Here's the story.
I spoke with QC's Dick Grannis and he confirmed that the company has experienced issues with 'Q' phone plastics. He indicated that, as with the QCP situation, the problem has effected a limited number of phones and that the company has already provided for the related warranty expense in its financials.
What I find rather exasperating is that it appears the February slowdown in 'Q' phone sales was related to both network performance (i.e. the oft-discussed "single-mode" issue) and to the company's need to rework the handset plastics. It appears that both factors influenced Sprint's decision to emphasize the QCP product family over the 'Q'.
Grannis emphasized that the 'Q' phone issue is not, in any form or fashion, a new development and that related warranty expense has been "baked" into the company's June quarter guidance to Wall Street (translation: the company will not be blaming an "earnings shortfall" on the 'Q' phone). Recall that in the April conference call, management indicated that manufacturing gross profit margins would be roughly flat sequentially (i.e. in the June quarter). Given that the March quarter had suffered from the QCP rework expense, a shortfall in 'Q' sales to Sprint and a canceled 'Q' order to Korea (the Hansol contract), I had previously believed that management was being excessively conservative with its June quarter gross profit margin guidance. Believing that the QCP problems were behind the company, and that volumes were at record levels, I had believed that margin convexity was probable and, therefore, that it was likely we would have a better than expected June financial performance. Management's margin guidance has now been placed in context and it would seem less likely that the June quarter will be substantially better than Street concensus...although as I indicated before, the 'Q' phone issue should not cause the company to "miss" the June quarter. Grannis additionally indicated that the issue has been resolved and will not have any financial impact going forward (i.e. in the September quarter).
Bottom line. The bad news is that the company has suffered another manufacturing snafu; that management was less than totally forthcoming in explaining this issue to shareholders (citing only problems with the QCP family last quarter); and that I apparently owe Tero an apology since I had emphatically contradicted his assertion that there were quality problems with the 'Q' phone. The good news is that management has addressed the issue; that it is baked into the company's earnings expectations for the current period; that it has not impacted the company's relationship with Sprint; and that it will not have an impact on prospective earnings. Finally, while I believe that Cabi has surfaced an "old" issue, that is not relevant to the company's forward prospects, I am more than a little annoyed that management was not more forthcoming on the topic.
Hope this is helpful,
Gregg |
