What the South Korean FTC Ruling Means for Qualcomm

On Dec. 27, South Korea’s Fair Trade Commission announced its decision regarding its investigation of

For Qualcomm, we are less concerned about the fine itself, as the firm has a substantial cash hoard ($32.4 billion at the end of September). However, the existing licensing agreements held by Qualcomm are at risk, and we surmise South Korea’s FTC could pursue revisions similar to those by China’s National Development and Reform Commission in 2015, in which Qualcomm’s royalties were calculated off a lower base and the firm’s patent pool was separated between essential and nonessential patents. This outcome would be significantly better than the alternative (royalties being calculated on certain components as opposed to the overall average selling price of the device). Furthermore, we don’t expect the corrective order to be severely detrimental to Qualcomm financially, as royalties for handset sales into South Korea accounted for less than 3% of the firm’s licensing revenue in fiscal 2016. Our narrow moat and negative moat trend ratings consider the potential for other regulatory agencies to follow suit in existing or new investigations, with ongoing investigations in the United States, Japan, and Taiwan. We are maintaining our $72 fair value estimate and believe an appropriate margin of safety exists for potential investors.

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