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Broadcom, Qualcomm, Legal Battles

Posted on Wednesday, Nov 11th 2009

The two leading chipmakers, Broadcom (NASDAQ:BRCM) and Qualcomm (NASDAQ:QCOM) have recently reported their results. While Qualcomm is enjoying a more stable legal environment after ending its disputes with Nokia and Broadcom and extending its patent deal with Samsung, Broadcom is getting involved in a legal tug-of-war with Emulex. Let’s take a closer look.

On October 22, Broadcom, a leading chipmaker with annual revenue of $4.6 billion, reported a strong third quarter driven by its enterprise networking and mobile and wireless businesses. Q3 revenue was down 3.4% y-o-y and up 20.6% q-o-q to $1.254 billion. Net income was $84.6 million or $0.16 per share compared with $13.4 million, or $.03 per share last quarter and $164.9 million, or $0.31 per share last year. Adjusted income was $0.40 per share. Analysts expected earnings of $0.33 per share on revenue of $1.16 billion. Q2 analysis is available here.

Gross margin increased from 46.3% to 48.5% primarily due to changes in product mix and focus on cost improvement. The company’s cash and marketable securities increased to $2.4 billion. It bought back shares worth $168 million in the quarter.

Broadband Communications revenue grew 9% q-o-q driven by growth in the set-top box and broadband modem markets. Enterprise Networking revenue grew 34% q-o-q. Mobile and Wireless revenue grew 30% q-o-q driven by growth in the company’s cellular and connectivity markets.

Broadcom expects revenue in Q4 to be roughly flat to Q3. Gross margin is expected to improve by around 20 to 50 basis points, driven by improvements in cost and mix. The stock is currently trading around $28 with market cap of about $14 billion. It hit a 52-week high of $31.20 on September 23.

Chart for Broadcom Corp. (BRCM)

Broadcom sees the digital TV market as a significant revenue growth driver for the company in 2010 and said that it will continue to invest in this market. It bought AMD’s digital TV business last year for $141 million.

Earlier in the year, Broadcom had made four unsuccessful attempts to acquire Emulex with the highest offer at $912 million. Emulex rejected its offers, saying that Broadcom was undervaluing. Two months later, in September, Broadcom sued Emulex, claiming that the latter had infringed on 10 of Broadcom’s patents related to networking and communications technologies. And this week, Emulex sued Broadcom claiming antitrust violations. It looks as though this is going to be another long-drawn-out dispute! Broadcom recently ended its four-year long dispute with Qualcomm by entering into a patent agreement under which Qualcomm would be paying Broadcom $891 million in cash over four years.

On November 4, Qualcomm (NASDAQ:QCOM), the leading wireless semiconductor company, reported its fourth quarter and fiscal 2009 results. Annual revenue declined 7% to $10.42 billion and net income was down 50% to $1.59 billion or $0.95 per share. During fiscal year 2009, the company paid $1.09 billion in dividends and bought back shares worth $284 million. It ended the quarter with $17.7 billion in cash versus $15.7 at the end of Q3 and $11.3 billion a year ago.

Q4 revenue was down 19% y-o-y and 2% q-o-q to $2.69 billion on lower sales of its wireless chipsets. Net income was down 9% y-o-y but up 9% q-o-q to $803 million or $0.48 per share. Results included a charge of $230 million to cover the fine to be levied by South Korean antitrust authorities and $35 million related to the legal settlement with Broadcom. Analysts expected earnings of $0.52 per share on revenue of $2.71 billion. In July, Qualcomm predicted $2.55 billion to $2.75 billion in Q4 and $10.25 to $10.45 billion in fiscal 2010. Q3 analysis is available here.

By segment, Qualcomm Technology Licensing (QTL) revenue was down 39% y-o-y and up 4% q-o-q to $837 million. Qualcomm Wireless & Internet (QWI) revenue was down to 23% y-o-y and 1% q-o-q to $146 million. Qualcomm CDMA Technologies (QCT) revenue declined 4% y-o-y and 5% q-o-q to $1.7 billion on a 6% increase in QCT shipments to 91 million. More than 700 devices were launched in 2009 based on Qualcomm’s solutions, and QCT revenue in fiscal 2009 was $6.1 billion. And as emerging markets continue their migration from 2G to 3G, market traction for both CDMA2000 and UMTS single-chip products was strong. Qualcomm’s new Snapdragon chipset is also doing well with design wins for four high-end smartphones including Acer Liquid A1 Android phone, Sony Ericsson Xperia X10 on Android,  HTC HD2, and an Android phone from LG. The Snapdragon platform is also targeted at smartbooks, and the first of those is expected before the end of this year.

For the first quarter, Qualcomm expects revenue to increase 1-9% to a range of $2.55 to $2.75 billion on CDMA/WCDMA device shipments of 600 million to 650 million. EPS is expected between $0.41 and $0.45.

For the fiscal year 2010, Qualcomm expects revenue to increase 1%-9% to a range of $10.5 million to $11.3 billion. EPS is expected between $1.56 and $1.76. Qualcomm expects CDMA device shipments to grow about 20% driven by the continued global migration to 3G, lower ASPs for 3G devices, and an increasing number of device launches. Expecting further consolidation and price competition in 3G chipsets, Qualcomm said that it will continue to invest in key areas such as integrated software multimedia and application processors to differentiate its integrated products. It already has a substantial portion of the 3G IP and gets royalties for every CDMA phone sold around the world.

While Broadcom is getting entangled in disputes, Qualcomm is entering into agreements. Last year it settled its dispute with Nokia and entered in a 15-year patent deal. Last quarter, it settled its dispute with Broadcom. And this quarter, the company announced that it has extended its licensing contract for 3G and 4G technologies with Samsung and will be paid $1.3 billion as down payment. Qualcomm’s licensing business now has over 175 licensees, including more than 45 Chinese companies. According to Wireless Intelligence, the total number of 3G subscribers globally will grow approximately 165% by 2013 to 2.4 billion, and China is expected to have about 16 million 3G subscribers by the end of 2010.

Though it has deals with Nokia and Samsung in place, Qualcomm is believed to have reduced its royalty rate. So, the deals reduce Qualcomm’s legal expenses and add to its revenue but not as much as earlier. There are two more deals that need to be renewed before 2017 but looks as though Qualcomm is no longer dictating the terms.

The stock is currently trading around $45 with market cap of about $74 billion. It has recovered well from its 52-week low of $28.16 on November 21 last year.

Chart for QUALCOMM Inc. (QCOM)

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