Chip maker Qualcomm (QCOM) announced this morning that it had been fined about $865M by the South Korean government for alleged violations of that country's competition law. Qualcomm denied that it had violated the law, while research firm Bernstein wrote that Seoul's decision appears to require changes to Qualcomm's business model.
NEWS: The Korea Fair Trade Commission, or KFTC, announced that it had fined Qualcomm about $865M. Calling the decision "unprecedented and insupportable," Qualcomm said that the judgment related to "licensing practices that have been in existence in Korea and worldwide for decades and that the KFTC reviewed but did not question in a previous investigation of Qualcomm." The company's counsel added in a statement that the KFTC findings are "inconsistent with the facts, disregard the economic realities of the marketplace, and misapply fundamental tenets of competition law."
ANALYST REACTION: According to Bernstein analyst Stacy Rasgon, the KFTC may have based its decision on its belief that Qualcomm was forcing companies to pay "unilateral, unfair terms on licensing contracts without [conducting] a fair calculation," "forcing handset makers to pay royalties" on unnecessary patents, "limiting the access of competing chip makers to its patents," and pushing handset makers "into unfair licensing agreements by refusing to supply crucial phone chips" to those that refused the deals. KFTC appears to be demanding that Qualcomm adopt changes to its business model, Rasgon stated Among these changes are offering separate licenses for standards-essential and non-essential patents, and licensing key intellectual property to competing chipmakers, Rasgon wrote. Following the issuance of an official written statement by KFTC, expected to occur in 4-6 months, Qualcomm will appeal the decision, Rasgon stated. The appeal could take many years, he indicated. Rasgon kept an $80 price target and a Market Perform rating on the stock.
WHAT'S NOTABLE: Noting that Qualcomm had reached a licensing deal with Chinese smartphone maker Gionee on Monday, Citi analyst Christopher Danely estimated that the deal could increase Qualcomm's 2018 earnings per share by 10c, or 2%, "all else being equal." The analyst, however, continues to believe that Qualcomm is "fairly valued." He kept a $70 price target and a Neutral rating on the stock.
PRICE ACTION: In morning trading, Qualcomm slipped 1.2% to $66.46.
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