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Qualcomm and Nokia Both Show Headroom

Posted on Tuesday, Feb 5th 2008

Guest Author Vijay Nagarajan has covered Qualcomm in great detail. Here are some of his prior writings on Qualcomm’s
Legal Battles , its aftermath, the impact on its margins, the Nokia war, and its effect on Qualcomm’s valuation.

In a nutshell, following the ITC ruling that held Qualcomm guilty for infringing on Broadcom’s patents, lawsuits seem to have snowballed for Qualcomm with Nokia seeking fairer licensing terms. These legal battles put its margin-heavy licensing business model in jeopardy. Vijay values the company at $47.2 if Qualcomm gets its way in the law suit and $40.6 if Nokia wins, which could tumble down to $36 in a domino effect situation.

Vijay has also pegged Interdigital (Nasdaq: IDCC) as a key acquisition target for Qualcomm.

With that as a background, let us look at the latest financial reports from Qualcomm and Nokia.

Qualcomm (NASDAQ: QCOM), on January 23, reported its first quarter fiscal 2008 results. Revenue increased 21% y-o-y and 6% q-o-q to $2.44 billion. Net income went up 18% y-o-y but declined 6% q-o-q to $767 million. Diluted EPS grew 21% y-o-y and declined 31% q-o-q to $0.46. It repurchased $900 million worth of common stock in the quarter and paid dividends of $228 million at $0.14 per share. R&D expenses increased 16% y-o-y to $511 million or 21% of revenues, compared to 22% of revenues last year.

Revenues from licensing and royalty fees went up 9% y-o-y to $737 million primarily due to increase in sales of CDMA-based products by licensees, partially offset by the Nokia lawsuit. Nokia’s rival Motorola, on the other hand, extended its relationship with QCOM.

Segment-wise, Qualcomm CDMA Technologies (QCT) revenues grew 28% y-o-y to $1.57 billion with operating margin at 30%. Qualcomm Wireless & Internet (QWI) revenues grew about 12% to $650 million and an operating margin of 83% driven by increasing BREW customer base and Q-Chat. ASP of CDMA wireless devices increased to about $211 per unit from $208 in Q1 2007. Qualcomm Technology Licensing (QTL) revenues grew about 8% to $650 million with an operating margin of 83%. Qualcomm Strategic Initiatives (QSI) reported loss before taxes of $55 million, up from $43 million last year, primarily due to increased losses from subsidiary MediaFLO USA.

Region-wise, revenues from customers in South Korea, China, Japan and the United States were 35%, 24%, 16% and 11%, respectively, of total revenues, compared to 29%, 23%, 17% and 13%, respectively, for Q1 fiscal 2007.

For Q2, QCOM expects revenues to be between $2.4 to $2.5 billion, a y-o-y growth of 8% to 13%. Operating margin is expected to decrease to the mid 20% range.

For 2008, it increased its revenue guidance from $9.6 billion to $10 billion, a growth of 8% to 13% despite excluding royalties due from Nokia. GAAP EPS is expected to be between $1.67 to $1.73 including a loss of $0.12 per share from QSI and the loss of $0.22 per share for estimated share-based compensation.

On January 31, its CEO, Paul E. Jacobs exercised options for shares for $17.47 and sold them for $41.96 to $42.47. After hitting a 52-week low of $35.17 on January 22, its stock has bounced to around $41 today, about $6 below Vijay’s valuation estimate. Its market cap is around $67 billion.

Chart for QUALCOMM Inc. (QCOM)

Nokia Corp(NYSE: NOK) on January 24 reported its Q4 and fiscal year 2007 results. Net sales for Q4 were EUR 15.7 billion, up 34% y-o-y and 22% q-o-q. Diluted EPS, excluding special items was EUR 0.47, up 57% y-o-y and 17.5% q-o-q. Earlier coverage on the Nokia is available here, here, here, and here.

Segment-wise, Q4 net sales from Mobile Phones grew 5% to EUR 7.4 billion, Multimedia increased 42% to EUR 3.0 billion, Enterprise Solutions went up 120% to EUR 670 million, and from Nokia Siemens Networks were EUR 4.6 billion.

For fiscal year 2007, net sales grew 24% to EUR 51.1 billion. Diluted EPS was EUR 1.83. In 2007, net sales from Mobile Phones grew 1% to EUR 25.1 billion, Multimedia grew 34% to EUR 10.5 billion, Enterprise Solutions increased 101% to EUR 2.1 billion, and from Nokia Siemens Networks were EUR 13.4 billion.

Region-wise, in 2007, Europe accounted for 39% of Nokia’s net sales, Asia-Pacific 22%, China 12%, North America 5%, Latin America 8%, and Middle East & Africa 14%. It gained device market share in all regions except North America and Latin America. It sold 437 million mobile devices in 2007, up 26% pushing its market share to 38% up from 36% in 2006. Q4 device market share is estimated at 40%, up from 39% in Q3 2007 and 36% in Q4 2006. It expects to maintain its market share in Q1 2008.

In December, Nokia completed the acquisition of Avvenu, a company that provides secure remote access and private sharing technology. On January 1, it formed a new Services and Software business unit. It is planning to close down its production facility in Bochum, Germany due to high labor costs. Its stock is currently trading around $35 and its market cap is around $135 billion.

My sense is that the market has not understood how strategic a position Nokia has crafted for itself in the fast growth, high margin convergence device / smart phone industry by acquiring Navteq. By the time it does, the stock would have become a lot more expensive.

Chart for Nokia Corp. (NOK)

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