Archive: Nokia (NOK)

PLT: Plantronics Turnaround May Present Value

The following is a reprint of my December 20, 2007 RealMoney column

I have long complained that Plantronics’ (PLT) increasing exposure to consumers was nothing but trouble. If lower margins and higher advertising costs weren’t enough, the fact that the consumer part of the business was dragging down overall growth was the icing on the cake.

The company was cleaning up its act earlier this year, and the shares rallied as a result. But an earnings miss in October and a downgrade by JPMorgan (JPM - Annual Report) have robbed stockholders of the entire year’s worth of gains.

Once again, the main culprit is the consumer business – specifically the Audio Entertainment Group (AEG), which was formed through the company’s ill-advised purchase of Altec Lansing. Through the six months ended September 30, that segment’s sales were just $43 million – down from $63 million in the same period last year.

In addition to the AEG, the company continues to struggle with more intense competition in the mobile headset business. One reason for the JPMorgan downgrade was that channel checks indicate the company is losing share of Bluetooth headsets to Motorola (MOT - Annual Report) and Nokia (NOK).

Finally, inventories continue to be far too high for my comfort. They have more than doubled over the past couple of years compared to a cumulative sales increase of just 42%. It isn’t the situation one wants to have in a slowing economy, especially in the face of competitive pressure.

The Good News

There are still a few reasons for optimism, though. For one thing, the drop in AEG revenues means it now accounts for less than 12% of the total business. Even if things continue to deteriorate, the incremental impact will be less likely to weigh on the total company.

Furthermore, the company took action to try and prevent such deterioration. Last month they announced a plan to close and/or consolidate a number of facilities as part of a strategic initiative to lower costs. They are also trying to design fresher products that consumers may actually want to buy, but those aren’t expected until next Christmas.

One good thing that could come of the restructuring in the short term would be a disruption in manufacturing. Though this doesn’t sound good at first blush, it would give the company a chance to work down those inventories.

Not a Bad Value

Shares are trading at less than 17x the consensus estimate for the fiscal year ending in March, and just 14x the estimate for March 2009. Unfortunately, given the recent news it is likely both sets of estimates will come down over the next few weeks.

The 9.9% consensus analyst estimate for 5-year growth is less than the company’s sustainable growth rate based on ROE. This means if growth is less than expected the company should be able to compensate by raising the dividend or buying back shares.   On a price to book basis, I think the current multiple of 2.2x could increase. Combined with the growth potential, a valuation expansion could lead to double-digit gains for the stock.

Over the last 12 months Plantronics generated $79 million in free cash flow. If anything, I think this could improve if the company gets a grip on its inventory levels and production capacity. The current FCF/EV yield is fairly attractive at 6.3%, which provides a decent margin of safety while waiting for the growth to materialize.

Although I like the valuation and believe there is cause for optimism, the stock has whipsawed lately due to numerous analyst upgrades and downgrades. Investors willing to take a chance on it would want to pick their price carefully.

Writing puts may also be an effective strategy here. As I write this, the February 25’s are trading at $1.10, offering a potential 4.5% 1-month return on the money risked and an effective purchase price of $23.90 in the event of further market declines.

Topics: Communications Equipment, JPMorgan Chase (JPM), Motorola (MOT), Nokia (NOK), Plantronics (PLT) | No Comments

28 Stock Ideas from the Durable Goods Report

This article was originally published at RealMoney on September 26, 2007.

My article last week about mining the PPI report for stock ideas was so well received I thought I’d share another of my favorite taxpayer-provided idea generators, the durable goods report. Published by the U.S. Census Bureau, the report has a similar breakdown by industry of durable goods orders, shipments, inventories and backlog.  I came away with 28 potential ideas for further research.

In line with much of the recent economic data, the headline durable goods number was weaker than expected. To quote from the report, “New orders for manufactured durable goods in August decreased $11.3 billion or 4.9 percent to $219.5 billion, the U.S. Census Bureau announced today…. Shipments of manufactured durable goods in August, down two of the last three months, decreased $3.4 billion or 1.6 percent to $216.7 billion.”

But in this case, I think focusing on the forest means you could miss out on some of the more attractive trees. I gathered the data from the Census Bureau and created charts showing the year/year change in durable goods statistics for a variety of industries hoping to find some areas worth further consideration. Keep in mind, this is an initial screen for idea generation, not a full-fledged analysis of any of the names. You wouldn’t want to buy the stocks listed here without further research. That caveat aside, let’s look at some of the better performing industries.

