Mike, Thanks for putting a little context on White's comments. The dent/scratch, wreck metaphor is probably a good one. And it is possible that the market is accurately pricing in a dent by dropping 20 points on a drop in earnings from 2.30 to 2.00. Hey, ORCL was only short 4cents and look what happened there.
I followed up on Doug's comment a little more. While it is true that 151 million in royalty with operating income of 97 million means that the operating income is pretty important for earnings. However, keep in mind that this is on $2 billion in total revenue when we know margins on commercial services are going to improve due to improved production techniques etc. The margin there even last year was $270 million. So a small improvement in margins, as we expect to be occurring could go a long way in offsetting the royalty stream. The party wrecker is R&D expense at $236 million. Presumably this will stay the same or drop and certainly drop as percent of revenue. Also selling expense at $147 million might start to drop as percent of revenues. A lot of the push here was to get CDMA accepted. Now that it is a fait accompli and potential customers are knocking at the door for a better mousetrap some of this might drop as a percent of revenues. Also note what is in the royalty stream:
License, royalty and development fees for fiscal 1997 were $152 million, a
52% increase compared to revenues of $100 million for fiscal 1996. The increase
was driven by increased royalties recognized in conjunction with the worldwide
sales of subscriber units and infrastructure equipment utilizing the Company's
CDMA technology by the Company's licensees. Royalty income will fluctuate
quarter to quarter due to the timing and amount of sales by the Company's
licensees and the Company expects to continue to experience considerable
fluctuations in quarterly and annual operating results in the future due to
variations in the amount and timing of recognition of CDMA license, royalty and
development fees. To date, the Company has entered into numerous royalty-bearing
license agreements including agreements with thirty subscriber, ten
infrastructure, three ASICs and seventeen test equipment licensees.
In other words, the royalty stream includes one time royalties paid by companies signing agreements to make CDMA equipment (perhaps a large chunk of this year and last years royalties - in fact if you look at last year's royalties components they say this). In addition there are ongoing royalties by many ASIC makers unrelated to Korea. Finally, royalties will be dependent on current sales going forward not on percentage of Korea's market compared to current subscriber base. As US and other providers scale up they should be going through a rapid growth phase which Korea presumably would have had behind it (and now unfortunately has behind it).
Also in thinking about reduction in royalty payments from Korea part comes from sales that would have been made that won't be made and part comes from decline in value of won in valuing those payments.
If wireless is essentially the only way to get a phone in Korea it may be a fairly inelastic demand. If people aren't bankrupt, even though many banks will be, they may still demand basic phone service. The infrastructure is already set up. Although some if its growth will be cut back - see Motorola announcing concerns for a $180 million infrastructure CDMA deal in Korea. In terms of the value of the payments themselves, as others have said, the price of the phone will have to rise since large components are made in US and these components are priced in US dollars by QCOM. A digital phone is after all just one big ASIC in a plastic case :). Therefore, the value of the royalty stream on a per phone basis will also rise in won even as the won falls.
Just trying to think through the way in which operating income will affected. |
