Qualcomm: Friend and Foe Alike Keeping Their Distance

 |  Includes: AVGO, NOK, QCOM, S
by: William Trent, CFA

It is hard to write about Qualcomm (NASDAQ:QCOM) without some mention of the enemies it has made over the years. The company's success, as well as the ire of its competitors, has stemmed from its strong patent portfolio - from which it has extracted hefty (some say unfair) royalties.

With the stock down about 20% on the heels of the current dispute, I thought it a timely time to wrap up what some of the interested parties have been saying. I'll start with Nokia (NYSE:NOK).

Rick Simonson

And Tim, in terms of the impact on royalties in the quarter, when you look at our WCDMA royalty provisions, it had some positive impact on the gross margin, but there are far many more important drivers for the sequential gross margin improvement in Q2.

The success of the total product portfolio and particularly driven by having very desirable hit products in every part of the range, high end, low end, midrange, a little bit of the slightly moderated price competition that Olli-Pekka just mentioned would be the second thing that I would call out. Our favorable product mix with M and ES growing faster than MP, thirdly. And fourth, the overall good cost management.

In other words, the benefit that we got in the COGS. Those four things far swamp the very small incremental benefit from the gross margin related to our total WCDMA royalty provisions. In other words, we would be writing the exact same story of this quarter without even that small incremental benefit.

Tim Long - Banc of America Securities

So we can assume that provision is lower than what was actually was being paid previous percentage rate but it's lower than what was being paid previously?

Rick Simonson

Well, again as we talked before, we necessarily have to be somewhere in between there because we feel strongly in our position that the rates under the old agreement with the one party, QUALCOMM are not correct and we wouldn't be spending the time on this debate if in fact we felt that we were accruing at the same rate. But it is, to repeat as we said before, somewhere in between those two.

(Excerpt from full NOK conference call transcript)

Next up is Broadcom (BRCM).

Finally, as we stated numerous times in the past, we stand ready to negotiate with QUALCOMM or any other market participant to seek a commercial solution as we've done today with Verizon.

With respect to Broadcom's current litigation proceeding against QUALCOMM things are going very well. Our goals remain simple and two-fold. One is to gain proper recognition of the value of our IP, and the second is to achieve a level of competitive playing field.

At this time QUALCOMM has been found to infringe four of our patents, three of them willfully in two different forms. We also have additional patents that have not yet been addressed to trial. Please note that QUALCOMM has either lost or dropped all claims against Broadcom. There has not been any movement in our discussions with QUALCOMM, as it appears that they have bet their future and end customers' upcoming product launches on their political lobbying skills.

(Excerpt from full BRCM conference call transcript)

The patent issues also affect Qualcomm's customers such as Sprint Nextel (NYSE:S).

We continue to explore our options to ensure our customers have the latest handsets. We continue to import handsets with the technology solution designed by Qualcomm. Qualcomm believes this workaround does not fall within the ITC order. We’ve been testing the solution for several months and there are no impacts on the customer experience.

We are also considering a number of other alternative resolutions to this dispute, including encouraging the two parties to reach resolution.

(Excerpt from full S conference call transcript)

As noted above, Verizon (NYSE:VZ) also uses the technology but has come to a commercial deal with Broadcom. So what does Qualcomm have to say about all this?

Obviously, we are disappointed with the rulings on behalf of Broadcom both in the Santa Ana case and in front of the ITC. We continue to believe that the rulings are wrong and are pursuing all avenues to reverse and to mitigate the effects of these rulings, including working with our partners who may obtain a license from Broadcom. We've been unable to come to agreement ourselves with Broadcom because they've insisted that a comprehensive settlement includes the ability for it's customers to obtain royalty free rights through significant portions of our patent portfolio which would have a material impact on our licensing business. This business is funded on R&D and innovations that we have transferred to are approximately 140 licensees. We remain committed to defend our business model and the benefits they provide to wireless industry. Unfortunately given the threat of injunctions against certain of our products, the next few months represent a crucial litigation time-frame and we can't predict the outcomes at this time...

With respect to the Nokia arbitration, we have now arrived at a process for selecting arbitrators and that process is underway and we expect to have the arbitration panel in place in fairly short order. And then once the panel is in place we think that the procedure will start moving forward, subsequently the panel will set a schedule and of course we will be pushing for a pretty aggressive schedule. I suspect Nokia will be pushing for '08 schedule and we won't know what kind of schedule we get obviously until the arbitrators order, but that would be the next step.

(Excerpt from full QCOM conference call transcript)

Supposedly it was Sun Tzu who counseled "keep your friends close and your enemies closer." Qualcomm currently seems fairly far from both.

Disclosure: William Trent currently owns put options against the shares of Qualcomm.