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How an Intel–AMD Licensing Deal Would Negatively Impact NVIDIA

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Mar. 23 2016, Published 10:22 a.m. ET

Intel–NVIDIA partnership nears its end

In the previous part of the series, we saw that there are rumors that Intel (INTC) is in talks with NVIDIA’s (NVDA) rival Advanced Micro Devices (AMD) over a graphics technology licensing agreement. Why is this a concern for NVIDIA?

In 2011, Intel signed a GPU (graphic processing unit) licensing deal with NVIDIA as a settlement to a patent infringement lawsuit filed by the latter. Under the agreement, Intel paid NVIDIA $1.5 billion over a span of five years to use NIVIDIA’s GPUs in its chips. However, the deal never translated into Intel chips equipped with NVIDIA’s technology.

If the AMD rumor comes true, NVIDIA will not be able to renew its existing licensing agreement with Intel.

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Impact on NVIDIA’s earnings

NVIDIA earns revenue from three segments: GPU, Tegra Processor, and Licensing. While revenue from the first two segments fluctuates, revenue from the third segment remains constant. Licensing is a profitable segment, as only the legal cost is involved.

In 2015, licensing revenue from Intel accounted for 6% of NVIDIA’s revenue. The expiration of the licensing agreement in March 2017 will impact NVIDIA’s earnings per share by $0.25–$0.30 in 2017, according to Needham analyst Rajvindra Gill.

NVIDIA seeks another source of licensing revenue

NVIDIA has been looking to secure another licensing deal to fill the revenue gap. It has filed a patent lawsuit against South Korea’s (EWY) Samsung (SSNLF) and the United States’ Qualcomm (QCOM). NVIDIA claims that its GPU technology is used in Qualcomm’s Snapdragon SoCs (systems-on-chip) and Samsung’s in-house Exynos SoCs. The ruling of this case is due to be announced in April 2016.

In the next part of the series, we’ll explore how a possible licensing agreement with AMD would benefit Intel.

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