singapore.
In 2017, Apple and the Federal Trade Commission sued Qualcomm, alleging the company abused its monopoly power in some markets for chips that handle cellphone communications. The suits alleged Qualcomm used its dominance to extract high royalty rates on its patent portfolio.
To gauge Qualcomm's chances of prevailing, Kevin Cassidy, an analyst at Rosenblatt Securities, surveyed lawyers after Apple and the FTC sued. "I probably interviewed 10 different lawyers and I would say eight out of the 10 said they have no chance against Apple," he said.
The companies settled last year and dropped all litigation, though the FTC case continued. A district-court judge ruled against Qualcomm last year, siding with the FTC, which threatened a key source of revenue for Qualcomm. The company appealed, leading to Tuesday's verdict.
Qualcomm hasn't resolved all of the regulatory issues it faces. The FTC is examining whether to appeal and Qualcomm also faces an antitrust inquiry over one of its businesses in Europe.
The company is also lobbying the Trump administration for approval to sell 5G chips to Huawei Technologies Co., the world's largest smartphone maker. Qualcomm, which has been blocked from such sales by the U.S. government's industrywide restrictions on the sale of some components to the Chinese company, has been lobbying in Washington for a license to go ahead with the sales.
Rosenblatt's Mr. Cassidy said litigation also appears to have led to changes in Qualcomm's focus, with the company leaning more heavily on its chip sales rather than the contentious licensing business.
"The good news on that side is that operating margins will go up because they are not going to be spending money on lawyers," he said.
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Write to Asa Fitch at firstname.lastname@example.org