Is Qualcomm Past Its Licensing Issues In China?

It has been more than a year since Qualcomm (NYSE:QCOM) has been struggling to get Chinese OEMs to comply with the new licensing terms laid out by the Chinese government. The company was accused of monopolistic practices by the NDRC of China and had to pay $975 million and lower its royalty rates in the region as a result of the settlement in 2015. However, slow progress by Qualcomm in implementing the NDRC licensing terms and non-compliance by Chinese OEMs of these terms have been affecting the company's licensing profits since then. Nevertheless, recent developments, as discussed below, suggest that Qualcomm is making significant progress in solving the compliance issues in China and it can soon be over the hump in the large smartphone market.

Major Chinese Players Are Now In Compliance With The Terms

Recently, Qualcomm concluded licensing deals with two major Chinese smartphone makers — Oppo and Vivo. Given that both these players have seen a rapid increase in their sales recently and have managed to secure a spot among the top five smartphone makers globally, this deal is significant for Qualcomm and should boost its licensing profits going ahead. Together Oppo and Vivo accounted for around 11.4% of the global smartphone market share in Q2'16.

Further, the company has already signed licensing deals with other major smartphone vendors such as Huawei, Lenovo, Xiaomi and ZTE, over the last few quarters. It is worth noting that significant shifts in market share have occured.  While Huawei held the third position in the global smartphone market in Q2'16, Lenovo and Xiaomi — which were at the fourth and fifth place, respectively, in market share during Q4'15 — have now been overtaken by Oppo and Vivo, respectively.

All these deals confirm that Qualcomm is quickly closing the gap in China by bringing the major Chinese smartphone makers in compliance with the terms of the judgement. This should help the company post strong profits going ahead. This comes from the fact that licensing revenues constitute more than 70% of Qualcomm's operating profits. Also, recent licensing deals should help the company garner additional income from catch-up payments.

Qualcomm's Lawsuit Against Meizu Technology Was Significant

In an effort to decrease the under-reporting of sales in China, Qualcomm filed a lawsuit against Chinese OEM – Meizeu Technology, earlier this year. This move has likely gone as a clear message to other OEMs in the region, who have not yet agreed to comply with the new terms. Going ahead, this should further increase compliance in the large Chinese smartphone market.

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