iPhone Bounties for Qualcomm and Infineon

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Includes: AAPL, IFNNY, QCOM
by: Sramana Mitra

Infineon (IFX) figured at the top of my recent list of 3G iPhone’s Top 5 Component Beneficiaries. It is a major beneficiary with four wins: the digital baseband processor, a UMTS transceiver, a power management chip and a GPS chip. However, there is a bigger beneficiary without a single design win in the 3G iPhone: Qualcomm. In addition, the recent settlement with Nokia (NYSE:NOK) puts Qualcomm (NASDAQ:QCOM) in an even better position.

Apple (NASDAQ:AAPL) will be paying Qualcomm royalties for using its patented WCDMA technology used in 3G chips. Apple is paying out $50 in royalties per unit of the iPhone to InterDigita (NASDAQ:IDCC), Qualcomm, and presumably Tessera (TSRA).

However, Qualcomm benefits from more than just Apple. The 15-year patent deal with Nokia announced last week would definitely add to Qualcomm’s value and reduce its legal expenses. Nokia will now be paying royalties on sales of all of its mobile devices whether they are based on CDMA or OFDMA standards. As Nokia holds 40% of the cell phone market share, this would amount to a hefty sum in royalties for Qualcomm.

Though the terms of the deal haven’t been announced, analysts estimate the royalty rate at 1.5-3%, down from 4% earlier. Nokia has also agreed to withdraw its complaint to the European Commission. Following the deal, there has been speculation that Qualcomm might supply chips to Nokia. For a detailed background on its legal wrangling with Nokia, read this post.

Now let us turn to its Q3 results reported on Thursday, July 24. Revenues were up 19% y-o-y and 6% q-o-q to $2.8 billion. Net income was $748 million, down 6% y-o-y and 2% q-o-q. Diluted EPS was $0.45, down 4%.

By segment, Qualcomm CDMA Technologies [QCT] revenue grew 29% y-o-y to $1.76 billion. Qualcomm Technology Licensing [QTL] revenues increased to $803 million with shipments of about 107 million new CDMA devices and average ASP up to about $226. In Qualcomm Wireless & Internet [QWI], revenue was down to $190 million.

QCOM increased its fiscal 2008 revenue forecast to between $10.3 billion and $10.5 billion, a y-o-y growth of 16% to 18%. Excluding the $0.07 to $0.13 increment for Nokia, EPS is now expected to be between $2.11 to $2.13, a y-o-y increase of 5% to 6%.

According to Wireless Intelligence, worldwide 3G subscribers grew about 38% y-o-y to $670 million in June 2008. The 3G market is growing fast and Qualcomm has great prospects now that its deal with Nokia is sorted out. It is already trading around $52, close to Vijay’s valuation of $50. The Nokia deal saw its shares surging 21% to about $54.51 on July 24.

Chart for QUALCOMM Inc. (<a href='https://seekingalpha.com/symbol/QCOM' title='Qualcomm Inc.'>QCOM</a>)

On Sunday, Guest Author Vijay Nagarajan posted his valuation of Infineon in the last part of his analysis of the company, which looked at its business segments in detail, including the loss-making Qimonda. Of particular interest is his analysis of Infineon’s wireless business, which he concludes has a flawed product portfolio that might result in the company losing market share, potentially including future iPhone designs. Vijay also argues that Infineon’s strategy needs to focus on mergers and acquisitions to bridge the gap.

With Vijay’s discussion as a background, let us review Infineon’s financial results for Q3, which were reported on Friday. Revenue was up 2% y-o-y and down 2% q-o-q to €1,029 million. The sequential decline is due to lower revenues in the Automotive, Industrial & Multimarket [AIM] segment. EBIT was €71 million, up from €36 million last quarter. Group net loss was €592 million or €0.79 per share versus €197 million last year. Analysts estimated a net loss of €273 million.

Net income from continuing operations was €45 million, or EPS of €0.06 versus €19 million, or €0.03 per share in Q2. Net loss from discontinued operations was €637 million, including charges of €411 million for the write-down of Qimonda.

By segment, AIM revenue was down 5% y-o-y and 4% q-o-q to €712 million. The sequential decline was mainly due to the de-consolidation of the HDD and bipolar business and the weakening US dollar. In April 2008, Infineon acquired Primarion, a leader in digital power ICs. Communication Solutions [COM] segment revenue was up 21% y-o-y and 4% q-o-q to €313 million. Apart from Apple and its iPhone, Infineon’s customer list includes Nokia, Samsung [KSX:5930], LG, and Sony Ericsson (NYSE:SNE).

As per iSuppli’s preliminary estimate that breaks down the iPhone costs, Infineon’s HSDPA Digital Baseband alone accounts for $15, or 9% of the cost, and in all more than $20. If you extrapolate that to the iPhone’s 2008 target of 10 million that brings in more than $200 million for the year. In the seasonally strong fourth quarter, Infineon expects COM revenues between €330 million and €350 million.

To curtail its losses, Infineon has announced a cost-reduction program, IFX 10+ that includes cutting about 3,000 jobs and saving about €200 million a year. As part of the plan, it would eliminate unprofitable product families, reduce manufacturing costs by about 15%, and improve efficiency in G&A, R&D and marketing & sales. From October 1, 2008, its business will be re-organized into five divisions: Automotive, Chipcard & Security, Industrial & Multimarket, Wireline Communications and Wireless Solutions.

For Q4, Infineon expects revenue to increase by a mid single-digit percentage sequentially. It is currently trading around $7.90 versus Vijay’s valuation of $9.30.

Chart for Infineon Technologies AG (IFX)

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