First up is technology – computers and electronic products. Although 3.3% order growth year/year and essentially flat shipments may not be the type of growth investors typically look for from tech, it is a clear improvement from recent months. Inventories are starting to be drawn down and backlog remains strong.


But there are areas of strength and weakness within tech. Specifically, computers (and related products) themselves are starting to look strong, with backlog headed through the roof and inventories in check.


The fairly obvious stock ideas from this industry include Apple (AAPL), IBM (IBM - Annual Report) and Hewlett Packard (HPQ - Annual Report). If things keep getting better (and the company figures out how to file its required regulatory reports) Dell (DELL) might even look interesting again. Stretching a bit further, Sun Microsystems (a href="">SUNW - Annual Report) and Lexmark (LXK) come to mind. And don’t forget the storage plays, which also showed up on the PPI hotlist. The names I mentioned then were Brocade (BRCD), EMC (EMC - Annual Report), Iomega (IOM), Hutchinson (HTCH), Quantum (QTM), SanDisk (SNDK - Annual Report), Seagate (STX - Annual Report) and Western Digital (WDC).

Communications equipment is also showing some signs of strength. Though the latest month was down, the trend seems to be up.


I have actually analyzed Motorola (MOT - Annual Report), so that would be a play to include here. Cisco (CSCO), Research in Motion (RIMM), 3Com (COMS), Nokia (NOK) and Corning (GLW - Annual Report) also come to mind.

And finally, turning away from technology, I hope you didn’t think the aircraft boom was over. If anything, it looks to be picking up steam.



Ways to play this include Boeing (BA - Annual Report), Embraer (ERJ), General Dynamics (GD - Annual Report), United Industrial (UIC) and Cessna parent Textron (TXT). Parts suppliers include Rockwell Collins (COL), Curtiss Wright (CW - Annual Report), and LMI Aerospace (LMIA).

So there you have it: 28 potential stock ideas from what looked at first glance to be a negative report on durable goods.

Disclosure: Long RIMM put options at time of publication.

Topics: 3Com (COMS), Aerospace and Defense, Apple (AAPL), Boeing (BA), Brocade (BRCD), Capital Goods, Cisco Systems (CSCO), Communications Equipment, Computer Hardware, Computer Peripherals, Computer Storage Devices, Corning (GLW), Curtiss Wright (CW), Dell (DELL), EMC Corp. (EMC), Embraer (ERJ), General Dynamics (GD), Hewlett Packard (HPQ), Hutchinson (HTCH), IBM, Iomega (IOM), LMI Aerospace (LMIA), Lexmark (LXK), Motorola (MOT), Nokia (NOK), Quantum (QTM), Research in Motion (RIMM), Rockwell Collins (COL), Sandisk (SNDK), Seagate (STX), Sun Microsystems (SUNW), Textron (TXT), United Industrial (UIC), WDC | No Comments

MOT: Motorola’s Cash Flow Backstop Confers Confidence

The following article was previously published at RealMoney on Sept. 10, 2007.

Though I consider myself a longer-term investor, I like to take a look at the stocks with unusual option activity on StockPickr to see if there is anything sufficiently interesting to investigate further. Friday’s list was a doozy, with heavy activity listed for deep out-of-the-money October calls for Motorola (MOT - Annual Report), Arch Coal (ACI) and Yahoo! (YHOO). I dug a little deeper on Motorola, and came away thinking it might be worthwhile even for those willing to wait longer than October to see a return.

Motorola was having an investor day on Friday, though it is hard to imagine anyone thinking it would produce an announcement worthy of a 20% up move. In fact, there probably is only one such possible announcement, and that is of Ed Zander’s resignation. The company has struggled to find a follow-up that matches the RAZR’s success, let alone one-ups it. In Zander’s own words, “In Mobile Devices, we did not achieve the level of sales and unit shipments that we had expected, primarily in Asia and the Middle East and Africa. Europe, as we have been saying all year, continues to be a challenge.” The message boards are downright gruesome.

