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Technology Stocks : Qualcomm Moderated Thread - please read rules before posting -- Ignore unavailable to you. Want to Upgrade?

To: Art Bechhoefer who wrote (68075)	8/21/2007 1:17:03 PM
From: slacker711	Read Replies (1) \| Respond to of 197444

I don't know of any evidence or statement from Nokia that it is accruing unpaid royalties pending settlement. In fact, the offer of a flat $20 million (rejected by QCOM) suggests just the opposite: The reason that you havent found any evidence that Nokia accruing royalties is that you dont actually follow the company. It was clearly stated during the call and if you didnt want to listen to the call you can just follow the Nokia thread where Eric and I both mentioned it. They dont give the exact number, but the fact that it had a minimal impact on gross margins means that they are accruing at a rate that is at least somewhat close to the old rate. seekingalpha.com Tim Long - Banc of America Securities Thank you. 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 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 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 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.

To: Art Bechhoefer who wrote (68075)	8/21/2007 1:19:22 PM
From: sag	Respond to of 197444

Art, below taken from Nokia latest earnings conference call. The highlighted areas may help. Tim Long - Banc of America Securities Thank you. 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 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 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 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.

To: Art Bechhoefer who wrote (68075)	8/21/2007 3:37:57 PM
From: Eric L	Respond to of 197444

Hi Art, << Eric, I don't know of any evidence or statement from Nokia that it is accruing unpaid royalties pending settlement. ... Because I don't see evidence of any set aside by Nokia, I conclude that Nokia's profits are overstated (based on my assumption that QCOM will prevail in the key issues currently under litigation). >> It does not in the slightest surprise me that you don't know of any evidence or statement of QUALCOMM royalty accrual by Nokia. <ggg> Too bad you missed Nokia's last earnings call. Since you evidently did let me repeat ... Nokia has to "skim off royalties" from its industry leading WCDMA margins (not its industry leading GSM margins) on its industry leading global WCDMA handset sales, to pay QUALCOMM. They have been doing that for some time, and now they are accruing them and will continue to do that until rates and terms are settled. Its possible they are not accruing sufficiently, but for all intents and purposes what they report as operating margins is very close to what their margins actually are even with an estimated accrual. Edit: I see Slacker chipped in and provided a link for you. Let me comment on this statement of yours ... Read that transcript closely and you will see how disingenuous are Simonson's comments. I see nothing disingenuous about Rick Simonson's comments whatsoever. At risk of being redundant, it does not in the slightest surprise me that you do. << I find it difficult to accept the notion that Nokia can sell WCDMA and related devices WITHOUT infringing one or more QCOM patents. All it takes is one claim of infringing one patent. >> Please permit me to paraphrase you and state ... I find it difficult to accept the notion that QUALCOMM can design, manufacture (have manufactured) and sell, multimode GSM/WCDMA, or CDMA2000 AS ICs WITHOUT infringing one or more Nokia essential GSM, WCDMA, or CDMA patents. All it takes is one claim of infringing one patent. In addition to their large portfolio of declared essential GSM patents and WCDMA patents Nokia has stated that they have declared over 125 essential patents applicable to the CDMA [cdmaOne, IS-2000, and IS-856] standards. They have asserted none, yet, only non-essential implementation patents that impact on CDMA handsets. Presumably if they do choose to assert some, at least one can be validated and certified to be essential. Pretty scary thought isn't it, since there is no really viable alternative source for CDMA chipsets? << I also believe we may never know who is infringing what, as the matters will be settled largely out of court as soon as one of the parties sees it could lose big time. >> We totally agree on that. The sooner the better. If I had the authority to, which obviously I don't, I'd lock QUALCOMM's and Nokia's COB and CEO's (IMJ and PJ, Jorma and OPK) in a room without benefit of counsel and feed em a daily ration of bread and water until they came to general terms on a licensing agreement. Only then would I let them out and the lawyers in to finalize the license. While the lawyers were doing their thing, and before signature. IMJ and Jorma, and PJ and OPK could play some tennis then relax and strategize future areas of common interest over a few glasses of pocket-chilled vodka. << Since Nokia has increased its global market share, and since the largest portion of what Nokia sells in the way of handsets is still GSM, with a smaller (but growing) number of WCDMA and related units, one can legitimately credit the continued growth in the GSM market as a main cause of Nokia increasing its market share. >> One has to credit increasing growth in BOTH sell-in to the GSM market, AND the faster growing (in units as well as in percentage terms) WCDMA market, as a main cause of Nokia increasing its unit market share, revenue share, and profit share. Increasing sales of WCDMA units have much more than offset decline in CDMA unit shipments as they ramped those shipments down and concurrently increased their operating margins and profit. Despite some strong offers from competition no WCDMA challenger has put a dent in their share. Their competition, instead, puts dents in each others. In the Nokia case as opposed to the case for all other handset OEMs, the profit margins on low end GSM and GSM/GPRS devices and high end EDGE/WEDGE/HEDGE/ devices are quite similar. Obviously since the average wholesale ASP of the high end units is perhaps 5x the average wholesale ASP of the low end units, the actual profit per unit is probably even greater than 5x. As a consequence the WEDGE/HEDGE contribution to Nokia's top and bottom line is significant. Nokia dominates both the low end of the GSM wireless market, and the high end of the EDGE/WEDGE/HEDGE markets. Its been most seriously challenged in the EDGE/WEDGE/ mid-range but as part of their ongoing product refresh they have significantly strengthened their mid-range product offer. I assume you are aware that GSM EDGE business will remain substantial through the end of this decade. Nokia's future success is based on profitably leading the industry across all price tiers in both the GSM EDGE and WEDGE/HEDGE segments. << Nokia apparently believes its future is marketing those units without having to pay royalties to QCOM. >> No. They don't believe that. They do intend to minimize the royalty outflow to QUALCOMM. How successfully they will be in lowering the net rate payable to QUALCOMM is yet to be determined. What that net rate is determined to be will have an influence on the rate Nokia negotiates with handset OEMs who have significantly less essential IPR in GSM or WCDMA than Nokia when existing licenses expire. << My thinking here is that many of Nokia's recent patents in this area are likely to be invalidated, at least in the U.S., owing to the recent Supreme Court decision in the KSR case. >> Highly unlikely, Art, highly unlikely, but keep the faith, think realistic but positive thoughts, and say your prayers on your knees each evening. We never again in this decade see January 1, 2000 QCOM share prices, but we should enjoy substantial appreciation from these levels. Best, - Eric -