Qualcomm's CDMA Royalty Rates Will Continue to Drop


The average royalty rate that Qualcomm ( QCOM ) charges mobile handset vendors has declined gradually over the past years, as the average selling price of CDMA mobile phones continues to fall.  We expect a larger base of mobile phones will contribute to the declining trend in royalty rates, though at a slower pace. Moreover, handset manufacturers like Nokia ( NOK ) and Reliance, which are dominant players in emerging markets, are becoming weary of Qualcomm's high royalty rates. This could cause them to shift to newer technologies offered by competitors Texas Instruments ( TXN ), Broadcom ( BRCM ) and Infineon (N/A:IFNNY).

While we expect Qualcomm's royalty rate will decline slowly to 2.5% by the end of Trefis forecast period, Trefis members predict a slightly higher level of 3%. This corresponds to an upside of 6% to our price estimate for QCOM stock.

We currently have a Trefis price estimate of $51.71 for Qualcomm's stock , about 1% below the current market price of $52.34.

High Royalty Rates Could Persuade Mobile Makers to Shift to Competitors

From 2005 to 2008, Nokia and Qualcomm were in a fight over higher royalty rates charged by Qualcomm. Though the negotiated figure is unknown, many industry watchers speculated that the royalty rate was close to 2%. This is much lower than the average royalty rates enjoyed by Qualcomm.This precedent could lead to other mobile phone vendors renegotiating royalty rates with Qualcomm.

Another example is that of India's Reliance which has lodged complaints in the past against Qualcomm's high royalty rates. If players like Reliance decide to shift to competing technologies like GSM, this could have a severe impact on Qualcomm's royalty revenues.

Emerging Markets Key to Qualcomm

Developed markets like U.S. and Europe are close to saturation in terms of mobile subscriber penetration. With huge population and growing GDP, emerging markets like China, India and Latin America are expected to see maximum growth in CDMA subscribers. The average selling price of mobile phones is lower in the emerging countries, which means Qualcomm earns lower royalty revenue per phone. However, volume gains from these markets should more than offset any declines in developed markets like the U.S. Hence we expect Qualcomm will continue to keep its royalty rates lower in order to retain its key customers, particularly in emerging markets.

Trefis Community Forecast

The Trefis community expects Qualcomm's royalty rate for CDMA mobile phones will decrease from 3.4% in 2011 to 3% by the end of the Trefis forecast period, compared to the baseline Trefis estimate of a decrease from 3.1% to 2.5% during the same period. The member estimates imply an upside of 6% to the Trefis price estimate for Qualcomm's stock.

Our complete analysis for Qualcomm's stock is here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: BRCM , NOK , QCOM , TXN



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