But if all it takes for a 20% up-move in Motorola is a new CEO, the market has gotten awful forgetful. After all, it was just four short years ago that the stock rallied 10% (from a far lower base) on the news that Chris Galvin was resigning to be replaced by Zander. It makes one wonder why they keep them as long as they do – if I could get a 10% rally on every CEO firing, I wish Motorola would do it at least once a year. Zander is credited with putting the RAZR on the fast-track and for… not much else. Why settle for anyone’s second-best idea? Give them a few months to put their best one into action, then sayonara! It’s time to find someone else, with a new best idea. Call it crowd-sourcing for CEOs.

So in case you missed the sarcasm, color me skeptical that Zander’s departure would do much for Motorola over the long term. And don’t tell me they need “compelling products” when Nokia (NOK) consistently produces the blandest, clunkiest, ugliest, bulkiest – and best-selling – phones on the market. The analyst day highlighted a return to cash generation – which will definitely be needed for a turnaround to succeed, regardless of who is behind it.

Motorola generated cash flow from operating activity of $3 billion in 2004, $4.6 billion in RAZR-backed 2005 and $3.5 billion last year. For the last 12 months, however, they are down to $2.2 billion – of which $700 million was used up in capex. Still, in a somewhat depressed year it is enough to make the free cash flow yield on Motorola’s $35.6 billion enterprise value comparable with the current treasury yield. All Motorola needs to do is get cash flow back to 2004 levels and today’s investors will be compensated for accepting the risk. If they can get to 2004 free cash flow levels and grow the cash flow a measly 2% per year from there I estimate the stock would be worth nearly $23 – more than 25% above the current price. They could pretty much do that just by trimming R&D expense to the 2004 level (which was all they needed to produce the previous hit product anyway.) This scenario doesn’t require them to create the next RAZR, but if they did it would make for a nice icing on the cake.

The obvious risk to this thesis is that cash flow could move in the wrong direction. It isn’t hard to imagine possible scenarios where this happens, especially given the lukewarm reaction the street is giving the recent comments on cash flow improvement. It wouldn’t be the first time a management team gave up on a promising strategy in order to give investors what they thought they wanted. If you are a buyer on the cash flow story you’ll probably want to flee for the exits if anything is announced that will eat up the cash. Fortunately, however, Icahn is nipping at Motorola’s heels. That might be enough to keep them from doing anything too rash.

Topics: Advertising, Communications Equipment, Motorola (MOT), Nokia (NOK), Services, Yahoo! (YHOO) | No Comments

Remembering the Memory Maker Memos

Last year the companies in the memory segment of the semiconductor industry were working flat out in anticipation of rising demand on the heels of Microsoft’s Windows Vista release. At one point last year they accounted for a significant portion of the investments in new semiconductor equipment as well. With the memory situation now more generally recognized as a glut and more rational investment plans being put into place, some memory prices are actually rising. I decided to take a look at the recent conference calls for some of the most exposed companies to see if there is anything noteworthy to report.

STMicroelectronics (STM) is the third-largest supplier of NOR flash memory and is combining its memory business with that of Intel (INTC - Annual Report) into a joint venture to be known as Numonyx. Flash was not their strongest segment, partly due to temporary customer issues.

Carlo Ferro

Good afternoon, everybody. This is not frankly a particular quarter for pricing pressure on flash when including both NOR and NAND. We’re used to this kind of pressure, which is in the mid-single-digit range. What maybe is somehow peculiar, has been somehow peculiar is that the price pressure on NOR has been somehow higher than price pressure on NAND.

Carlo Bozotti

Yes, but the major issue in Q2 on flash was volume and specifically in the wireless and of course a specific customer where our presence is very important and I think that the major issue that we had was the lack of volume at this customer, or at that customer.

(Excerpt from full STM conference call transcript)

Nokia (NOK) is the largest customer for STMicroelectronics, accounting for about 20% of sales. Last week Nokia announced they would be sending even more business to STM, and STM shares rose on the announcement. I think STM has generally been making the right moves.

SanDisk (SNDK - Annual Report) is one of the world’s largest suppliers of flash-based data storage products for the consumer, mobile communications, and industrial markets. SanDisk is hopeful the industry has hit bottom for this cycle.

The second quarter started under very difficult market conditions but improved markedly as the quarter progressed. April and May were characterized by excess supply, but July is coming to balance and during the distinct possibility the demand for high capacity flash products may outstrip industry wide supply in the second half of this year.

