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Qualcomm settles Huawei patent spat, warns of 5G flagship phone delay -- likely the iPhone

Apple's first 5G iPhones, which will use Qualcomm modems, may not arrive in September but instead could launch later in the fall.

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Qualcomm, based in San Diego, is the world's biggest mobile chip maker.

Shara Tibken/CNET

The expected iPhone 5G delay may be a reality. Qualcomm, which likely will supply the modems that power the newest crop of iPhones, on Wednesday warned of "the delay of a global 5G flagship phone launch."

The company said handset sales are expected to drop about 15% in the current period, its fiscal fourth quarter, because of the delay. While Qualcomm didn't specify what phone it was discussing, it's widely believed to be the upcoming iPhone. Apple is expected to introduce its first 5G iPhones this fall, but worries about coronavirus-related delays have plagued the company for months.

Apple didn't immediately respond to a request for comment. 

At the same time, Qualcomm said it and Huawei have settled their long-running patent spat, with the two companies signing a long-term, global patent license agreement.  

As part of the agreement, Qualcomm will record about $1.8 billion from Huawei in its September quarter, helping its stock soar 13% to $105 in after-hours trading. The US government has banned Huawei from buying Qualcomm chips and other American components, but Huawei now is paying licensing fees for Qualcomm's patents. 

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Qualcomm is the world's biggest provider of mobile chips, and it created technology that's essential for connecting phones to cellular networks. The company derives a significant portion of its revenue from licensing those inventions to hundreds of device makers, with the fee based on the value of the phone, not the components. Because Qualcomm owns patents related to 3G, 4G and 5G networking technology, as well as other features like software, all handset makers building a device that connects to cellular networks have to pay it a licensing fee, even if they don't use Qualcomm's chips.

Qualcomm and Apple had battled in courts around the globe over patents and Qualcomm's licensing terms. The two giants reached a licensing and chip supply agreement a year ago, just after opening arguments began in a trial in San Diego. The pact cleared the way for Qualcomm to resume supplying modems for iPhones. Apple's devices expected this fall will likely include 5G chips from Qualcomm. Its other modem supplier, Intel, exited the market

Huawei licensing battle

Huawei, one of the world's biggest handset makers, was the last major company fighting with Qualcomm over its licensing terms. The two reached an interim licensing agreement 18 months ago, with Huawei at that time agreeing to pay Qualcomm $150 million each quarter. 

The new deal reached this month is long term and gives the two companies access to each other's patents. 

Qualcomm said the new global patent license agreement covers sales beginning Jan. 1, 2020. It said it's still assessing the accounting impacts of its new pact with Huawei but noted its current quarter revenue will include royalties for sales made by Huawei in the September 2020 quarter, as well as the $1.8 billion payment and estimated amounts due for the March 2020 and June 2020 quarters under the new pact. 

Qualcomm's results

Qualcomm is a key partner for companies like Apple and Samsung. Its modems connect the majority of the world's phones to wireless networks, and it had been expecting a big boost this year from the move to 5G. Because of its position as a key supplier, it has insight into the health of the mobile industry and can provide information into how COVID-19 is impacting tech.  

Qualcomm typically forecasts how many 3G, 4G and 5G phones will be shipped each calendar year.

In April, it warned that handset makers likely would ship about 30% fewer phones in the June quarter than it previous expected. And that followed a 21% drop in phone demand in the first three months of the year because of weakness in China. The bright spot was 5G, which Qualcomm at the time said was as strong as it previously expected. 

On Wednesday, Qualcomm reported better-than-expected fiscal third-quarter results, boosted by the rollout of 5G. It said shipped 130 million chips for handsets, in line with its prediction for 125 million to 145 million. 

Qualcomm reported fiscal third-quarter revenue of $4.89 billion, down from $9.6 billion a year ago. Its per-share earnings tumbled to 74 cents from $1.75 in the same period last year. But its results were better than Wall Street expected. Analysts polled by Yahoo Finance expected revenue of $4.8 billion and earnings of 71 cents a share. 

Looking forward, Qualcomm expects to report fiscal fourth-quarter revenue of $7.3 billion to $8.1 billion, thanks to the Huawei payment. Excluding Huawei, Qualcomm's revenue will total about $5.5 billion to $6.3 billion, in line with the $5.8 billion projected by analysts. It also expects per-share earnings of $1.05 to $1.25 a share, excluding items. Analysts expected $1.10 a share. 

"As 5G continues to roll out, we are realizing the benefits of the investments we have made in building the most extensive licensing program in mobile and are turning the technical challenges of 5G into leadership opportunities and commercial wins," Qualcomm CEO Steve Mollenkopf said in a press release.