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MarketWatch First Take: Qualcomm gets big windfall in surprise settlement, but Apple may have saved the iPhone from 5G doom

Apple Inc. and Qualcomm Inc.’s surprise settlement agreement — in the midst of opening arguments of their much anticipated patent trial in San Diego — will result in a huge cash windfall for Qualcomm, and puts Apple on a faster path to add the latest 5G technology into future iPhones. Read More...

Apple Inc. and Qualcomm Inc.’s surprise settlement agreement Tuesday will result in a huge cash windfall for Qualcomm, and puts Apple on a faster path to 5G for the iPhone.

The companies issued a terse joint press release Tuesday that did not disclose any financial terms of a settlement that includes a six-year deal with options for more and payments from Apple. Qualcomm QCOM, +23.21%  did add a slide to the news release that it sent reporters and analysts to indicate that it expects an additional $2 a share in profit. Wells Fargo analyst Aaron Rakers estimated, based on that statement, that Qualcomm expects about $2.4 billion as product shipments begin to ramp.

Qualcomm’s shares soared more than 20% in regular trading as the news filtered out. Apple AAPL, +0.01%  shares were pretty much flat on the news, since the company will be shelling out possibly several billion dollars in catch-up payments to Qualcomm, plus attorney’s fees, for litigation that has now gone on a little more than two years.

As part of their agreement, Apple will license future products from Qualcomm directly, instead of having its original equipment manufacturers license chips from the San Diego-based chip maker. Apple signed a six-year licensing agreement, with a two-year option to extend the deal.

The big loser in the deal may be neither of the two companies involved. Shares of Intel Corp. INTC, +0.76% Apple’s current provider of communications chips for the iPhone, slipped in immediate after-hours trading on thoughts that Apple made the deal to avoid solely counting on Intel to make it to 5G. Qualcomm’s first-generation 5G chip platform is expected to power the first 5G phones later this year, and its second-generation 5G chip will sample with customers next quarter and be in products in the first half of 2020.

Pat Moorhead, principal analyst at Moor Insights & Strategy, said Apple was “motivated to negotiate,” as it has fallen behind in adopting the next generation of mobile technology. “They benefit from an accelerated 5G schedule, a lower-risk 5G schedule,” he said.

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Intel made it official later Tuesday afternoon, when it issued a statement that it was exiting the 5G modem business, noting that Bob Swan, its new CEO, was reviewing its businesses and “that it has become apparent that there is no clear path to profitability and positive returns.” Intel said it is still excited about the opportunity for 5G and the “cloudification” of the network. Intel shares shot up more than 4% in after-hours trading following the announcement.

Several analysts speculated on Twitter that Intel’s plans to exit 5G modems may have propelled Apple’s settlement with Qualcomm. Moorhead said it was a positive move for Intel, because it will let the company focus on other, more important, product areas.

Apple was Intel’s biggest customer for wireless communications chips, and Intel’s delay in 5G had put additional pressure on Apple, which is already dealing with slower growth in its once-exploding iPhone business. Many of its rivals are launching 5G smartphones, which were all the talk of the latest Mobile World Congress in Barcelona, but some of the recent unveilings lacked a date as to when the product would reach consumers. And in this transition to a new network, 5G phones are coming out ahead of the network itself.

Still, Apple doesn’t want to risk being too far behind its rivals. So it wisely decided it was time to use up a portion of its massive cash pile to settle all of the mounting litigation with Qualcomm — plus it will get a write-down.

The settlement ends litigation that began in 2017, when Apple sued Qualcomm for $1 billion, contending that it was demanding onerous terms for use of its patent licenses. Qualcomm countersued for payments that Apple withheld, leading to lawsuits around the world, as well as battles involving the U.S. Federal Trade Commission.

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It’s not clear what will happen with FTC case, but Moorhead speculated that the FTC will reach a settlement agreement with Qualcomm.

“With Apple as the prime complainant to the FTC and with them settling, I think the FTC, as a whole, their case is a lot weaker,” he said.

The big winner is obviously Qualcomm, which many analysts expect to see boosted by an additional windfall of billions dollars from Apple in payments for all the missed royalty revenue. Moody’s analyst Richard Lane said in an email that in addition to the future royalty revenue stream, “Qualcomm is also likely to receive a significant portion of an estimated $8 billion in catch-up royalty payments, adding yet another favorable boost to the company’s bottom line.”

Apple will lose some money, but it can afford it with $45 billion in net cash sitting on its books. It also gets to avoid the tedious day-to-day coverage of a jury trial that was hearing opening statements when the settlement was announced. That was probably another factor for the famously secretive Apple, which likely was hoping to avoid another long, costly legal fight like the one it had with Samsung Electronics that ended in its favor in 2018.

Whenever it was made, the decision by Intel, which wasn’t even an actual party in this heavyweight legal battle, should be making Qualcomm an even happier winner.

This article was updated after Intel announced it was getting out of the 5G modem business.

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