CC Notes:
First, a comment. It was a pretty good conference call (Thanks QCOM management!). Qualcomm was much more straightforward than in the first call. This is not to say that there weren't some questions that they said they didn't want to answer, but that is, IMO, completely understandable as long as there is a good reason. (What bothered me yesterday was the lack of clear information such as the dancing around about the modes of CDMA). Also note there is at least one aspect of the deal that is probably substantially better than I expected, but as with most conference calls there was some communication problems and as a result some of the information appears to conflict. I think we will have to wait to get answers from Gregg before all of the info is straightened out.
Enough commentary:
1) Specific financial aspects of the deal will be discussed in the next quarterly CC. (In the last CC it wasn't clear whether many of the specifics would ever be released.)
2) The Ericsson puchase includes inventory and manufacturing infrastructure, but does not include financed receivables. (e.g. vendor financing on already shipped infrastructure.)
3) The Ericsson deal excludes small infras contracts like those with Africa, Ukraine (and Russia was also mentioned I think). These will be subcontracted to Ericsson.
4) Qualcomm will share future financing of some infrastructure contracts in Mexico, Chile, Brazil, Leap, ... . Qualcomm could put as much as $400M into this and at least in some cases gets equity in return (e.g. Brazil). (Does Ericsson also get equity? Also, note that this use of the cash from the sale makes me a little nervous given their capacity constraints in their remaining products, but at least they were open about it.)
5) Qualcomm will now pay some smallish amount of royalties to Ericsson for all phones shipped (but they never mentioned having to pay royalties for ASICs even though the general subject of royalties owable to Ericsson came up several times. I would assume from this and item #6 below that they aren't paying appreciable royalties for ASICs, but it would be nice to know for sure. If so this is a better deal than I expected.) including CDMAOne phones, but they expect that the growth in GM will more than offset this payment.( the fact that the royalties paid will be small, and offset by increases in GM implies to me that Qualcomm did indeed get most of the IPR settlement since we know that standard royalties for CDMAOne handsets are 5 or 6%. Even half of that is material when your GM is only 20%. I would guess that Ericsson gets less than 1/3 of the royalty split.)
6) ASIC customers pay no royalties to Ericsson ( nor does Qualcomm appear to pay royalties to Ericsson for ASICs. See item #5.)
7) Impact of infras sale to Ericsson on Q3 is that they expect to get two months of revenue before the sale is finalized, but they don't know exactly how long it will take to finalize since it depends on monopoly determination. They expect to lose about $200M in revs for Fiscal 99 due to the sale.
8) They believe that the sale of the infrastructure division is long term accretive even ignoring other concerns like licenses etc, is that although currently the infras division is breakeven, it may be hard to keep it that way. ( Presumably because they were worried they would never effectively compete and yet would need to pump in more money to keep it afloat.)
9) In answer to a question about whether Nokia will owe license fees to Ericsson for CDMA handsets, they said no. (Note that this is different than royalty fees.)
10) The royalties for all CDMA modes will be identical. ( It wasn't completely clear whether this included CDMAOne, but my impression was that it did. If so, this is a very good thing. Qualcomm had earlier suggested that license fees could decrease for 3g, and they still will to some degree because of the royalty split, but still I expect that effect is small. See #5.)
11)HDR rights are retained by Qualcomm, but now they will need to work with infras vendors to really make the standard happen. (This is the drawback in selling the infra division, and they seemed a little uncertain about how it would work, but this is to be expected. I anticipated that it would be harder for Qualcomm to make new standards without infra, but hopefully the standards are mature enough that it doesn't matter too much.)
12) If the Direct Sequence mode of 3gCDMA does end up as W-CDMA ( which Q! seemed somewhat doubtful of - they thought there might be some problems under load etc.) they are already working on ASICs for this. But they were unclear as to their strategy for staying abreast of the trials etc.(Note that this is an area where I'd be surprised if Ericsson didn't continue to try to screw Qualcomm. Less now than before they acquired Q IPR, but ... .)
13) Qualcomm wouldn't give the split in the royalties, but they were asked several times if the split was the same for all types of CDMA. They never completely clearly answered, but it sounded like the answer was yes. (This is very good since it lessens the incentive for Ericsson to push a technology in which Qualcomm has less insight.)
14) Generally existing CDMAOne licenses apply only to CDMAOne and will have to be upgraded for 3g.
15) Next set of new phone models will come out early next year. Apparently phone companies do not like new models just before Xmas.
16) In answer to a question, Qualcomm said that although occasionally handset sales are tied to infrastructure sales, it isn't a large percentage of the handset market.
Feel free to make comments.
Clark
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