San Diego wireless giant Qualcomm (NASDAQ: [[ticker:QCOM]]) and Irvine, CA-based Broadcom (NASDAQ: [[ticker:BRCM]]) said last night they have agreed to end their wide-ranging patent war and enter a broad cross-licensing deal.
As part of the global settlement, which terminates litigation in federal court as well as formal disputes before trade commissions in Europe and South Korea, Qualcomm has agreed to pay Broadcom $891 million over the next four years. Qualcomm says its first payment, for $200 million, will be paid to Broadcom before June 30.
That could put a ding in Qualcomm’s net income next quarter, but it seems doubtful shareholders will mind. A J.P. Morgan analyst said last week that settlement payments would have little impact on Qualcomm’s future earnings.
When Qualcomm announced Wednesday that it was postponing the release of its earnings for the second that ended in March (because it was in advanced settlement talks with Broadcom), the San Diego company added it would meet or exceed its prior guidance for quarterly revenue and operating income (excluding the cost of its deal with Broadcom.) In last year’s second quarter, Qualcomm reported operating income of $766 million on $2.6 billion in revenue—and the company said earlier this year it expected second-quarter revenue to fall between $2.25 billion and $2.45 billion.
The agreement also relieves both Broadcom and Qualcomm of substantial legal costs—in a battle where Qualcomm wasn’t faring particularly well. The company suffered its worst setback in mid-2007 when San Diego federal judge Rudi Brewster issued a blistering, 54-page ruling that found Qualcomm and its trial counsel had committed “gross litigation misconduct” by withholding tens of thousands of relevant documents from Broadcom during a patent infringement trial. That decision against Qualcomm was largely upheld by a federal appellate court last December.
Strategically, the benefits of reaching a comprehensive settlement with Broadcom would seem to far outweigh the financial impact on Qualcomm’s earnings—especially since Qualcomm said terms of the agreement “will not result in any change” to its licensing revenue model for its 3G and 4G wireless technologies. And Qualcomm’s licensing revenue is the central engine of its success.
After fighting for more than a decade to establish its CDMA (for Code Division Multiple Access) wireless digital standard, Qualcomm attained its first strategic breakthrough in 1999, when it settled a wide-ranging patent dispute with Sweden’s Ericsson. In that deal, Qualcomm agreed to sell its CDMA wireless infrastructure business to Ericsson and Ericsson agreed to support a single worldwide CDMA standard.
At that time, Qualcomm also settled on a corporate strategy that focused its business on wireless innovation, which enabled the company to generate enormous revenue through technology licensing deals.
In July, Qualcomm struck a surprise settlement agreement with Nokia, the world’s largest mobile phone maker, that ended a similar high-stakes licensing dispute. That deal enables Qualcomm and Nokia to share many more technology patents than they did before. Qualcomm also licensed its technology to Nokia and Nokia allowed Qualcomm to incorporate its technology within its mobile phone components; buyers of those components will pay Nokia’s royalty fees rather than Qualcomm’s.
Broadcom posed the last major challenge to Qualcomm’s licensing model.
“We believe that this resolution is positive for both Qualcomm and Broadcom, our customers, our partners and the overall industry,” Paul E. Jacobs, chairman and CEO of Qualcomm, and Scott A. McGregor, president and CEO of Broadcom, said in a joint statement.
“The settlement will allow us to direct our full attention and resources to continuing to innovate, improving our competitive position in this economic downturn, and growing demand for wireless products and services,” Jacobs said.
