"Defining the Payments" and The New Credit Suisse Report
JG,
<< I agree. "There has been a lot of chatter about "make up" royalty payments and so on. I would advise against thinking of the monies like this, as I can almost guarantee that the two parties will NOT define the payments as such." >>
Ditto for me [and AlfaNut made a good post, IMO], and moreover I believe that both parties for slightly different but related and justifiable reasons (and not just accounting reasons), will go out of their way NOT TO "define the payments as such." and to the best of their abilities will mask the actual effective and definable rate. Attempting to guesstimate it, will keep lots of folks busy -- here and at research firms -- for lots of hours.
Speaking of guesstimates ... I've just spent the better part of an hour with the new 27 page report just issued by the Americas/US Credit Suisse (CS) Telecoms Equipment research team (Kulbinder Garcha, Randy Abrams, Achal Sultania, Deepak Sitaraman, Walid Armaly) and I find their guesstimates and forecasts highly credible considering the fact that they have little more visibility than us (if any) on the actual terms of the settlement, and also recognizing that their forecasts for both Nokia WCDMA handsets and Qualcomm EPS might be somewhat aggressive. Conversely their estimated royalty payment to Qualcomm of 2% [noted by Jim] could be a tad conservative but in the ballpatk certainly. CS is estimating an upfront payment from Nokia of $430 million and they are assuming the same 2% royalty rate applies retroactively. They note:
Qualcomm has guided for an EPS impact from Nokia of $0.07-$0.13 for fiscal Q408. This guidance includes a portion of the upfront payment with the balance of the upfront payment being amortized over the life the agreement (15 years). This means that this level of EPS contribution is not the run rate we should extrapolate from.
[No mention of the licensing fee we assume and which would be amortized, although not necessarily over 15 years, in the statement above]
One exhibit I find particularly interesting is "Figure2: (page 4) Nokia and Qualcomm – looking at the EPS impact of the settlement" in Qualcomm FY 2009. In that exhibit, CS divides a table into two columns ...
1.) What we think may happen
2.) What QCOM may have assumed
They then sum those columns down to total "EPS impact from Nokia (US$)."
1.) $0.35 -- What we think may happen
2.) $0.24 -- What QCOM may have assumed
The above is based on Nokia WCDMA handset sales in Qualcomm's upcoming fiscal year of 136.1 million units (+60% YoY) at an ASP of $279 (= $37.971 Billion) while Qualcomm is conservatively assuming lower (they think). They are using the 2% royalty rate in either column.
They note:
Our initial thoughts are that from Qualcomm’s guidance, it is hard to decipher the actual EPS impact from Nokia. However, we believe this will be driven by four key assumptions:
¦ Nokia WCDMA volumes
¦ Nokia WCDMA ASP
¦ Legal cost savings
¦ Royalty rate
¦ Tax rate
They also note:
Looking at the above key assumption metrics, it clear that the scope for Qualcomm to be conservative is high something that we believe is likely given the company’s track record in financial guidance. Indeed, Qualcomm would have needed to take a view on Nokia’s potential WCDMA units and ASP in 2009 and this is of course difficult even for any device manufacturer let alone for Qualcomm to estimate. However, we compare in Figure 2 our estimate of Nokia 3G volumes and what we believe Qualcomm may be assuming and this comparison leads to two important conclusions. Firstly, it suggests that even based upon conservative volume estimates for Nokia, Qualcomm have probably settled on a royalty rate around 2%. Secondly, this could prove grossly conservative and the impact over time could be more meaningful.
CS is forecasting WCDMA/HSPA handset unit shipments on a calendar year basis as follows ...
2007 2008E 2009E 2010E CAGR 07-10E
====== ======= ======= ======== ===========
167.9m 263.0m 391.1m 540.7m 47.7%
I personally think that's a reasonable estimate (guesstimate).
I've seen research reports from the European side of CS's telecoms house in the past but the whole Americas/US team is new to me. They have earned my respect in a short period of time. I wish Schwab would add reports from the European side on Nokia and Ericsson but multinational companies that trade here as ADSs aren't covered.
- Eric - |
