Patent victory may boost Qualcomm's bottom line

Shares of San Diego, Calif.-based Qualcomm have slid in recent months because of concerns over the company's prospects for future revenue. Today, however, its stock jumped nearly 11 percent on news that the wireless communications company won a key victory in a patent battle in Europe and Japan. Shares closed at $69.81, up $6.75.

Today's news is doubly important because Qualcomm is set to release quarterly earnings Wednesday. Analysts will be looking for any signs of weakness in the company's revenue from royalty payments on patents.

"It definitely allows the people at Qualcomm to take a big sigh of relief," said Gartner wireless analyst Bob Egan. "The consequences of this not being upheld would have been disastrous for the company."

Qualcomm has structured its business model largely around the revenue it earns by licensing its wireless intellectual property. Losing even a portion of these rights in some of the world's strongest wireless markets could cloud the company's future revenue growth.

The fight surrounding wireless patents has been a long one. Finland's Nokia, Sweden's Ericsson and NTT, the leading Japanese telecommunications company, have challenged Qualcomm's wireless technology patents in Japan. A few less critical patents were similarly challenged in Europe.

The issue centers on which next-generation wireless technology will become the de facto standard in Europe and Asia. Many companies abroad are leaning toward using a wireless standard called W-CDMA, instead of Qualcomm's own CDMA2000 standard.

Qualcomm has claimed that W-CDMA, a next-generation technology for the popular GSM mobile phone standard in Europe, contains core elements of its original technology called code division multiple access, or CDMA. Earlier, a coalition of companies had challenged Qualcomm's rights to claim royalty revenue for several wireless technologies, including W-CDMA.

Japanese regulators have now chosen to uphold companies' rights to royalty revenues from both leading next-generation technologies: CDMA2000 and W-CDMA. Today's decision specifically upheld Qualcomm's original CDMA patent, which was originally filed in the United States in 1986. The patent was granted in Japan in 1998.

Today's decision should help Qualcomm boost its bottom line and bolster its strategy of relying more on licensing revenue, analysts said. Establishing this foothold in one of the world's largest wireless phone markets was critical, they added.

The ultimate effect on earnings is still unclear, however. Ericsson, which settled its outstanding patent disputes with Qualcomm last year, said the decision was "not anything of significance" to them.

A Nokia spokeswoman said the company had not yet seen the Japanese decision. She declined to comment.

"The confirmation of these inventions strengthens our patent portfolio in Japan and Europe and emphasizes the international value of the many licenses granted by Qualcomm," Ben Miller, Qualcomm's chief patent strategist, said in a statement today.

Analysts said the regulators' decision could bring Nokia to the negotiating table. The ruling "could set the stage for a licensing agreement with Nokia or litigation in 2001," PaineWebber analyst Walter Piecyk wrote in a research report today.

Piecyk has been among the most bullish of Wall Street analysts, maintaining a 12-month split-adjusted price target of $200 for Qualcomm in spite of the company's recent difficulties.

His pre-split $1,000 price target late last year epitomized how hot Qualcomm had become.

Other analysts have revised their estimates further, noting the company's difficulties in breaking into the Chinese market despite early promise. Analysts have also raised questions about uncertainty in Korea, one of Qualcomm's largest markets.

Analysts have said they expect few surprises in this week's earnings but are keeping an eye out for any indication that a recent string of bad news for the company will be reflected in its report to Wall Street.

"We believe the focus for the quarter will be predominantly on the book-to-bill ratio...as well as management's comments during the conference call regarding the overall business and CDMA market pace, especially in light of recent developments in the South Korean market," Salomon Smith Barney analyst Alex Cena said today.