Qualcomm (QCOM) inked a new, five-year patent licensing deal with South Korea–based LG Electronics yesterday. The agreement will allow LG to use Qualcomm’s modem technology to develop and sell 3G, 4G, and 5G smartphones. Qualcomm and LG didn’t disclose the terms of the deal.
LG terminated its licensing deal with Qualcomm in 2018 over a patent dispute in the US. Despite the companies’ differences, LG agreed to negotiate with its key smartphone chip supplier in June and renewed an interim supply agreement with Qualcomm.
Smartphone maker LG is highly dependent on Qualcomm chips for producing global 5G devices. LG has already launched its V50 ThinQ 5G smartphone powered by Qualcomm Snapdragon processors.
LG follows Apple in settling a dispute with Qualcomm
LG’s deal comes after Qualcomm reached a surprise settlement with iPhone maker Apple (AAPL) in April. Apple agreed to pay around $5 billion–$6 billion to Qualcomm to dismiss their long-standing licensing dispute. The companies also agreed to a multiyear chip supply agreement and a six-year patent license agreement, which also includes a two-year extension option.
The renewed agreement with Apple thus gave the chip maker hopes of supplying chips to Apple’s 5G iPhones. Until 2016, Apple solely relied on Qualcomm chips. However, last year, Apple replaced Qualcomm with chip giant Intel (INTC) to supply modem chips for its recent iPhone models. But Intel backed out, which put Apple in a fix. Apple was looking to buy chips for its upcoming 5G models in 2020. Therefore, the iPhone maker had no choice left but to settle the dispute with Qualcomm despite its differences with the company. However, Qualcomm took a hit when Apple bought Intel’s modem business for $1 billion in July.
Qualcomm relies on licensing deals for revenue
The company earns more than 60% of its profits from licensing. Lately, though, its customer base is shrinking. Earlier, the chip maker was supplying chips to handset makers and smartphone original equipment manufacturers. The semiconductor giant’s top customers were Samsung (SSNLF), Huawei, and Apple, which were using its processors in most of their smartphones.
However, Trump’s ban on US companies’ trading with Huawei significantly affected chip makers, especially Qualcomm. Trump stated that no 5G-related technology could be shipped to Huawei until the trade war ended. The ban, however, eased on August 19 after the US granted a 90-day reprieve to US companies, allowing them to trade with Huawei.
Qualcomm is now eyeing 5G to get more licensing deals from companies, as it dominates the 5G chip market. We expect it to return to growth next year when 5G smartphones roll out.
Like LG, other smartphone makers are also trying to tap the fast-growing market with their 5G devices and network.
Rivals including Samsung and Huawei have already released 5G modems. Samsung has already shipped the Galaxy S10 5G and is working on releasing another 5G phone this year. LG is also set to release its V60 smartphone next month. Motorola has also released its 5G phone Moto Z3 with the Moto 5G Mod.
Chinese smartphone makers OnePlus, Xiaomi, and ZTE are also reportedly progressing in their efforts to launch 5G phones this year.
Stock price performance
Qualcomm has returned 36.45% YTD (year-to-date) as of August 20. In comparison, the S&P 500 has gained 15.7% in the period. Qualcomm has underperformed its semiconductor rivals Advanced Micro Devices (AMD) and Micron (MU) YTD. AMD and Micron have returned 66.4% and 39.4%, respectively, in the same period. NVIDIA (NVDA) and Intel are up 26.0% and 1.2%, respectively, YTD.