isn't a stranger to China. But while the company's done business
in the region for decades, lately China hasn't been too kind to
Qualcomm. The country is already in the middle of investigating
the company for monopoly practices and, to make matters worse,
Qualcomm recently said Chinese businesses aren't paying device
royalties owed to the company.
Same country, new problems
In addition to selling mobile processors, the company makes
much of its revenue from baseband chips that connect mobile
devices to cellular networks. Qualcomm is a leader in the mobile
chip space, typically being several generations ahead with its
chip technology than other companies. The Chinese
government's investigation into Qualcomm's business practices
isn't anything new, but last week a state-run newspaper said the
company indeed does have a monopoly on wireless communication
Receiving a monopoly ruling against Qualcomm doesn't
necessarily mean it broke any Chinese antimonopoly laws, but the
investigation is hurting the company's revenue. The company said
last week in an SEC statement that the monopoly probe made
it harder to collect licensing fees for its technology.
The Wall Street Journal
, Qualcomm makes about 29% of its revenue from licensing its 3G
and 4G patent technology, but makes about 77% of its pretax
profits from those fees. As China clamps down on the company,
those important royalty fees are being squeezed.
Though the company hasn't specified just how much its
royalties are suffering, Qualcomm said in a
We also believe that 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 that unlicensed
companies may seek to delay execution of new licenses while the
NDRC investigation is ongoing.
So not only is the monopoly probe hurting current licensing
negotiations, but some companies in China are underreporting the
amount royalty fees they owe to Qualcomm.
Qualcomm just ended its fiscal third third quarter 2014 and
beat most analysts' expectations. The company posted revenue of
$6.81 billion, up 9% year over year. But the uncertainty from
China leaves the company in a difficult position in one of it's
most lucrative markets.
Still lots of potential
Despite the setbacks, there's no way Qualcomm can back off of its
China ambitions. The country is in the middle of a major 4G LTE
rollout, which will bring both chip and baseband revenue for the
company, as well as additional licensing royalties.
-- the world's largest mobile network by subscribers --
has already launched part of its TD-LTE network, increasing its
number of 4G subscribers from 1.3 million in February to 14
million at the of June. By the end of 2014, China Mobile says it
will have 50 million 4G subscribers.
China Mobile was the first network carrier in China to receive
government licenses to sell 4G LTE connectivity to consumers.
China Telecom and China Unicom just received LTE test licenses
last month and are limited to just 16 cities. But these licenses
are step in the right direction in boosting the country's 4G
connections and creating better competition between the three
major carriers. China Mobile has 790 million subscribers
alone, and less than 2% of those customers are currently
connected to a 4G network.
China is one of Qualcomm's largest markets right now and
accounted for nearly half of all the company's revenue in fiscal
year 2013. Despite the investigation into Qualcomm and its impact
on licensing revenue, as China Mobile and other telecoms
expands their 4G coverage, the huge increase in those network
connections will help push the company's royalty revenues even
higher, and open up new avenues for the company to sell its
baseband chips to smartphone makers.
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Despite Massive Setbacks in China, Qualcomm Still
originally appeared on Fool.com.
has no position in any stocks mentioned. The Motley Fool
recommends China Mobile. The Motley Fool owns shares of Qualcomm.
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