Qualcomm shares soar on surprise settlement with Apple of long legal dispute

By Stephen Nellis

(Reuters) - Qualcomm Inc on Tuesday won a major victory with a surprise settlement of its wide-ranging legal dispute with Apple Inc that includes a supply agreement paving the way for the iPhone to once again use Qualcomm modem chips.

The settlement also incorporates a six-year patent license and a payment from Apple to Qualcomm, but the companies did not disclose the amount.

Because Qualcomm is already shipping 5G chips while Apple supplier Intel Corp is still developing them, the deal gives Apple an opportunity to catch the iPhone up to Samsung Electronics Co Ltd and other manufacturers whose phones already work on the faster networks.

“This is a big win" for Qualcomm, said Christopher Rolland, an analyst at Susquehanna Financial Group. Shares of Qualcomm jumped 23 percent to $70.45, their biggest gain in more than 19 years.

The settlement followed two years of increasingly bitter legal conflict between the two companies and came as a opening arguments took place at a trial in federal court in San Diego.

As their conflict intensified, Apple had relied exclusively on Intel chips since last year. Apple stock rose marginally, gaining two cents to $199.25.

Shares of Intel, Qualcomm's main competitor for supplying modem chips to Apple, rose 43 cents to $56.71. While Intel likely will lose some share of iPhone chips, Intel investors have been lukewarm on the modem chip business because they are less profitable than Intel's core CPU chips.

“Intel isn’t trading lower because modems represent such a small portion of revenues for the company," said Patrick Moorhead of Moor Insights & Strategy.

The deal could help Qualcomm return to the preeminent position it held in the early 2010s when it dominated the transition to 4G mobile networks and expanded revenues dramatically.

Apple had accused Qualcomm of using illegal patent practices to keep a monopoly on modem chips that connect phones to mobile data networks. Qualcomm had said Apple was using its technology without paying for it.

Qualcomm and Apple did not say when their new supply agreement would start. Because Intel does not expect to have a 5G chip ready for phones until next year, Bernstein analyst Stacy Rasgon said Apple is most likely tapping Qualcomm for its 5G chip.

Apple did not say whether it would keep Intel aboard as a supplier, but the company's executives testified in January at a trial between the U.S. Federal Trade Commission and Qualcomm that Apple's policy is always seek several suppliers.

BOOST TO EARNINGS

Qualcomm said the arrangements are expected to generate $2 per share in additional earnings, though analysts cautioned it was not clear how much of that was coming from the license deal versus the supply agreement.

Analysts were also unsure whether Apple's a onetime payment under the deal represented unpaid royalties from the past two years or a down payment on future royalties.

The settlement could also have an impact on China's Huawei Technologies Co Ltd, which is also in a licensing dispute with Qualcomm. Analysts widely believe that Huawei was watching the outcome of the Apple case to gauge its bargaining position.

Finally, a U.S. FTC case against Qualcomm that makes many of the same claims of anticompetitive behavior remains unresolved, with a decision expected at any time.

A jury of six men and three women was in the process of hearing opening arguments from Apple and Qualcomm when news of the settlement broke.

Judge Gonzalo Curiel briefly dismissed the jury as reporters in the courtroom rushed to confirm the news. Apple's litigation chief Noreen Krall chatted privately with Qualcomm attorney Mark Snyder before Judge Curiel called the jurors back into the courtroom.

In addition to the federal lawsuit, the companies had lodged litigation in dozens of jurisdictions around the world, including Qualcomm efforts to ban iPhone sales in Germany and China and a state court case in San Diego where Qualcomm accused Apple of helping steal its chip secrets to benefit Intel.

Apple filed a $1 billion (765 million pounds) lawsuit against Qualcomm in January 2017, accusing the chipmaker of overcharging for chips and refusing to pay some $1 billion in promised rebates.

Later Qualcomm hit back with its own lawsuit, alleging that Apple used its heft in the electronics business to wrongly order contract factories such as Hon Hai Precision Co Ltd's Foxconn to withhold royalty payments from Qualcomm that Apple had historically reimbursed to the factories.

As part of the settlement, Qualcomm will also end litigation with Apple's contract manufacturers.

Intel did not immediately respond to Reuters request for comment.

(Reporting by Vibhuti Sharma in Bengaluru and Stephen Nellis in San Diego; Additional reporting by Shanti Nair; Editing by Arun Koyyur and Cynthia Osterman)