Analysts stay bullish; Qualcomm seeking presidential veto
By Dan Gallagher & John Letzing, MarketWatch
NEW YORK (MarketWatch) -- Shares of Qualcomm Inc. actually gained ground Friday morning despite the fact that the wireless technology company lost a significant ruling before the U.S. International Trade Commission. The gains came following reports from Wall Street analysts that the ruling would not have a major impact on the company's near-term business. Late Thursday, the ITC issued a statement saying that it has decided to ban from import all wireless devices that contain chips made or designed by Qualcomm Inc. However, the ban is limited to device models produced after June 7. The ruling stems from a patent dispute battle between the company and rival chipmaker Broadcom Corp., which has accused Qualcomm of illegally using its wireless technology in its chip designs. Broadcom cheered the move and said it holds out hope to negotiate a licensing deal with its rival. Qualcomm, on the other hand, is pursuing efforts to have the Bush administration overturn the ruling and is seeking a stay on the order from the U.S. Court of Appeals for the Federal Circuit. "We will ask the White House to veto this decision and avoid turning back the clock on the tremendous gains that have been achieved in mobile broadband communications, disaster preparedness and emergency response," Qualcomm CEO Paul Jacobs said in a statement Thursday night.
Wall Street remains bullish
Shares of Qualcomm picked up were up 1.7% at $41.72 in morning trading. Broadcom also made gains, picking up 1.4% to trade at $30.52.
Analysts are staying largely bullish on Qualcomm in light of the ruling, which was better than other worst-case scenarios.
Calling the ruling "better than we feared, worse than we expected," Avi Silver of Bear Stearns kept his outperform rating on Qualcomm, saying he expects "strong fundamentals" to drive higher earnings for the company.
A less bullish view came from Brian Modoff of Deutsche Bank, saying he is "concerned" that Qualcomm is in a defensive position, waiting for an appeal or veto. "While there is no way to predict the eventual outcome, it is important to note that Qualcomm has more to lose at this stage," wrote Modoff, who also maintained his buy rating. Lawrence Harris of Oppenheimer trimmed his price target on Qualcomm to $49 from $52 but maintained his buy rating, citing the uncertainties remaining over the stock. The ruling strengthens Broadcom's hand, both in negations with Qualcomm as well as with potential customers in the wireless handset market.
Krishna Shankar of JMP Securities upgraded the chipmaker to market outperform from market underperform on Friday, citing the benefits from the ruling as well as the belief that the company's products are being used in the soon-to-be-launched iPhone.
"The recent court wins by Broadcom against Qualcomm are also positive and will clear the decks and remove any lingering hesitation among cell phone OEMs seeking advanced multiple sources for their 3G chips," Shankar wrote in a report.
Ruling limited to newer models
The agency limited its injunction to wireless device models produced after June 7, which means all models already on the market can be sold.
"The commission found that an order excluding all downstream products would impose great burdens on third parties, given the limited availability of alternative downstream products not containing the infringing chips," the ITC's statement read.
Qualcomm's technology is widely used in phones made by companies including Motorola Inc. and LG Electronics Inc., and then sold directly to customers by carriers including AT&T Inc and Sprint Nextel Corp.
In its ruling, the FTC said a blanket order barring all wireless devices containing Qualcomm chips "could adversely affect the public interest, particularly the public health and welfare, competitive conditions in the U.S. economy, and U.S. consumers."
By contrast, the agency said limiting the rule just to chips excluding the phones that contain them "would afford little or no relief to the patent holder, Broadcom."
Qualcomm's Jacobs said a veto is in order because the ruling could "jeopardize America's disaster preparedness," due to its potential to shut off the supply of the many wireless communication devices containing Qualcomm chips.
Broadcom indicated a willingness to negotiate a licensing agreement with Qualcomm, which it accused of "seeking unfair compensation for its own patent portfolio" of wireless technology.
"We simply want to be adequately compensated for the use of our intellectual property. To that end, we have made it clear to Qualcomm that we are open to discussions regarding the potential for licensing of our patent," read a statement by the company on Thursday. "The ball is in Qualcomm's court."
Negotiations dismissed by Qualcomm
But Qualcomm sounded a defiant note in a conference call with analysts late Thursday.
Negotiations with Broadcom are impossible
Qualcomm general counsel Louis Lupin said, because "it has been the case since day one of our discussions that what they are seeking are terms that would be destructive to our business model."
Lupin acknowledged that White House vetoes of ITC orders are relatively rare, adding that there have been "slightly more than a handful over a decade." Lupin said the White House has 60 days from Thursday to act on the request for a veto. He said that he expects action from the Court of Appeals within "a time frame on the order of days or weeks, as opposed to months."
In a note to clients, Blair Levin of Stifel Nicolaus called the ITC ruling "bad news for Qualcomm and its wireless carrier customers, because they revise and turn over their handset models rapidly."
Jacobs said it is difficult to assess the full impact of the ITC's action on Qualcomm's business, because he has not yet seen the full ruling. But he said there should be "no short term disruption to the business."
Qualcomm chief operating officer Sanjay Jha said that while a technology solution to avoid infringing on Broadcom's intellectual property has been discussed, such an action would require a great deal of time to gain acceptance from wireless carriers and phone manufacturers.
Jha said that, "I'd imagine for Christmas all the carriers have set out their plans to launch large number of models," which could now be impacted by the ITC ruling.
Jha said the best way to avoid an impact on those carriers "is for all of us to implore the President to veto this order."