(Excerpt from full SNDK conference call transcript)

Micron (MU - Annual Report) did not sound quite as confident – call it cautious optimism. Micron is a leading manufacturer of both DRAM and flash memory.

The major factors affecting this quarter’s results were, one: significant growth in industry memory supply, which caused average selling price erosion across DRAM and NAND memory; two: noteworthy cost per megabit reductions achieved by the company for its DRAM and NAND devices, which could not keep pace with ASP declines, and three: progress made on reductions and overhead expenditures….
Despite the demand strength and encouraging signs pointing to stronger demand in the second half of the calendar year, the memory business in particular has been under profitability pressure due to persistent oversupply. Moving forward, I am optimistic about a more favorable supply/demand balance as we see the impacts of memory content expansion, new end product introductions, seasonal demand upticks, and a slowing industry-wide output growth rate.

(Excerpt from full MU conference call transcript)

Finally, I turn to one of the companies most at risk should capital spending subside – Lam Research (LRCX). They sound optimistic, but I’m not so sure.

We expect that foundry shipments for Lam will be weak in the September quarter as a function of the pull-ins to June and we expect that shipments in foundry will strengthen in the December quarter. Shipments for Logic, Flash other and MPU are expected to be flat in the second half compared with the first half.

Turning to 2008, as we discussed at our Analyst Meeting last week, we believe that 50% CapEx intensity and memory is not sustainable existing 2007, and in fact the rated capacity additions has already begun to slow. The depth and duration of this reduction in capacity additions will be dictated by the actual demand environment as we go forward in the next 6 to 12 months.

Demand trends to watch here included adoption rates of major products such Vista and the iPhone, as well as, the overall demand for the broad range of other semiconductor intensive consumer digital electronic products.

As we move into 2008 it will also be important to watch the conversion of 200 millimeter memory production to 300 millimeter as memory manufactures ability to generate acceptable profits of 200 millimeter will force additional production to move to 300 millimeter.

Based on current industry dynamics, our very early assessment for calendar year 2008 is that overall wafer side equipment spending is likely to be flattish with memory spending to be down potentially 10% to 15%, and an expectation that foundry logic/other and MPU spending will increase sufficiently to offset the decline in memory spending.

(Excerpt from full LRCX conference call transcript)

Lam got 73% of its revenue from the sale of equipment to memory chip makers in the last quarter. If three quarters of the business declines 10% to 15%, for the overall business to remain flat the remainder would have to grow from 27% to 39%. Semiconductor sales growth has averaged high single-digit, and most forecasts I have seen for semi equipment over the next two years are in that range as well. I think the guidance is too optimistic.

Disclosure: William Trent owns put options against shares of Lam Research (LRCX) and has a short position in put options related to the Semiconductor HOLDRS (SMH) ETF.

William Trent currently owns put options against the shares of Lam Research (LRCX).

Topics: Communications Equipment, Intel (INTC), Lam Research (LRCX), Micron Technology (MU), Microsoft (MSFT), Nokia (NOK), STMicroelectronics (STM), Sandisk (SNDK), Semiconductors | No Comments

QCOM: Qualcomm Keeps its Distance

It is hard to write about Qualcomm (QCOM) without some mention of the enemies it has made over the years. The company’s success, as well as the ire of its competitors, has stemmed from its strong patent portfolio – from which it has extracted hefty (some say unfair) royalties.

With the stock down about 20% on the heels of the current dispute, I thought it a timely time to wrap up what some of the interested parties have been saying. I’ll start with Nokia (NOK).

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.

(Excerpt from full NOK conference call transcript)

Next up is Broadcom (BRCM - Annual Report).

Finally, as we stated numerous times in the past, we stand ready to negotiate with QUALCOMM or any other market participant to seek a commercial solution as we’ve done today with Verizon.

With respect to Broadcom’s current litigation proceeding against QUALCOMM things are going very well. Our goals remain simple and two-fold. One is to gain proper recognition of the value of our IP, and the second is to achieve a level of competitive playing field.

At this time QUALCOMM has been found to infringe four of our patents, three of them willfully in two different forms. We also have additional patents that have not yet been addressed to trial. Please note that QUALCOMM has either lost or dropped all claims against Broadcom. There has not been any movement in our discussions with QUALCOMM, as it appears that they have bet their future and end customers’ upcoming product launches on their political lobbying skills.

