Qualcomm upbeat on prospects, despite legal ‘overhang’

Qualcomm Inc. remains positive about its business prospects this quarter, even as it girds for an unprecedented procession of litigation.
The chip maker is scheduled to appear in court in late March and regularly through the fall, reflecting battles with rivals and customers over alleged patent infringement and anti-trust activities in which Qualcomm is variously defendant and litigant.
At its annual shareholder meeting last week, company executives reassured investors that it is prepared for the ordeal. Questions from shareholders, however, reflected continued concern among investors. One investor asked executives about the April 10 expiration of Qualcomm’s cross-licensing agreement with Nokia Corp. and whether the chip company had the legal expertise to protect its technology.
Qualcomm’s president, Steve Altman, responded that Nokia has publicly stated it won’t continue to pursue a cross-licensing agreement with Qualcomm, yet will continue to sell its handsets with Qualcomm IPR without paying Qualcomm royalties.
This appeared to be news to Nokia.
“Our position has not changed,” said Laurie Armstrong, a Nokia spokeswoman, when apprised of Altman’s statement. “Nokia continues to negotiate in good faith, with the intention of reaching a mutually agreeable, cross-licensing agreement on a timely basis.”
Altman said that despite the full plate of legal challenges ahead, there’s “a distinct possibility” of additional litigation with Nokia over CDMA and W-CDMA technology.
“We’ve geared up for that possibility,” Altman said. “One hundred and forty companies pay us royalties on our patents. Come April, one company will not respect our patents. We’ve done a lot of work to prepare for that.”
Altman said he’s optimistic the two parties will reach an agreement, but that will take time and may involve “an unpleasant process.” Meanwhile, Qualcomm has beefed up its internal legal department-most notably by hiring former San Diego-based U.S. Attorney Carol Lam-and set aside $200 million for legal matters this year.
“This is a big issue,” Altman said to investors, referring to the defense of Qualcomm’s IPR. “We take it very seriously. We’ll do what’s necessary to protect our interests-and your interests.”
Analyst Maynard Um at UBS Equity Research said that the legal “overhang” shadowing the company may lead to short-term volatility in its stock price, but suggested that the company’s resolution of its legal challenges is inevitable. Meanwhile, according to Um, solid business fundamentals will sustain the company’s fortunes.
According to Um, two trends bode well for Qualcomm. First, handset vendors are likely to focus on areas of industry value growth and W-CDMA-based handset sales-a market Qualcomm serves-will grow 34 percent in 2007 from the prior year to a nearly $42 billion annual market. The second trend is consolidation among handset vendors.
“Given Qualcomm’s strong presence at Samsung [Electronics Co. Ltd.] and LG Electronics [Co. Ltd.] and eventual presence at Motorola [Inc.], we believe Qualcomm will be a key beneficiary of consolidation,” Um said.
Meanwhile, Qualcomm faces three hurdles in the next three weeks.
This week a trial in Qualcomm’s suit against rival Broadcom Corp. on allegations of patent infringement in GSM technologies has been canceled in anticipation of a settlement, according to Broadcom. Qualcomm had sought damages and an injunction against certain Broadcom products. Broadcom has disputed the claims’ validity.
Also this week, the U.S. International Trade Commission has scheduled a public hearing on the issues of a remedy and its impact on the public interest in Broadcom’s suit against Qualcomm over radio frequency/analog circuit design; the court has ruled that Qualcomm infringed on two of Broadcom’s patents. A remedy is expected to be announced May 8.
Early next month, the cross-licensing agreement between Qualcomm and Nokia expires. The two companies have other legal disputes pending as well, having initiated litigation against each other in U.S. District Court, the Delaware Court of Chancery and before the European Commission relating to alleged patent infringements and anti-competitive behavior.