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  1. Home
  2. / Investing
  3. / Technology

Qualcomm's Settlement With Apple Looks Like Big Win for Chipmaker -- Tech Check

The two tech firms made the surprising announcement on Tuesday afternoon.
By ERIC JHONSA
Apr 16, 2019 Updated Apr 16, 2019 | 04:01 PM EDT
Stocks quotes in this article: QCOM, AAPL, INTC, SNE, AMD, TSM, NVDA, MSFT, IBM, RHT

Qualcomm's Settlement With Apple Looks Like a Big Win for Chipmaker

In a bombshell Tuesday afternoon press release, Qualcomm (QCOM) and Apple (AAPL) announced that they've settled their bitter and far-reaching patent-licensing dispute. The deal features a one-time payment from Apple to Qualcomm of unspecified size, along with a 6-year patent license agreement that's accompanied by a 2-year option to extend. It also features (notably) a "multiyear chipset supply agreement."

Qualcomm shares are up over 22% as of the time of this post, while Apple's shares are up fractionally. Shares of Intel (INTC) , which is the sole supplier of the modem going inside of Apple's 2018 iPhones, fell about 2% following the news and are now nearly unchanged on the day. The fact that Apple appears to be once more turning to Qualcomm for its iPhone modem needs is a clear negative for Intel, but it's worth noting here that Intel's iPhone modem sales are believed to have carried low margins.

No details have yet been shared about the terms of the new licensing deal; Apple had been pushing for major reductions in the royalty rates it pays (via its contract manufacturers) to Qualcomm on iPhone sales. However, Qualcomm does say that the deal will add about $2.00 in "incremental EPS" as chip shipments ramp. The company will benefit not only from chip sales to Apple and the resumption of royalty payments, but also from a major drop in its legal expenses. 

It's a little surprising that Apple chose to settle now while still waiting to hear the decision in an FTC lawsuit against Qualcomm that could have major implications for Qualcomm's licensing model, depending on how the ruling and any appeals go.

Two possibilities: One, that Apple had concerns about how the trial for a lawsuit it filed against Qualcomm in early 2017 would go (the trial began on Monday in San Diego). And two, that there was some truth to recent reports that Apple was unsatisfied with the progress that Intel had made towards developing a 5G modem meant for 2020 iPhones, and as a result was eager to use Qualcomm's 5G modems without the companies' legal battle acting as an overhang.

Regardless of Apple's motivations, this looks like a big win for Qualcomm. However, we won't know just how big of a win it is until more details emerge about the settlement terms.

Sony's PlayStation 5 Specs Are Good News for AMD

Sony  (SNE) just disclosed to Wired that its next-gen PlayStation console will rely on a high-speed solid-state drive (SSD) and a custom AMD (AMD)  processor with an integrated CPU and GPU. The fact that AMD was tapped isn't too surprising, since AMD is already the processor supplier for the PlayStation 4 and PlayStation 4 Pro. But some of the technical details that Sony shared suggest the AMD processor going inside the the console, which many expect will launch next year and could be called the PlayStation 5, will be a fairly powerful one that initially carries a relatively high price.

Like desktop and server CPUs that AMD is launching this year, the processor going inside of Sony's next console is based on a 7-nanometer (7nm) manufacturing process (most likely Taiwan Semiconductor's (TSM) ). The chip's CPU will have 8 cores and be based on the company's third-gen Ryzen CPU family, which will see desktop products launch in mid-2019 and features a revamped CPU core architecture known as Zen 2.

The chip's GPU will be based on AMD's soon-to-launch Navi architecture (PC GPUs based on it are due later this year). Notably, the GPU will support real-time ray tracing, a graphics-rendering technique that enables photorealistic imagery and is a key selling point for many of Nvidia's (NVDA) recently-launched, Turing-architecture GPUs. And though few TV sets currently have 8K display panels, the GPU will also support 8K graphics rendering.

Wired also says the AMD chip will have "a custom unit for 3D audio" that will enable more immersive audio experiences while playing games. All in all, the chip appear to pack a punch, and (assuming Sony's next PlayStation arrives in 2020) should provide a nice boost to AMD's "semi-custom" revenue, which is driven by its console processor sales starting next year.

