Kraig Biocraft Laboratories Inc (KBLB)

[Romans828]

Kraig's potential licensing revenues...advantages of incorporating into the business model...$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

One company with a fairly unique business model is Qualcomm (NASDAQ:QCOM). It's very much a chip-making powerhouse as it is the leading merchant vendor of mobile applications processors with its Snapdragon family of chips. It also repurposes its core mobile chip technology to serve other markets, such as automotive, Internet of Things, and even personal computers. Qualcomm also has significant chip efforts beyond applications processors, such as RF front-end chips, 3D-sensing technology, and fingerprint scanners.

Qualcomm's chip business is known as Qualcomm CDMA Technologies, or QCT for short.

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But Qualcomm is more than a chipmaker; it also licenses out its large and growing portfolio of wireless patents. Indeed, you might not realize that the company not only profits from selling chips into smartphones (and if you're reading this on an Android-based smartphone, the odds are good that it has a Qualcomm processor inside), but it also gets a cut of the selling price of each smartphone as a royalty payment.

That licensing business is called Qualcomm Technology Licensing, or QTL.

Let's take a closer look at just how each of these business units contributes to the whole of Qualcomm.

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Chips drive revenue, but licensing drives profits
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Historically, Qualcomm's chip business generated significantly more revenue than its wireless technology licensing business. After all, if the company receives a 3% cut on a smartphone that sells for $200, that's $6 in revenue, but selling an applications processor and related components into that same smartphone might yield something more on the order of $20 in revenue for the company.

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On the flip side, Qualcomm's licensing business is generally more profitable than its chip business. That's true from both an operating margin perspective -- in other words, the percentage of each revenue dollar that gets converted into operating income is much higher for QTL than it is for QCT -- as well as from a raw operating profit dollar perspective.
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Why is that the case? Quite simply, a royalty check is nearly pure profit. Sure, there are some expenses associated with that business, such as the costs involved with filing patents, hammering out licensing deals with licensees, paying (expensive) legal personnel to work to ensure licensee compliance, and other things...
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but historically QTL's operating margin has been extremely high.

Now consider the costs involved with the company's chip business. First, there's a huge amount of money that goes into simply developing the wide array of chips that the company sells. On top of those significant development costs, chips aren't free to produce -- there are significant manufacturing costs involved (wafer manufacturing, packaging and testing, shipping, and so on), which means that the gross margin percentage of a chip sale is dramatically lower than that of a royalty check.