Qualcomm stock soars on Nokia settlement: 15-year agreement includes next-gen technologies

Given the broad scope of an agreement between Nokia Corp. and Qualcomm Inc. announced last night, it’s apparent that negotiators have been quietly hard at work for some time to resolve a vast swath of issues that were hamstringing the two industry powerhouses.
Yet the announcement held an element of surprise, given the arc of events leading to the settlement.
Nokia and Qualcomm appeared ready this week for arguments in a court case closely watched for its legal implications for the wireless industry.
The two sides had squared off, thrown the requisite verbal jabs and suited up for court.
The case, set for Delaware Chancery Court this week, would have determined the validity of bilateral agreements struck between participants in standards-setting bodies and whether injunctions could be sought by an aggrieved party in disputes over patents declared essential to standards.
And, of course, the case created a high-profile cage match between two formidable opponents that continue to shape the wireless industry.
Observers were keen to see which side would prevail in what was probably the most significant, bilateral dispute in the wireless industry – the giant handset vendor and innovator from Espoo, Finland, or the smaller chip and patent powerhouse headquartered in San Diego. They needed each other and, judging by their public statements, they loathed each other.
And in this corner.
Nokia, with 40% global market share, is the world’s largest customer for wireless chipsets and claimed key patents in GSM technology, W-CDMA technologies and other areas. Qualcomm, the undisputed CDMA champion, had myriad patented innovations in GSM and W-CDMA technology as well. Handsets enabled with W-CDMA-based radios represent a major growth area in the industry.
Then came word, yesterday afternoon, that the trial in Delaware had been delayed by one day. The judge – Vice Chancellor Leo Strine – apparently gave the two sides verbal cover when word trickled out that a “Web feed” in the courtroom was not working. A few hours later, Qualcomm postponed its quarterly earnings report, without explanation, until this morning.
Last night, the two sides issued a statement: They’d settled their long-running dispute, stemming from the apparent expiration of their latest cross-licensing agreement in April 2007. Most of the details remain confidential, but the news gave both companies’ stock a boost and perhaps disappointed those who looked forward to a public adjudication of their differences, including the legal points at stake. After the announcement, Qualcomm issued its earnings report.
While observers will attempt to weigh in on the now-moot question of “who blinked?” many investors may simply breathe a sigh of relief. Qualcomm’s stock soared as much as 17% on the settlement news and Nokia’s ticked up more than 4% – some measure of Wall Street’s assessment of who stood to gain most from the settlement.
But not all can be pleased.
Nokia and Qualcomm’s competitors had probably benefited from a standoff that kept Nokia from charging after the 60% CDMA-based United States market – where it made gains last quarter – and in doubt about the legal and financial implications of its pursuit of the W-CDMA market. The standoff had forced Qualcomm to spend as much as $200 million annually to defend its IPR-licensing business and created a legal “overhang” that many analysts thought depressed its stock valuation.
The settlement probably clears the way for Nokia to pursue the lucrative and booming 3G handset market, now invaded by Apple Inc. and plied as well by all top-tier vendors. Qualcomm emerged with its IPR-licensing business model intact, its largest customer back on its books and a raft of legal issues resolved, for now.
The details
Some details of the agreement were made public and they reflected the massive scope of the agreement.
The new deal will cover, for 15 years, a slew of past, present and future standards, including GSM, EDGE, CDMA, W-CDMA, HSDPA, OFDM, WiMAX, LTE and other technologies. All pending litigation between the companies will be settled, though the companies did not say how. Both sides have unfettered access to the other’s patents. And Nokia gives Qualcomm an upfront payment of unknown size and will pay ongoing royalties.
In addition, Nokia will assign ownership of a number of patents to Qualcomm, including patents deemed essential to W-CDMA, GSM and OFDM.
The statements issued by both companies’ top executives reflected the balancing act and compromise that must have led to the settlement. There’s little doubt the statements themselves were the subject of negotiation as well.
“The positive financial impact of this agreement is within Nokia’s original expectations and fully reflects our leading intellectual property and market positions,” said Olli-Pekka Kallasvuo, Nokia’s CEO.
In other words, Qualcomm may have lowered its royalty rate to Nokia in recognition of the latter’s IPR, and Nokia saved face by declaring its “original expectations” were fulfilled.
“The terms of the new license agreement, including the financial and other value provided to Qualcomm, reflect our strong intellectual property position across many current and future-generation technologies,” said Paul Jacobs, CEO of Qualcomm. “This agreement paves the way for enhanced opportunities between the companies in a number of areas.”
In so many words, Qualcomm’s IPR-based business model was vindicated and it will get a piece of the action from Nokia, as well as all its other licensees.
Whether the two companies indeed will realize those “enhanced opportunities” remains to be seen, but there’s little doubt that the past year’s bruising, public war of words will have to recede in memory before the two companies sing together in harmony.
Meanwhile, it appeared that the settlement cleared the way for Qualcomm to upgrade its earnings outlook for 2009, even as it narrowed its range for revenue and earnings in the fiscal fourth quarter, now underway.
Qualcomm’s revenue was up 19% over the year-ago quarter and net income was down 6%, missing Wall Street’s expectations, but with the Nokia settlement in hand, investors rewarded the company for emerging from its legal overhang.