(Excerpt from full BRCM conference call transcript)

The patent issues also affect Qualcomm’s customers such as Sprint Nextel (S - Annual Report).

We continue to explore our options to ensure our customers have the latest handsets. We continue to import handsets with the technology solution designed by Qualcomm. Qualcomm believes this workaround does not fall within the ITC order. We’ve been testing the solution for several months and there are no impacts on the customer experience.

We are also considering a number of other alternative resolutions to this dispute, including encouraging the two parties to reach resolution.

(Excerpt from full S conference call transcript)

As noted above, Verizon (VZ - Annual Report) also uses the technology but has come to a commercial deal with Broadcom. So what does Qualcomm have to say about all this?

Obviously, we are disappointed with the rulings on behalf of Broadcom both in the Santa Ana case and in front of the ITC. We continue to believe that the rulings are wrong and are pursuing all avenues to reverse and to mitigate the effects of these rulings, including working with our partners who may obtain a license from Broadcom. We’ve been unable to come to agreement ourselves with Broadcom because they’ve insisted that a comprehensive settlement includes the ability for it’s customers to obtain royalty free rights through significant portions of our patent portfolio which would have a material impact on our licensing business. This business is funded on R&D and innovations that we have transferred to are approximately 140 licensees. We remain committed to defend our business model and the benefits they provide to wireless industry. Unfortunately given the threat of injunctions against certain of our products, the next few months represent a crucial litigation time-frame and we can’t predict the outcomes at this time….
With respect to the Nokia arbitration, we have now arrived at a process for selecting arbitrators and that process is underway and we expect to have the arbitration panel in place in fairly short order. And then once the panel is in place we think that the procedure will start moving forward, subsequently the panel will set a schedule and of course we will be pushing for a pretty aggressive schedule. I suspect Nokia will be pushing for ‘08 schedule and we won’t know what kind of schedule we get obviously until the arbitrators order, but that would be the next step.

(Excerpt from full QCOM conference call transcript)

Supposedly it was Sun Tzu who counseled “keep your friends close and your enemies closer.” Qualcomm currently seems fairly far from both.

Topics: Broadcom (BRCM), Communications Services, Nokia (NOK), Qualcomm (QCOM), Sprint Nextel (S), Verizon (VZ) | No Comments

Interesting Look at the Handset Market

Cellular News put out a story called Top 10 Handsets Sales Statistics for July:

The Swedish manufacturer of carrying cases for portable electronics, Krusell, has released their “Top 10″-list for July 2007. The list is based upon the number of pieces of model specific mobile and smart phone cases that have been ordered from Krusell during July 2007. Krusell’s list is unique due to the fact that it reflects the sales of phones on six continents and in more than 50 countries around the globe. 1. (2) Nokia 6300
2. (1) Sony Ericsson K790i/K800i/K810i
3. (3) Nokia N95
4. (4) Nokia N73
5. (9) Sony Ericsson W880i
6. (-) Blackberry RIM 8300 Curve
7. (5) Blackberry Pearl 8100C/G/V
8. (9) Nokia 6233/6234
9. (6) Sony Ericsson K750i/W700i/W800i
10. (-) Nokia 5500 Sport

Notably missing from the list is the iPhone, but then again Krusell isn’t making a case for it yet. Just one of the many potential flaws in this type of market share analysis.

More interesting is the presence of two Blackberry models and nothing from Motorola, given how many observers have fretted over the fact that Research in Motion (RIMM) is carrying a higher market valuation than Motorola (MOT - Annual Report). Perhaps the higher value is deserved.

Or perhaps people just like to wrap Blackberries in leather.

Topics: Apple (AAPL), Communications Equipment, Ericsson (ERIC), Motorola (MOT), Nokia (NOK), Research in Motion (RIMM), Technology | No Comments

MOT: Motorola’s Earnings are Not So Easy-Come After All

When Motorola, Inc. (MOT - Annual Report) said last week that they would be taking a charge, I said:

When I do the math for taxes and share counts, it looks like the charge will amount to $0.03 per share. Which doesn’t sound like much until you check the earnings estimates, and find that $0.03 was all the company was expected to earn in the quarter. Easy come, easy go.

