Apple’s Nokia Suit More Pressing Than Qualcomm

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May 18, 2017 3:07 p.m. ET

Wells Fargo Securities

In this note, we catalog a comprehensive list of patent litigation that


Apple



AAPL 1.524126455906822%



Apple Inc.


U.S.: Nasdaq


USD152.54


2.29
1.524126455906822%



/Date(1495141200240-0500)/


Volume (Delayed 15m)
:
32649966



AFTER HOURS



USD152.58


0.0400000000000205
0.02622263012980202%


Volume (Delayed 15m)
:
897497




P/E Ratio
17.840935672514618

Market Cap
783379436523.437


Dividend Yield
1.6520256981775272%

Rev. per Employee
1894280









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is involved in, key upcoming dates, current status, and a detailed look at what we believe are the most important disputes.

While, understandably, the key investor focus continues to be on the iPhone 8 cycle, we believe these legal disputes have the risk of introducing volatility to Apple’s (ticker: AAPL) share price if/when initial rulings are made. And though most of the focus has been on


Qualcomm



QCOM 1.3728323699421965%



Qualcomm Inc.


U.S.: Nasdaq


USD56.12


0.76
1.3728323699421965%



/Date(1495141200455-0500)/


Volume (Delayed 15m)
:
12462455



AFTER HOURS



USD56.12



%


Volume (Delayed 15m)
:
662689




P/E Ratio
18.706666666666667

Market Cap
81790913870.506


Dividend Yield
4.06272273699216%

Rev. per Employee
762066









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(QCOM) given the recent headlines, we believe the


Nokia

(NOK) litigation is more important with the potential for news flow as early as the end of calendar 2017.

Following the conclusion of Apple and Nokia’s prior royalty agreement, the two parties were unable to come to new terms and Apple declined the opportunity to go to arbitration, setting up the legal battles of Apple versus Acacia and Nokia versus Apple. Nokia is claiming patent infringement by Apple while Apple counters that it does not violate the patents, patents are invalid, and the patents are not enforceable due to patent exhaustion. We note that Nokia is litigating in jurisdictions that, according to Bloomberg, have the shortest times to trial and higher risk of blocking infringing products and believe initial determination could come as early as calendar fourth quarter.

In the U.S., Nokia’s late December complaints with the International Trade Commission (ITC) are expected to be heard on Oct. 2 and Nov. 13 with Initial Determinations on March 27, 2018, and completion on July 27, 2018. While we have less visibility to exact dates internationally, determinations related to complaints filed in Munich and Mannheim could potentially come as early as the fourth quarter followed by other regions in first-quarter 2018.

While the exact rate Nokia and Apple are asking for is unclear, we believe the implied 0.2% rate previously paid by Apple to Nokia is likely to be too low as Nokia no longer needs all of Apple’s intellectual property (IP) related to smartphones since it sold its handset business to


Microsoft



MSFT 0.34084173088322467%



Microsoft Corp.


U.S.: Nasdaq


USD67.71


0.23
0.34084173088322467%



/Date(1495141200443-0500)/


Volume (Delayed 15m)
:
24362468



AFTER HOURS



USD67.73


0.0200000000000102
0.029537734455767243%


Volume (Delayed 15m)
:
847803




P/E Ratio
29.960176991150444

Market Cap
520980387343.038


Dividend Yield
2.303943287549845%

Rev. per Employee
761693









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(MSFT). We presume a 2.7% rate similar to Qualcomm is unlikely though a rate in between at 1.5% would equate to a 58 basis points impact to gross margin or 20 cents in earnings per share with every 10 basis points change to the Nokia royalty rate impacting gross margins by an incremental 4 basis points or 1.3 cents in EPS. If Apple has to pay Qualcomm the full rate (assuming Apple is not accruing the full amount), we estimate the impact to Apple’s fiscal 2018 gross margin would be 57 basis points or 20 cents in EPS, all else equal. We believe this may be an issue given our view that underlying fundamental gross margins at Apple are lower than the reported number due to accounting benefits.

— Maynard Um
— Munjal Shah
— Jason Ng

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