Nokia Q3 2006 Earnings Call: QUALCOMM Licensing and IPR Content
<< Blah, blah, blah, IPR, blah, Qualcomm, blah, blah ... They have done a decent job in the past of shutting up about this stuff, but they obviously decided to change that rule this quarter. I guess they are warning investors that they are going to go to the mat over these issues. >>
LOL! In the past Nokia has been relatively circumspect in that regard. I think it was very appropriate to speak out on the issue at that time. Basically they proacted to questions sure to be asked in Q&A.
QUALCOMM has been waxing poetic on the subject for over a year at virtually every event they've held, and they will wax some more at London Analyst Day, and Nokia will conduct a session on the subject at Capital Market Days on the 28th or 29th of this month.
Using the SeekinkgAlpha transcript of the Q3 Earnings Call ...
seekingalpha.com
... and for my own purposes after listening to the call for a 2nd time I've edited out all comments not related to IPR, leaving in all references to QUALCOMM and Nokia's IPR stance. As Follows ...
>> Olli-Pekka Kallasvuo, Nokia CEO
Ladies and gentlemen, the third quarter was an impressive quarter in many respects. ... <big snip> ... Additionally, and of critical importance, Nokia's IPR portfolio gives us a meaningful cost advantage versus those who have not made similar productive R&D investments. Rick will cover IPR in more detail. In fact, in much more detail in a few minutes. Over to you, Rick.
Rick Simonson, Nokia CFO
Thanks for that, Olli-Pekka. ... <Big Snip> ... On the subject of IPR, let me elaborate on what Olli-Pekka said in his remarks. Nokia has built its IPR portfolio over the last 15 years, investing over EUR25 billion in R&D and now we own close to 11,000 patent families. As a leading innovator in the wireless space, we have built what we believe to be one of the strongest and broadest IPR portfolios in the industry. We are a world leader in the development of the wireless technologies of GSM, Edge, WCDMA, HSPA, OFDM, WiMAX, LTE and TDSCDMA.
We also have a robust portfolio in CDMA2000 for which we receive royalties from certain handset vendors. We believe our standards related to essential patent portfolio is one of the strongest in the industry. In GSM, Nokia has declared more than 250 GSM essential patents with a particularly strong hold in codec technologies in the mobile packet data.
Nokia's major contribution to Nokia WCDMA development is demonstrated by approximately 350 essential patent declarations to date. The number of WCDMA essential patents is expected to increase further due to the rapid development in higher data rate technologies, an area where Nokia is a particularly strong contributor.
Additionally, we have successfully expanded our IPR portfolio beyond wireless to other areas like multimedia technologies and GPS. For example, earlier this month, we signed an agreement with Trimble which gives us full access to their world-class GPS patent portfolio for our own unrestricted use and for sublicensing purposes in the wireless consumer product and service space.
In addition to our vast quantity of patents, we also believe that the quality of our patent portfolio is second to none and thus stands up well to those of Qualcomm and others. One way to assess the strength of the patent portfolio is to look at its use by other industry players. 20% of Nokia's patent portfolio is standards-related and is in broad use by our competitors, which means that the number of Nokia IPR used by third parties is higher than the industry average.
Nokia believes that a company should be compensated for its IPR based on fundamentals of reasonable, cumulative royalty terms and proportionality. Proportionality in terms of the number of essential patents that a company contributes to a technology and proportionality in terms of how important the technology is to the overall product.
Let's take one important example of proportionality and technology, as it related to IS-95 CDMA and WCDMA. In 1992 when Nokia made its initial licensing agreement with Qualcomm, mobile phones were only intended for voice calls and CDMA2000, and or WCDMA standards rather did not even exist. As a result, Qualcomm owned the majority of relevant patents relating to its own priority CDMA specification. However, today, as we are six months away from the partial expiration of our licensing agreement with Qualcomm, we believe and research shows that we are a world leader in WCDMA IPR and Qualcomm's relative contribution to the development of technology used in mobile devices is significantly lower than that in 1992. Our dependence on Qualcomm's CDMA2000 IPR becomes increasingly less relevant as we intend to discontinue our CDMA mobile phone production in R&D by April next year.
This means that Nokia will need a license only for Qualcomm's GSM and WCDMA IPR. And importantly, Qualcomm will need access to Nokia's CDMA IPR in addition to Nokia's GSM and WCDMA IPR. As Nokia's IPR position is much stronger than the early days of CDMA, we believe our future licensing agreement should reflect this fundamental change. This is essentially the basis for our debate with Qualcomm as it relates to April 2007.
Wireless devices have changed dramatically since the early '90s. In the early days of cellular, devices were one-dimensional. The primary feature was voice, and the key enabler for that was the cellular engine. There have been an incredible evolution in the features and functionality devices since that time. This is well illustrated in the Nokia N95 Multimedia computer. Not only does it have a WCDMA cellular engine, it also has HSDPA, GSM, Edge, WIFI, GPS-based navigation and mapping, Bluetooth, MP3 player, five megapixel camera, sophisticated mechanics, a lot of internal memory, powerful process, robust software platforms, a brilliant display and the list goes on and on and on.
Given that the content of devices have changed so dramatically over the years and we are now even starting to call some of the devices multimedia computers because of this massive functionality, we do not believe it is reasonable that the same royalty base and structure should still apply.
Finally, as you know, Nokia is a net payer of royalties due to the magnitude of our product business. Our negotiation position has become much stronger as we have seen a major increase in our patent portfolio over the last several years. As our current payment obligations expire, we believe our portfolio will give us competitive advantage when renegotiating some of the existing contracts although we will continue to be a net payer for the foreseeable future ... <Snip> ... .
