Arm vs. Qualcomm – Noisy Crickets

More noise than bang.

• Arm has served Qualcomm with a notice that cancels its contract to sell Arm IP in its products, but because the notice period ends in the middle of the trial, it is going to have no incremental impact on Qualcomm’s ability to sell chips.
• Arm and Qualcomm have been embroiled in a contract dispute for some time (see here) which as always boils down to a fight over money.
• The complaint is essentially over Nuvia which was a company full of highly talented engineers but no product for which Qualcomm paid $1.4bn in January 2021.
• These engineers originated from Apple where they worked on its processor cores whose talents Qualcomm has now used to close, and largely surpass, the performance gap on the M-series of processors.
• These engineers created the Oryon custom CPU which powers the X Elite and X Plus chips for laptops and this week was launched in the 8 Elite for smartphones and the Cockpit Elite and Ride Elite for vehicles.
• Nuvia had an Arm license but, because it was a new company, it would have ended up paying a higher royalty rate to Arm when it sold its chips than Qualcomm does for similar products.
• Qualcomm on the other hand has had a license to design its own cores for years and wants to use this license to ship products with Nuvia-designed cores, which will attract much lower royalties than they would have done under the old Nuvia license.
• Put this in the context of Arm needing to maximize its profits and growth to generate a healthy return for public shareholders and one can begin to see where this lawsuit came from.
• This lawsuit has been in the discovery phase for quite some time which is why the news flow has been quiet of late, but Arm has lit the fire of battle once again by cancelling Qualcomm’s license citing a breach of contract.
• I think the timing of the cancellation has nothing to do with Snapdragon Summit and everything to do with the launch of the 8 Elite which will ship in huge volumes as soon as it is available meaning that there are large revenues to chase for damages.
• The X Elite and X Plus are just getting started making a much smaller target, which to my mind explains why Arm has waited this long.
• The contract cancellation has a 60-day notice period meaning that it will end right in the middle of the trial that has been set to resolve precisely this issue.
• Consequently, I suspect that as a matter of procedure, the cancellation will be suspended at the beginning of the trial and will depend on the outcome.
• Consequently, nothing fundamental has changed other than Arm has generated a news cycle which has annoyed Qualcomm which wants the focus this week to be on its products not its legal issues.
• I think that the outcome of this trial is far from certain as, looking purely at the contracts that were in place at the time, Arm has a case as far as I can see.
• Unless Qualcomm has uncovered something incendiary during discovery, I suspect that as the trial goes on, there will be pressure to settle which is what I think is the most likely outcome.
• The settlement will of course be confidential, but I suspect that the royalty rate that Qualcomm will end up paying on Oryon cores will be higher than it would have been under the old architecture license but less than Arm is currently demanding.
• I continue to think that this dispute is disruptive for both companies who should be working together to take the fight to the x86 and RISCV camps rather than fighting each other.
• This is why it makes most sense to settle it as soon as possible as the value accretion to both by winning more share and faster from x86 and not giving it away to RISCV more than offsets the amount of money being disputed here.
• Either way, I don’t think this case materially changes the investment case for Qualcomm where I remain a happy holder.