Qualcom Bulls Stampede, But What About Nokia?

The bulls in Qualcom (QCOM-NASDAQ) are stampeding today on the heels of a royalty agreement with Nokia. The deal is not a huge surprise, but the timing is, and San Diego should be rocking tonight as the locals go out and spend a little of the $14 billion in market cap the stock is adding. Overlooked today are the implications for Nokia (NOK-NYSE). The stock gets little love with Apple and RIM hogging the headlines, but might be overdue for a bounce.

We have a little color for you courtesy of Avian Research. They are open for business, and can help you trade the names, buy, sell or fade:

Last night, Nokia and Qualcomm announced a new 15 year wireless IPR royalty agreement, finally putting the long-standing legal dispute between the two companies to bed. The announcement, which came on the first day of the phase I trial scheduled to commence yesterday in Delaware, and as a bit of a surprise from a timing standpoint, is fairly broad based covering 2G, 3G, and 4G wireless standards. The agreement puts an end to all outstanding legal disputes between the two companies. As part of the agreement, NOK will have the right the license QCOM’s IPR portfolio. NOK is also transferring ownership of several of its wireless patents to QCOM. On the flip side, QCOM also has the right to incorporate NOK’s wireless IPR into its chipset designs.

As a reminder, the dispute between the two companies is really over what net royalty rate NOK should be making to QCOM for use of QCOM’s patents. The dispute escalated last year when the previous agreement between the two companies expired in April 2007. Avian Research Note

NOK’s position has been that it should pay a lower net royalty rate to QCOM going forward given that NOK’s own IPR portfolio is much larger and more relevant than it was when the previous agreement was struck in 1996. In addition, NOK (and others) have argued that QCOM’s gross royalty rate charge of 4.5% of the wholesale value of a device is an antiquated method given that the radio is no longer the only value driver of a handset with the proliferation of additional application processors, memory chips, and components to support MP3 players, Bluetooth, WLAN, cameras, and advanced displays. So while NOK had been paying a net royalty of roughly 3% (per NOK) to QCOM up until April 2007, NOK moved to lower that rate with the expiration of the prior agreement early last year. However, QCOM did not accept the reduced rate and rejected the lowered payment. Since that time NOK has been reserving for the amount it believes it owes QCOM. In fact, NOK has stated that it has reserved a bit more than it believes it owes in order to remain conservative in the event that it lost the case to QCOM.

With the new agreement, NOK and QCOM have come to terms on the net royalty rate to be paid. In addition, NOK will make an upfront “catch-up” payment to QCOM to cover the period since April 2007. The specific financial details of the agreement with regards to royalty rate and upfront payment were not disclosed. However, the language in the press release leads us to believe that the agreement was at least in-line with what NOK had been planning and reserving for.

We view the new agreement as a net positive as (1) it removes an overhang from NOK shares and (2) it opens the door for NOK and QCOM to collaborate in the future. We believe this could benefit NOK given QCOM’s leadership in 3G platforms. From a financial standpoint, we expect the agreement to be at least neutral to NOK going forward based on the language in the press release. Again, the specific financial details of the new agreement have not been disclosed. More concretely, we believe the agreement should result in lowered litigation expense for NOK, perhaps by as much as EUR100 million (several cents to EPS). We would note, from a negative standpoint, that the agreement will have a negative impact on cash flow as NOK resumes payment to QCOM going forward.

Maintain POSITIVE rating. We view NOK as a leader in the wireless communications industry. The company boasts a strong global brand, a healthy balance sheet, and world class manufacturing and distribution. Our POSITIVE rating is predicated on our belief that sentiment towards the stock has become too negative (stock down more than 35% from highs) and at current levels the stock adequately reflects competitive and macro-economic related challenges. We expect NOK’s burgeoning handset product cycle to sustain the company’s fundamentals in 2H08 and into 2009. The company remains well positioned in the highest growth regions (Middle East & Africa, Asia-Pacific, and China) with dominant market share and brand and distribution advantages. Furthermore, the company’s push into North America and the CDMA market present additional opportunity for share gains in the intermediate term.
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Nokia one-year

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