Turns out I was being too generous. Yesterday the company announced preliminary estimates of second quarter 2007 financial results:

Although the company has not finalized its financial results for the quarter, the company expects second quarter sales to be in the range of $8.6 billion to $8.7 billion. The company previously estimated that second quarter sales would be essentially flat with first quarter 2007 sales of $9.4 billion. The company expects a second quarter GAAP loss per share from continuing operations in the range of $(0.02) to $(0.04), including estimated net charges of approximately $0.03 – $0.04 per share related to previously announced workforce reductions and other highlighted items.

The company’s shortfall in sales and earnings for the second quarter is primarily attributable to lower overall unit volumes in the Mobile Devices business in Asia and Europe.

The previous expectations were already factoring in Motorola’s fall from RAZR-driven grace. So now the question becomes whether the additional weakness is more company-specific problems or whether the entire industry is running into trouble. Samsung’s numbers today should provide a clue.

Update: Sony Ericsson is taking share: Sales in the quarter were boosted by a 59 percent rise in handset shipments to 24.9 million from 15.7 million the previous year.

Topics: Motorola (MOT), Nokia (NOK), Research in Motion (RIMM) | 1 Comment

Handset Market Share Update {News: Global handset sales figures up 14% year-on-year}

Global mobile handset sales reached 257.4 million units in 1Q07, representing a 14% annual increase according to results published by business analyst firm Gartner.

According to the report, market share was as follows:

It has been a while since we looked into handset market share. It is always worth keeping an eye on.

Topics: Ericsson (ERIC), Motorola (MOT), Nokia (NOK), Sony (SNE), Stock Market | No Comments

QCOM and NOK: Sound and Fury on the Conference Calls

We took a different approach with our preview of Qualcomm’s (QCOM) earnings report this week. Rather than guessing whether the company would beat earnings estimates, we forecast what they would discuss on the conference call: “Nokia Nokia Blah Blah Nokia ad nauseam (excerpt from pending conference call transcript).” For those of you who are just joining the show, Nokia and Qualcomm have been conducting bitter negotiations over how much Nokia will have to pay Qualcomm for the right to use Qualcomm’s CDMA patents.

Now that the deed is done, it is time for us to check our forecast for accuracy. So here are some excerps from the actual call, along with a few from Nokia’s (NOK) on the subject at hand.

Regarding Nokia, there is really nothing new to discuss. As you know, we commenced arbitration a few weeks ago to resolve certain issues under our existing agreement. Our patent infringement cases against Nokia’s GSM product outside the United States and our new cases against Nokia’s GSM products in the United States are under way.

(Excerpt from full QCOM conference call transcript)

The latest update on the matter from Nokia was somewhat bare-knuckled:

Rick Simonson

Thanks, Olli-Pekka. First, I want to cover a few key points around the recent IPR activity, try to cut through what seemed like a lot of noise and discuss what is relevant and important for Nokia. As you know, April 9th passed without any new agreement between Nokia and Qualcomm. However, we continue to be in cross-license negotiations and are working to reach a mutually acceptable agreement as soon as possible. After April 9th, Qualcomm’s early patents are now fully paid up, royalty-free to Nokia. Any future royalty arrangement with Qualcomm needs to address Qualcomm’s latter patents only. This agreement should reflect that we believe that to Qualcomm’s relative contribution to the development of technology used in mobile devices, especially W CDMA, is significantly lower than in 1992.

Reflecting these changes that occurred over the partial expiration of the old agreement, and other compelling reasons, we made a $20 million payment to Qualcomm, which we believe is fair and reasonable compensation for the use of Qualcomm’s patents in UMTS handsets during this quarter. We intend to make similar payments in the future and we will announce these payments when they are made.

Since Qualcomm has indicated they will not accept our payouts, we have deposited them in an escrow account for Qualcomm’s benefit. We also have said that Nokia has paid less than 3% cumulative license fees for all patents under all its patent license agreements. This number is a gross number, and it excludes infrastructure royalties and all royalty income collected by Nokia.

The point of this disclosure is that we want to highlight that there’s no such thing as a Qualcomm standard agreement or a so-called standard rate. The actual payment — i.e., what you pay — is subject to a lot of different commercial terms and conditions from Qualcomm. We then later stated that we believed Qualcomm is currently using over 100 of Nokia’s GSM, WCDMA, and CDMA 2000 central patens in its chipsets. We have yet to agree with Qualcomm on the compensation due to us for these patents, but this is a very important and critical component to our ongoing negotiations.

