The two companies are involved in a bitter dispute about renewing their current patent agreement that expires on April 9, 2007. Qualcomm has been forced to revealed a risk of between $0.04 and $0.06, to net earnings per share, if Nokia refuses to pay royalties in Qualcomm’s fourth quarter 2007, which runs to September 30.
Because licensees pay one quarter in arrears, this would cover shipments of Nokia products, largely mobile handsets, in the quarter to June 30.
Qualcomm’s earnings per share estimates point to a total figure of between $67m and $100m for the quarter, suggesting the company relies on a $400m annual contribution to its bottom line from Nokia, the world’s largest handset manufacturer. As Qualcomm paid a 22% tax rate in 2006, this in turn suggests a gross contribution of over $500m from Nokia.
The San Diego, California-based company, which has a dominant share of wireless IP, has always been secretive about royalty rates and anyone agreeing a licensing deal is bound to keep the terms confidential. But the $500m figure represents more than 10% of Nokia’s net profit and covers IP that is essential for it to remain in business.
Officially, Qualcomm has always been pessimistic about the prospects for a deal. Our negotiating team is not optimistic we will conclude the extension by April 2007, president Steven Altman said last week.
Qualcomm’s 10-K annual filing, where companies are bound to spell out any risk they may conceivably face, says there a possibility that the parties will not be able to conclude a new or extended agreement by April 2007.
In that event, it says Nokia’s right to sell subscriber products under most of our patents (including many that we have declared as essential to the CDMA, WCDMA and other standards) and therefore Nokia’s obligation to pay royalties to us will both cease under the terms of the current agreement.
Equally, it acknowledges that its right to sell integrated circuits under Nokia’s patents will likewise cease under the terms of the current agreement.
Both sides have been actively pushing their own case. Qualcomm has said Nokia depends on the license pact for the generation of about $40bn of its revenue in 2005, compared to Qualcomm’s $3.3bn revenue exposure.
But Nokia has insisted that with a patent portfolio boosted by a hefty R&D budget, it is now in a far stronger position than when it concluded the present agreement with Qualcomm.
Lawyers on both sides of the Atlantic are currently feasting on the dispute and, with more than half a billion dollars a year at stake, have a lot to aim at. Qualcomm has stepped up the pressure by taking legal action alleging patent infringement by Nokia in the US, the UK, Germany, France, and Italy.
Despite the legal action and the war of words, a settlement between the two most important companies in wireless IP appears inevitable at some stage. In an interview with the Financial Times in June, Qualcomm CEO Paul Jacobs said he anticipated a settlement. We’re in discussions with them. Somehow, we’re going to end up resolving those discussions, he said.
When it comes to detailed information, both companies retreat into silence. Asked to confirm the $500m figure, a Nokia spokesperson said: I am not able to comment on that.
