Qualcomm's License to Drive

It was business as usual for Qualcomm (Nasdaq: QCOM  ) last Wednesday, as the wireless communications chip provider posted another quarter of impressive profitability. There are, however, some potential clouds on the horizon.

Our recent Fool by Numbers will walk you through the nuts and bolts of Qualcomm's first quarter, but overall sales growth was strong. Profit margins slipped slightly, but the company was still able to post jaw-dropping net margins just over 32.1% -- well above the 13.4% average for constituent firms in the S&P 500.

Management expects total sales to grow 8%-14% for all of fiscal 2007, but relatively flat earnings growth. If all goes according to plan, Qualcomm should be able to post another solid year of impressive cash flow generation and steady growth. It may not be that simple, though, as the company is currently in a high-profile licensing dispute with Nokia (NYSE: NOK  ) , the largest wireless phone provider in the world.

According to Qualcomm, its license agreement with Nokia partially expires on April 9, but Nokia has an option to extend the agreement through 2008. The firms are looking to work out a new agreement, but if the negotiations lead to an all-out brouhaha, Qualcomm estimates its fourth-quarter diluted earnings per share will be hit to the tune of $0.04-$0.06. That's if the agreement expires and Nokia stops paying Qualcomm royalties on its CDMA patents and intellectual property.

Overall, it's difficult to further quantify the potential impact to Qualcomm if it's unable to come to an agreement with Nokia. The dispute could drag out indefinitely if both turn to litigation, and pursue injunctions and the recovery of damages (should license agreements move to unlicensed status).

Developments from the dispute could also have ramifications across the industry and influence royalty levels paid to the likes of Qualcomm and Texas Instruments (NYSE: TXN  ) by users of their chips, which also include Motorola (NYSE: MOT  ) and Samsung. This could ultimately affect the amounts that Sprint (NYSE: S  ) , AT&T (NYSE: T  ) , and others charge consumers for mobile phones. Those who have to pay for the rights to use technology would clearly prefer the lowest royalty rates possible, while the patent owners want to charge as much as possible.

I'm not enough of a technology guru to determine what the proper balance is, but if you have some useful insight to offer, feel free to share it with the Motley Fool's burgeoning CAPS community. I take solace in the fact that Qualcomm bulls outnumber bears by almost 10 to one, but no one knows for certain what the next few months will bring -- not even the company.

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AT&T is a former Motley Fool Stock Advisor recommendation.

Fool contributor Ryan Fuhrmann is long shares of Qualcomm, Motorola, and Nokia but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.


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