Monday, November 10, 2008

Valuing the Nokia settlement

On TheStreet, Marerk Fuchs dissects Qualcomm’s quarterly results released Thursday — specifically the higher than expected Q4 and the lower than expected predicted earnings for Q1.

His conclusion? Analysts are overlooking the boost from a onetime $560m payment by Nokia (as part of their patent settlement) and that without it, Qualcomm’s revenues have already started to decline.

According to its Q3 filings, Nokia is paying Qualcomm $2.3b (or $2.5b) in back and prepaid royalties.

In its earnings call transcript (as reported by Seeking Alpha), CEO Paul Jacobs said that Qualcomm received a $2.5b payment in October. He explained the profits as follows:
The agreement includes among other things, the non-refundable upfront payment of $2.50 billion received in early October. Ongoing royalties and the assignment of patents valued at $1. 8 billion and recorded in intangible assets.

At the end of fiscal 2008, unearned revenue attributable to the upfront consideration of the Nokia agreement was $3.9 billion, which will be recognized over the approximately remaining 14 year term of the license agreement. The value of the patents assigned to us last month will be amortized on a straight line basis to licensing cost of sales over their estimated useful life of approximately 15 years. The fourth quarter of fiscal 2008 includes six quarters of revenue amortization and the resumption of royalties for the second half of fiscal 2008.'
I have not seen anyone do a model of this to see how it compares to what Qualcomm would have received at list price. Nokia clearly bought down its royalties by assigning patents to Qualcomm, and also by its promise of non-assertion of its patents against Qualcomm. (In the rest of the world, we call that a cross-license).

I haven’t seen anyone analyze the value of the patents Nokia assigned (or won’t assert) to Qualcomm. Nokia and Qualcomm were spending lots of money on economic and IP experts, so perhaps with their current truce, there aren’t many expert left interested in studying this — or maybe just no one left being paid to study this.

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