So what’s our end game with all of this? Nokia, over the last 15 years, has invested close to EUR 30 billion in R&D, and we have over 11,000 patent families. We want to be fairly compensated for our leading R&D investment and IPR and portfolio, both by paying what is fair and reasonable — nothing more — and also by ensuring that we are properly compensated by those who are using our technology.

(Excerpt from full NOK conference call transcript)

That begged a question, which Tim Long didn’t hesitate to ask Qualcomm:

Tim Long – Banc of America

Thank you. Just a question related to some of the legal matters here. Just from a higher level, you have the arbitration with Ericsson and Sony Ericsson where you were successful. We have seen press releases from you and Nokia with different understandings of the royalty rate. Could you talk to us a little bit about how it’s possible that there are two different perceptions of that royalty rate? And then related to that, do you think there is anything to learn from the, is it a similar type of dynamic that happened or may have happened in the Sony Ericsson case that you think positions you better for a positive outcome and potentially some back payment from Nokia? Thank you.

Lou Lupin

Tim, its Lou Lupin. With respect to the different statements regarding the royalty rates, we can only tell you about that from QUALCOMM’s perspective, and as we said publicly, the rate is not as Nokia has portrayed it. There is a rate that’s forced in the agreement. There is the way of calculating it. And as far as we understand, Nokia has been paying us in accordance with the agreement and in accordance with the rate that’s set forth there, and that’s not consistent with their public statement. So, I don’t want to speculate on how they get to their number.

(Excerpt from full QCOM conference call transcript)

As we predicted, there was quite a bit more said about the topic. They key points are:

  • Qualcomm and Nokia have entered binding arbitration to resolve the issue.
  • Under the current terms Qualcomm is owed about a nickel per share per quarter that the arbitration goes on.
  • Nokia thinks the new terms will allow it to pay much less than that.

Both companies appear to be having success on their own merits. We’ll know the impact of the arbitration after it’s done, and in the meantime all the hot air the analysts and company management teams expell on their conference call won’t make a bit of difference.

Topics: Nokia (NOK), Qualcomm (QCOM), Stock Market | No Comments

NOK: Nokia Looks Good By Comparison in Lousy Handset Market

Motorola preannounced but still disappointed, Research in Motion (RIMM) and Palm (PALM) dueled sob stories about smartphone prices, and altogether cellphone makers have been working to prove us right.

As I said a few weeks ago, the performance in our Mobile Devices business in the first quarter was unacceptable, and we are committed to restoring it to profitability and positive cash flow.

(Excerpt from full MOT conference call transcript)

By contrast, Nokia said:

Olli-Pekka Kallasvuo

Thanks, Bill. Good morning and good afternoon, ladies and gentlemen. Nokia had a solid first quarter.

(Excerpt from full NOK conference call transcript)

If there is any indication that the handset market is slowing down, it is Nokia calling 4% year/year growth “solid.” What they mean is, “at least we aren’t in the gutter like some others we know.” Still, a caller pointed out Nokia’s weakness in the U.S. market:

Richard Kramer – Arete

You really didn’t address fully the question previously on the U.S. market. I think a year or so ago when you came on as CEO, you mentioned you were going to spend a week or so out of every month in the U.S. We continued to see units decline year on year. Can you give us some sort of prognosis, when and if the U.S. might turn around for Nokia, and what might spark that happening?….

Olli-Pekka Kallasvuo

I will start with the second question and then I will move on to this turning up the heat matter. If you look at the U.S. market and I simplify a bit, if you allow that, in order to make the point. So in China, we do have about 1.3 billion customers — or potential customers — meaning the consumers in that market. In the U.S., we have four — and I’m not talking about billions here. Four customers. In that way, at the moment because of the operator dominance in the channel, you need to look at each of these customers separately. You have, in this way, one dimension only looking at this situation. So there we have to look at obviously, Verizon Wireless, Sprint Nextel, AT&T, and T-Mobile, the four customers that really are very, very important in the totality.

(Excerpt from full NOK conference call transcript)

That certainly cleared things up. For all the tea there may be in China, the handset customers tend to be buyers of low-end models. One of the big problems for handset makers is the shift to the low end, and the impact that has on margins. And all of the device makers are going to need a better answer for it.

Topics: Motorola (MOT), Nokia (NOK), Palm (PALM), Research in Motion (RIMM), Stock Market | No Comments