FTC Ruling Against Qualcomm Looks Onerous to Analysts

(Bloomberg) -- The judge in the Federal Trade Commission case against Qualcomm Inc. ruled against the company on “virtually every” measure, disappointing investors who had expected the judge to soften her stance after the settlement with Apple Inc. and delay in decision, Bernstein analyst Stacy Rasgon wrote. The shares fell 12.6%, their biggest drop in more than two years.

The most onerous remedies imposed by the judge require renegotiation of existing licenses and mandating offering chipset licenses, Rasgon said in a note. Given the “somewhat schizophrenic” behavior of the government, the analyst sees the possibility of winning on appeal, especially due to the recent Apple settlement.

Qualcomm said it “strongly disagrees” with U.S. District Judge Lucy Koh’s ruling and will seek an immediate stay and appeal. “We strongly disagree with the judge’s conclusions, her interpretation of the facts and her application of the law,” said Don Rosenberg, executive vice president and general counsel of Qualcomm.

An appeal is likely to take time and uncertainty on Qualcomm’s licensing business is likely to persist, Rasgon said. Bernstein rates Qualcomm market perform.

Here’s a round-up of what other analysts are saying:

Susquehanna, Christopher Rolland

(Positive, PT cut to $85 from $100)

• If Qualcomm loses appeal, which may take years, QTL profitability may be “significantly” cut as the judge doesn’t think Qualcomm can charge a royalty on the end device (handset), but rather the modem
• Ruling may also allow customers to break long-term chip contracts more easily
• Expect Apple will “tread lightly” in any renegotiation as Qualcomm is significantly ahead of rivals in 5G modem development

Stifel, Kevin Cassidy

(Buy, PT $9)

• Expects there may be delays in forcing Qualcomm to change its business model given Trump administration considers the company’s technology, especially 5G, critical to national security
• Surprised by decision in the case

Raymond James, Chris Caso

(Strong Buy, PT $115)

• Should the ruling stand, Qualcomm would be forced to “change their licensing practices and renegotiate licensing agreements with customers, potentially upending their licensing model"
• For Qualcomm “the main near-term impact will be to create uncertainty as the appeals process gets underway"
• “A key question will be whether the Apple agreement that was just signed can be reopened as a result of this agreement"
• If the pact with Apple stands, “then no major U.S. OEMs would benefit from the ruling - Samsung and (ironically) Huawei would stand to benefit"

Morgan Stanley, James Faucette

(Overweight, PT $95)

• Stock weakness is a buying opportunity as the headlines read more negatively than they should
• Ruling doesn’t really change Qualcomm’s current position and is similar to rulings in Taiwan and Korea; Qualcomm adjusted its licensing agreements in those countries to go along with local rulings
• FTC case was focused on SEP (standard essential patents), though QCOM licensing deals with handset makers outside China usually cover non-SEP intellectual property so judge’s ruling on SEP likely not applicable to those agreements

Bloomberg Intelligence, Anand Srinivasan

• Judge’s ruling puts Qualcomm on its “heels again by clearly separating its royalty dealings from its chip sales to handset makers”
• FTC remedies are “onerous” and carefully monitored; likely to cut Qualcomm’s leverage in royalty collection
• Some phonemakers, such as Huawei, may press this advantage
• Link to court decision

To contact the reporters on this story: Joshua Fineman in New York at jfineman@bloomberg.net;Kamaron Leach in New York at kleach6@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Courtney Dentch, Jeremy R. Cooke

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