Qualcomm: Patent Protection Pays Off

April 4, 2007
Aggressiveness, whether in the lab or the courtroom, is the M.O. at Qualcomm.

Like many of the companies that dominate today's tech landscape, Qualcomm was born in the sun-drenched coastal climate of California. Since its start more than 20 years ago, the San Diego-based wireless R&D powerhouse has become a permanent fixture on magazine "Best 100" this and "Top 400" that lists (including the IndustryWeek 50 Best Manufacturing Companies for 2006 award that made them the focus of this eNewsletter), and has received honors from associations ranging from the AARP to the YWCA. Over the years the company has made some great tactical tech-sector acquisitions and owns the rights to well over 5,000 patents, as well as the naming rights to Qualcomm stadium, home of NFL playoff contenders the San Diego Chargers, until 2017.

So what could possibly be wrong with this picture?

For starters, consider the lawsuit-filled, murky patent environment of the high-tech world in which a company like Qualcomm operates. Although it recently agreed to dismiss long-standing trade secret and patent claims against rival chipmaker Broadcom Corp., the company is still locked in a battle over intellectual property rights with its biggest customer, Finnish cell phone manufacturer Nokia. In fact, if this legal issue is not resolved by April 9, the ensuing expiration of cross-licensing agreements could cause further legal actions and lead to revenue losses on both sides.

Knowing the contentiousness of this segment of this industry, as well as Qualcomm's fierce protectionism of its intellectual property rights, more legal dustups with both customers and competitors probably loom on the horizon no matter the outcome next Monday.

Add to this a "clash of titans" over the next set of international standards for mobile telephony and data transmission that pits Qualcomm against pretty much every other industry heavyweight, each of them jockeying for supremacy in this incredibly lucrative and dynamic marketplace.

Amidst all this fur flying, Qualcomm recently raised its economic forecasts for the second quarter of 2007. In a forward-looking statement released on March 13 for Q2 (ending April 1) the company raised its expectations for pro forma revenues to fall within a range of $2.1 billion to $2.2 billion (up from $2.0 billion to $2.1 billion) and raised pro forma diluted earnings per share expectations to fall within the $0.48 to $0.49 range (compared with previously anticipated per share earnings of approximately $0.42 to $0.44, and compared with $0.41 for the same quarter a year ago).

What allows them to see a rosier picture than might be visible to the outside observer? Part of Qualcomm's unflagging financial optimism might have to do with the strength of its two main assets: a crack research and development staff -- after all, 5,100 patents don't spring out of nowhere -- and the strength of a savvy and uncommonly well-seasoned legal department.

Qualcomm Inc.
At A Glance

Qualcomm Inc.
San Diego, Calif.
Primary Industry: Communications Equipment
Number of Employees: 9,300
2005 In Review
Revenue: $5.7 billion
Profit Margin: 37.78%
Sales Turnover: 0.45
Inventory Turnover: 9.94
Revenue Growth: 16.25%
Return On Assets: 19.81%
Return On Equity: 22.18%

For example, Qualcomm's R&D team recently rolled out a new mobile network architecture called Ultra Mobile Broadband (UMB). A series of demonstrations at a major communications industry conference in late March showcased the first live over-the-air demonstration of UMB showing simultaneous high-definition video streaming, video conferencing, VoIP (voice over internet) and Web browsing applications. Additionally, in the mid-March press release announcing increased earnings estimates, Qualcomm CEO Paul Jacobs pointed to recent tech successes and some new business deals as being another main driver of optimism. "The GSM Association selected LG's phone powered by a Qualcomm chipset as the '3G For All' winner to enable feature-rich handsets at lower prices. The BREW (Qualcomm's wireless application development platform) developer community powered past $1 billion in cumulative payments. Our MediaFLO service, bringing brand name TV entertainment to handsets, is launching with Verizon, and AT&T/Cingular announced their plan to launch this service later this year."

Such technological great leaps forward will surely fit the pace of the coming Age of Convergence and should leave Qualcomm with enough incoming revenue to keep hiring sharp technologists -- as well as battle-tested lawyers -- or the trials sure to come.

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