Nokia Margins and QUALCOMM Royalties ...
Slacker,
<< One thing I cant figure out is if they made a reserve for possible royalties to Qualcomm. The margin numbers become a bit less impressive if they have been boosted by not paying the 3.5% Q toll. >>
As promised ... From the horses mouths (courtesy of SeekingAlpha) complete and verbatim in response to the 1st and 2nd important Q&A question today, and the question above you asked here ...
seekingalpha.com
Tim Long (Banc of America Securities): Two-parter, if I could, on the handset operating margins. I guess the message about next quarter with a similar product set, that's clear. But could you just talk a little bit, maybe, Olli-Pekka, on whether or not you think there's been a change back in the industry that's going to cause the operating margins you're seeing to be a little more sustainable? Have they taken a leg back up given some of the transition?
Second, Rick, if you could just qualify for us, quantify for us a little bit the treatment and impact of the royalty dispute with QUALCOMM maybe on the numbers in the June quarter and how we should think about that going forward? That would be very helpful. Thank you.
Olli-Pekka Kallasvuo, Nokia CEO: Okay. This is Olli-Pekka. I will start on the operating margins. So, definitely, we need to be happy with the operating margins we generated in the business in the second quarter and you're right that we made the point about the portfolio being pretty much the same, not exactly but pretty much the same in the third quarter as it was in the second quarter.
Now this overall question is there change somehow in the margin dynamics. I think the competitive situation needed faced in the second quarter was relatively easy. And of course, so competitive dynamics are the biggest driver on gross margins overall. Of course, your mix has to do with that and both product mix and area mix, but competitive dynamics, of course, come to play there very much.
To say that we would have going forward in every quarter a similar very good competitive type of situation that we did have in the second quarter, I think that would be too much to say.
It's will simply be we will see margin volatility going forward, that's been the case in this business, will continue to be the case at the end of the day. The consumers are voting every day with their purchase decisions and who is competitive and who is not and what type of margin you can get.
But having said that, I have definitely sort of have a lot of confidence in Nokia's overall product portfolio going forward. And definitely we will continue to assess the target levels we do have in the devices business in our capital markets, that we have done in the past. So that's really the time to look at sort of what type of targets we should have.
Rick Simonson, Nokia CFO: 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, Nokia CFO: 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.
Tim Long (Banc of America Securities): Thank you very much. ###
As I stated earlier (and to which I think you agreed in general) ...
The short answer is that they are accruing royalties but probably at a lower level than what they have been paying in the past. If I had to guess, however, I'd guess that given the highly astute nature of Nokia fiscal accounting that it isn't much lower.
I should add that I would consider it to be less than astute if Rick had stated that they were accruing at or above the prior level, simply because it would project insecurity in the confidence they have in their stance, and neither OPK (who sensibly admits to being intelligently paranoid in the Andy Grove sense) or Rick, are insecure by nature, and both, obviously, are imbued with abundant sisu, a characteristic that should never be underestimated or confused with false bravado.
Best,
- Eric - |