Just as importantly, Sony's disclosures up the pressure for Microsoft  (MSFT) to include a powerful processor within its next traditional Xbox console, which is expected to launch in 2020 and (like the Xbox One and One X) be powered by AMD silicon. Microsoft is reportedly prepping two next-gen Xboxes: A traditional console with a lot of processing power, and a cheaper device that's focused on video streaming and supporting Microsoft's upcoming cloud gaming service. Details about the company's next-gen Xboxes will reportedly be shared at June's E3 gaming conference.

Zoom's IPO Pricing Spells a Rich Valuation

Zoom Video Communications, which will begin trading on Thursday under the symbol ZM, just hiked its price range to a level of $33 to $35. After accounting for outstanding stock options, that spells a valuation range of $9.7 billion to $10.2 billion.

At the midpoint of Zoom's valuation range, shares are trading for 30 times the company's fiscal 2019 (it ended in Jan. 2019) revenue of $330.5 million, and about 25 times their fiscal 2019 billings. Though such multiples won't necessarily prevent Zoom's shares from seeing a healthy first-day pop, they do act as a good argument for investors who aren't able to get IPO shares to stay on the sidelines for now.

To be fair, Zoom does have a lot going for it, as I discussed in late March following the company's IPO filing. Revenue rose 118% annually in fiscal 2019 and 108% during Zoom's January quarter, as the enterprise footprint for the company's popular, subscription-based, videoconferencing and collaboration software keeps rapidly growing. Moreover, unlike many other fast-growing enterprise software firms, Zoom, which is able to keep R&D spend low by relying on Chinese developer teams, is now producing a small amount of net income and positive free cash flow.

But this is also a company that has been rapidly growing its sales and marketing spend as it pursues large enterprise deals. And though Zoom looks well-positioned to keep gaining share in its core market thanks to the quality and virality of its offerings, this is a company that faces competition from some deep-pocketed rivals; Microsoft, which bundles its Skype for Business communications and online meeting software with some business Office 365 plans, is especially worth keeping an eye on.

Zoom's IPO pricing is in many ways a sign of the times: Wall Street has been quite eager to grant lofty multiples to fast-growing software-as-a-service (SaaS) plays, and Zoom's profitability and legions of satisfied corporate users are probably further boosting investor interest in its offering. And as is the case for many other richly-valued SaaS plays, it's probably better to wait until Wall Street's enthusiasm cools a little before buying in.

Keep an Eye on IBM's Software Unit as Earnings Arrive on Tuesday 

IBM ( IBM)  reports first-quarter earnings after the close on Tuesday. Big Blue is expected to see revenue decline 3% annually to $18.47 billion and for non-GAAP EPS to fall 9% to $2.22, according to analysts polled by FactSet.

Any changes to IBM's full-year guidance will naturally get a lot of attention. In January, IBM guided for 2019 EPS of "at least" $13.90 and free cash flow (FCF) of roughly $12 billion. The FCF guidance implies a slight improvement from 2018 FCF of $11.9 billion, but is below 2017 FCF of $13 billion and well below a 2012 high of $18.2 billion.

In addition to IBM's full-year outlook, keep an eye on the performance of its Cognitive Solutions (CS) segment, which covers much of the company's software operations and is easily its most profitable reporting unit. The fact that Q4's CS revenue, though just flat annually, topped analyst expectations by close to $200 million was a key reason why IBM's shares jumped after reporting earnings in January.

For Q1, the consensus is for CS revenue to be down 3% annually to $4.17 billion. Though having performed better than expected in Q1, CS has been underperforming an enterprise software market believed to be growing at a high-single digit clip.

IBM has announced a string of asset sales as it tries to improve its software performance; the biggest of these moves has been a $1.8 billion deal to sell seven software businesses to India's HCL Technologies, a transaction that's expected to close by mid-year. The company is also, of course, pushing ahead with a $34 billion deal (expected to close in the second half of 2019) to buy open-source software giant Red Hat (RHT) .

Expectations still aren't especially high for IBM going into earnings -- the stock is, after all, down over the last five years amid a 50%-plus gain for the S&P 500. But with IBM's stock up 18% since its Q1 report, expectations have risen a little lately. And that spells more pressure for its closely-watched software unit to deliver respectable numbers.

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TAGS: Investing | Software & Services | Technology | Technology Hardware & Equipment |

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