Question-and-Answer Session
Phil Cusick (Bear Stearns): I wanted to ask for a little more clarity, Rick, on something you said. You mentioned the partial expiration of your agreements with Qualcomm. I wonder if you could expand on that? Also, there's going to be a speaker on IPR at the analyst day next month. Is there a little more detail you can give us in terms of what might be broken out there? Thanks.
Rick Simonson : Phil, thanks for that. There will be a session on IPR at the Capital Markets day and I'm sure it will be a popular one. You asked a specific question about partial expiration and obviously I think there are a lot of questions around this topic. Certainly as I've had discussions with you, others and all of our investors around the world here lately.
Rather than answering each one of these separately, given we've brought up the topic here that I'd tackle a couple of the more common topics, and for the purposes of this call, really just address those because I think I have a pretty good feel from the discussions with all of you of what the key topics are, and try to limit and those will be the only ones that we would have on this call if that's okay, Phil. We'll go from there.
So I think in terms of potential injunction is one of the topics that come up regularly related to Nokia's products to the ongoing and potential future litigation with Qualcomm. What I'd have to say there is as we've been talking injunctions are extremely rare and they should never apply to essential patents anywhere in the world. There are several reasons why we believe that Qualcomm would not be entitled to any injunction covering our products now or in the future.
Firstly, Qualcomm has made a written contractual commitment in international standards-setting organizations to license valid, essential patents on FRAND terms, fair, reasonable, and nondiscriminatory. Due to this contractual commitment, we do not believe injunctions are available to Qualcomm in the standard setting context.
Secondly, Nokia has been negotiating in good faith with Qualcomm while the two companies are in active negotiations. We do not believe any U.S. court will issue and enforce an injunction when parties are negotiating in good faith.
Thirdly, the recent U.S. Supreme Court ruling in eBay versus Merck exchange case concludes that a four-pronged balancing test should be performed before any injunction is issued. This test favors Nokia in this situation. We're not aware of any specific cases in the high tech area where injunctions have been enforced recently in similar situations and we expect that this will be even more relevant in the U.S. going forward after the recent eBay decision.
Also, as you know, this issue of injunction is not asymmetrical. If we have not reached an agreement by the expiration of the licensing agreement in April next year, we can also seek to obtain injunctions and other exclusionary remedies covering Qualcomm's service and chipset business.
Finally, in terms of potential negative litigation scenarios between Nokia and Qualcomm, we hope we are now just talking about theoretical outcomes. We expect that we will most likely reach a license negotiation where both parties come to a mutually acceptable terms on a timely basis and hopefully in this case, before April of next year. So, that is the topic of injunction that I've gotten many questions on.
Then let me take up another topic if I may. A claim that operators would not want to take Nokia products that were allegedly infringing on Qualcomm IPR. First of all, as stated, also by Qualcomm, our current contracts will expire in part. Due to the NDA, Phil, I can't say anymore than the fact that the contract will expire in part. So, I'm afraid I can't give you any more detail on that specific question.
In addition, these kinds of license negotiations are normal course of business. There're always many of these types of discussions, negotiations, disputes going on in our industry and other industries. Our customers recognize this. We believe and understand that these discussions take time to be resolved. We're in constant dialogue with our carrier customers. We believe that they accept our right to seek recognition for R&D investments and the IPR we've accumulated. Also based on our discussions with our carrier customers, we believe that they're also sensitive to high cumulative royalty rates and are looking for ways to reduce that burden.
The next question, we get asked often what would happen if April 9th, 2007 expires without a licensing agreement between Nokia and Qualcomm. What I can say there in case we do not come to agreement by April 9th, 2007, Nokia's obligations to pay royalties to Qualcomm under the current license agreement will expire on that same day. After that date, we would continue to ship products, recognize revenue as we normally would and from a strictly accounting point of view, we would then accrue for the appropriate royalty rate, and this would flow through the P&L as it normally does. However from a cash flow perspective, all cash payments to Qualcomm would most likely cease until we reach a new agreement.
Finally, there's been a lot of confusion surrounding the subject of pass-through rights. Without referring to any particular contract, Nokia has not allowed its licensees to grant pass-through rights to Nokia patents to third parties. A relevant example is Kyocera. This January, Kyocera joined a growing list of CDMA manufacturers who have taken royalty bearing agreements with Nokia.
Olli-Pekka Kallasvuo: Okay this is Olli-Pekka. Can I just add to that and reiterate that we see IPR as an extremely important asset for Nokia and we simply want to be fairly compensated for our leading IPR. While we understand that there's a concern in the near term about potential business risk, we believe that the risk is remote, and we will continue to act in the best interests of our shareholders and customers. We see a lot of value we can pass on to the shareholders in the near term. In terms of our ability to monitor the asset; but also how our IPR investment gives us a full course benefit over the competition in the future. ... <Big Snip> ... ###
The Earnings CC Presentation Slides contain 2 slides (13, 14) related to Nokia IPR ...
media.corporate-ir.net
Comments on, and links to Ulla James' (Director, Nokia IPR) October 3, IPR presentation ...
Message 22880837
"I wouldn't say the sooner the better for us. ... Time is not money for us. It's business as usual … That date can come and it can go – but it's a risk factor for Qualcomm. ... [Negotiations are] complex [because the IPR situation has become a lot more complex.] It's not just cross-licensing any more. ... " Today, Nokia contributes 25 percent of the patents that make up the GSM standard and 28 percent of WCDMA patents, James said. It also holds 130 essential patents for CDMA. Despite announcing an exit from the CDMA market, Nokia intends to hold onto those patents as a revenue generator, she said.
Message 22885053
Best,
- Eric - |
