Qualcomm Declines Should Continue

By Trefis

Qualcomm(QCOM) recently reported earnings, indicating that its royalty rates and chipset prices declined faster than we had expected. We've updated the Trefis price estimate for Qualcomm's stock from $43.53 to $41.64 (vs. market of $39.39) to reflect faster future declines in both royalty rates and chipset prices.

Qualcomm's royalty rates on CDMA technology declined more than expected to 3.6% for 2009, down from 4% in 2008. The royalty rate represents the percentage of the average sale price of a CDMA mobile phone, sold by companies like Nokia and Motorola (MOT), which is earned by Qualcomm.

Increases in the number of low-end (low-price) phones and the lower royalty rates associated with them compared with higher-priced smartphones contributed to the recent decline.

Mobile phone companies like Samsung, LG and HTC that pay royalties to Qualcomm and sell large volumes of low-end phones bargain for lower royalty rates due to pressure on their margins from falling mobile-phone prices.

We expect that Qualcomm royalty rates will continue to decline and reach as low as 2.9% by the end of the Trefis forecast period.

Qualcomm's CDMA chipset prices declined more than expected to $18.5 per chip in 2009, down from about $20 in 2008. We believe the declines are attributable to increased competition from chipmakers ST-Ericsson, IFX and Broadcom(BRCM) in the 3G chipset market.

We expect that chipset prices will continue to decline and reach as low as $17 by the end of the Trefis forecast period.