), the largest manufacturer of wireless chipset globally, is in
deep trouble in China. On Nov 2013, the Chinese regulatory
authority, National Development and Reform Commission (NDRC), had
initiated a probe on the company related to its monopolistic
practice. Recently, a state-run Chinese news paper stated that the
NDRC has determined that Qualcomm is exercising monopoly power in
Just a couple of days ago, Qualcomm reported strong financial
results for the third quarter of fiscal 2014. Both the top and the
bottom line significantly outpaced the respective Zacks Consensus
Management stated that the company is facing near-term
challenges related to its licensing business in China, and
accordingly lowered its profit forecast for the ensuing fourth
quarter of 2014. As a result, the stock price of Qualcomm fell6.7%
over the last two trading sessions.
Qualcomm is currently involved in a royalty dispute with a major
customer in China. Moreover, some small companies haven't agreed on
a royalty payment as the NDRC has yet to come up with its decision.
A few companies are also under-reporting the amount of phones sold,
for which they should have ideally paid license fees.
Meanwhile, the low-end 3G tablets are gaining huge market
traction in China. However, tablet developers are completely
different from smartphone developers in China. For that, Qualcomm
needs to enter into new licensing agreement with them.
The Chinese newspaper also reported that if found guilty,
Qualcomm will have to pay a hefty fine and will face a cut in royal
fees. Qualcomm generates approximately 29% of its total revenues
from the licensing business however, this business accounts for
almost 77% of the company's net profit.
China - the largest emerging market - contributed approximately
49% of Qualcomm's total revenue in fiscal 2013 (ended Sep 2013).
Accordingly, industry observers project that Qualcomm may need to
pay a significant $1.2 billion or more in fine. More importantly,
the company might also have to forego royalties of TDD-LTE as a
settlement. Such unfavorable actions will severely impair
Qualcomm's patent portfolio.
Qualcomm is clearly the undisputed leader in the global wireless
baseband chipset market. According to a recent research report by
Strategy Analytics, in the first quarter of 2014, Qualcomm
dominated this market with approximately 66% of the revenue share,
followed by 15% of MediatekInc. and 5% of Spreadtrum
Communications. Two other major players in this field are Marvell
Technology Group Ltd. (
) and Intel Corp. (
Nevertheless, recent regulatory problem in China is a major blow
to Qualcomm. In the meantime, China Mobile Ltd. (
), the largest Chinese wireless operator, together with China
Unicom and China Telecom, are gradually deploying 4G TD-LTE network
which was considered Qualcomm's significant future growth
potential. Qualcomm currently carries a Zacks Rank #3 (Hold).
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