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Qualcomm Declines Should Continue

By Trefis

Qualcomm (QCOM - Get Report) 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.
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