The fight between Apple Inc. (NASDAQ:AAPL) and Qualcomm Inc. (NASDAQ:QCOM) has reached a new height. Apple has informed Qualcomm that it would stop paying disputed licensing fees, intending to wait for a court decision to resume payments. Apple filed its suit against Qualcomm in January.
Apple and Qualcomm have been fighting relentlessly over the royalty payments. Qualcomm is a key chipset supplier for many of the smartphone makers around the world and holds a ton of patents related to wireless technologies. Smartphone builders must license those patents from Qualcomm. Licensing revenue represents around a third of the company’s total revenue.
Apple alleges that Qualcomm forced it to pay more in royalties than other smartphone makers because Apple uses chipsets manufactured by Qualcomm competitors and is asking the judge to award it $1 billion. Apple also filed another suit in China. Qualcomm has responded by filing a countersuit.
Apple does not directly license from Qualcomm, unlike other smartphone makers. The manufacturers that are contracted to build Apple’s phones pay the Qualcomm licensing fees and Apple is supposed to reimburse them. Apple says it will not pay the royalties owed to those contract manufacturers until its current legal dispute with Qualcomm is settled. Apple expects to pay a lower fee after the decision.
Qualcomm confirmed Apple’s decision and reported that its revenue and profits would be lower than expected as a result. Qualcomm has adjusted its financial forecast for the third quarter, saying that revenue should now range between $4.8 billion and $5.6 billion. The prior revenue guidance was for $5.3 billion and $6.1 billion for a 12 percent decrease to 1 percent increase.
The adjusted third quarter earnings per share guidance is now between 52 cents and 62 cents instead of the prior EPS guidance of between 67 cents and 92 cents. The lost Apple royalty revenue is potentially a half-billion dollar hit to Qualcomm’s third quarter sales. If revenue comes in as now expected, it would mean a year-over-year revenue decrease of between 7 percent and 21 percent.
Qualcomm said in a statement, “Apple is improperly interfering with Qualcomm’s long-standing agreements with Qualcomm’s licensees. These license agreements remain valid and enforceable.” The statement continued, “We will continue vigorously to defend our business model, and pursue our right to protect and receive fair value for our technological contributions to the industry.”
Qualcomm has already been fined roughly $850 million (1.03 trillion won) by South Korea’s antitrust regulator for its patent royalty activities in the country. The regulator found that Qualcomm licenses too many patents and forces smartphone makers to pay expensive royalties for patents they might not even need. Qualcomm was also accused of threatening to withhold its chipsets if the smartphone makers didn’t pay those royalty fees.