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Is Licensing the Next Catalyst for NVIDIA Corporation (NVDA)?

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Despite reporting a strong recent quarter purveyance of GPUs, NVIDIA Corporation (NASDAQ:NVDA) is on the hunt for additional sources of revenue. To that end the company has announced a new emphasis on licensing its patent portfolio as an additional revenue stream. The company has been willing to license its technology in the past, providing the design for the GPU in Sony Corporation (ADR) (NYSE:SNE)’s Playstation 3 and licensing visual computing patents to Intel Corporation (NASDAQ:INTC) but this does mark a shift in strategy.

NVIDIA Corporation (NASDAQ:NVDA)In its announcement NVIDIA Corporation (NASDAQ:NVDA) highlighted a shift in the dynamics of the IT market, pointing to the current erosion of the PC market while the mobile market rapidly expands. The company also highlighted the prevalence of high definition graphics in workspaces everywhere and how that is stimulating demand for their particular brand of computing prowess.

Interestingly the company name checks Google Inc (NASDAQ:GOOG)’s Android as the catalyst for what they perceive to be “an unprecedented opportunity to accelerate” their licensing effort. It isn’t a surprise that they are fond of Google Inc (NASDAQ:GOOG)’s mobile operating system; Android has delivered quite a few customers to their doorstep and helped move them to the forefront of mobile graphics.

While NVIDIA Corporation (NASDAQ:NVDA) has seen success in the mobile landscape, it hasn’t yet struck a major deal with the current winners of the mobile war, Samsung and Apple Inc. (NASDAQ:AAPL). NVIDIA Corporation (NASDAQ:NVDA) has a major foothold in mobile, but it is far from the only game in town. Could licensing their patent portfolio be the answer? It seems like it may be, though the strategy does have some drawbacks.


The Advantages

The biggest advantage is that there is plenty of evidence that this approach can pay off. Without a focus on licensing deals the company has already managed to land two significant licensees, and in the case of Intel Corporation (NASDAQ:INTC), it has resulted in a nontrivial revenue stream. Intel pays NVIDIA Corporation (NASDAQ:NVDA) $250 million a year for licensing, which represents roughly 6% of the company’s revenue for the fiscal year 2012.

Furthermore, NVIDIA Corporation (NASDAQ:NVDA)’s success with licensing isn’t the only example. For instance, in the most recent fiscal quarter rival QUALCOMM, Inc. (NASDAQ:QCOM) derived approximately 33.5 percent of its total revenue from its QTL business division. QTL, which stands for Qualcomm Technology Licensing, handles the licensing of QUALCOMM, Inc. (NASDAQ:QCOM)’s extensive patent portfolio and is undeniably a major part of the company and its success. Qualcomm isn’t alone: ARM Holdings plc (ADR) (NASDAQ:ARMH), perhaps the most prolific of the mobile chip companies, subsists almost entirely on royalties and fees from licensing their designs. It’s this structure that allows ARM Holdings plc (ADR) (NASDAQ:ARMH) to maintain its impressive gross margins: 94.5 percent for 2012.

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