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China’s Data Decision May Favor Qualcomm

A wildly shifting variable affecting Qualcomm Inc.’s well-being — China — may have dealt the San Diego technology company a break earlier in the month.

China’s state-owned telecom company told domestic manufacturers that smartphones coming to market must come equipped to transfer data in five ways — a decision that benefits Mira Mesa-based Qualcomm (Nasdaq: QCOM), analysts said.

The news may be responsible for sending Qualcomm stock higher. Shares rose 3 percent on March 17 to close at $77.02. The stock stepped slightly higher in the two days that followed, dipping at the end of the March 19 session.

The news plays against another report from China. In November, Qualcomm said Chinese regulators were investigating the company in connection with China’s anti-monopoly law. The investigation is confidential. In the November notice, Qualcomm pledged to cooperate and said it is not aware of any charge that it violated any law.

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News from March may bode better.

The latest generation of smartphones is able swap data at very high speeds. For a while, China Mobile told domestic manufacturers that they may use three standards for swapping data. In late spring, it will raise that number to five. Beginning in June, the BrightWire news service reported on March 11, advanced cellphone modems sold in China will have to work on the following five air-interface standards: TDD-LTE; FDD-LTE; TD-SCDMA, GSM and WCDMA. The letters LTE refer to the most advanced of the fourth generation, or 4G, mobile-phone technologies.

The change will mean a higher royalty rate for Qualcomm, said Mark McKechnie, an analyst with Evercore Partners in San Francisco. The investment community had been concerned about royalties coming from three-mode phones, McKechnie said.

Qualcomm collects royalties on its large patent portfolio. The corporation’s technology licensing arm provided 30 percent of the company’s $24.9 billion in revenue during 2013. Another part of the business, the chip-making arm, provided 67 percent of the revenue.

“We view this [change] as a meaningful positive for Qualcomm, as it will likely mean greater royalty collections and higher chipset share in China Mobile’s TD-LTE rollout this year,” Simona Jankowski, an analyst with Goldman Sachs, wrote in a March 17 research note.

Qualcomm has the most mature and broad portfolio of five-mode chips, Jankowski wrote, noting that the portfolio beats chipmakers Marvell Technology Group Ltd., MediaTek Inc. and Spreadtrum Communications Inc. So Qualcomm could gain market share.

Secondly, Jankowski wrote, Qualcomm could have a better chance of collecting royalties in China: “We believe Qualcomm’s level of LTE royalty monetization in China has been one of the top concerns on investors’ minds this year, so this should go a long way toward alleviating that overhang.”

The regulators’ investigation is still a concern, she wrote, “but we believe that is more related to negotiating the amount of royalties, rather than whether Qualcomm will be able to collect at all.”

Jankowski’s team rates the stock as a buy and gives it a price target of $90.

Raymond James analyst Tavis McCourt wrote in a Jan. 30 research note that he was “still very bullish on China-based LTE as a driver for both chipsets and license revenue ramping throughout the year.” A matter of concern, he continued, is that Qualcomm’s forecast for its March quarter was below normal seasonality. The company rates Qualcomm stock as a “market perform,” meaning it will probably not outperform the Standard & Poor’s 500 index.

McKechnie, the Evercore analyst, rates Qualcomm stock as overweight and gives it a price target of $80. In an email, he said China’s push toward five-mode phones might be so that Chinese vendors would be able to participate in the export market.


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