Stock weakness:
Starting around 2:00pm yesterday somebody, who is apparently pretty well organized, began spreading several rumors about Qualcomm throughout the financial community. The first was that Bell Atlantic had stopped selling QC phones. The second was that QC was imminently going to preannounce disappointing fourth quarter results (September quarter), potentially have to restate prior period results due to a royalty controversy with the Korean government and that there was a potential disruption to the Korean cellular market. Having spoken with management at length, I will address these issues.
First the bad news. Bell Atlantic is NOT widely selling QCP's right now. The good news? There are spot shortages because BANM has sold out their inventory and, with QCP production capacity constrained, are awaiting shipment of additional product (which is on its way). This is a testament to the strength of the 800mhz CDMA market, not some product problem or manufacturing difficulty at QPE. Translation. The "bad news" is "good news".
Second. Management was absolutely, positively emphatic that there is nothing at all wrong with the company's current business and there is absolutely, positively no intention to preannounce anything negative. This story is a total fabrication. After the February "shock" from Samsung, QC's ASIC manager (Don Strock) went to Korea with the specific mission of improving the flow and continuity of orders deriving from QC's major Korean customers. Due to these efforts, QC has better visibility into Korea demand. Given this dynamic, and management's emphatic commentary about the state of the business, I would assign a zero..that's right..zero..probability to a surprise emanating from this Korean market this quarter.
With regard to the Korean government and royalties. During its developmental days, QC entered into various agreements with companies (such as Motorola) and countries (such as Korea) on royalty sharing arrangements. There are all kinds of very specific conditions relating to these royalty-sharing arrangements...for example, MOT participated in QC royalties up until a certain aggregate amount was paid and then this liability was extinguished. In the case of the Korea government agency, this organization participates in QC royalties with regard to domestic (i.e. internal to Korea) cellular-based CDMA products. QC's contract with this agency has specific exclusions and limitations and it appears that our Korean friends would like to retroactively rewrite the contract. Qualcomm has politely refused and the agency has publicly threatened litigation (even though it is contractually bound to arbitration). The dollar amount under contention would appear to be between $5mm and $15mm and, at the very worst, this would be a prospective liability incurred after an extended arbitration process. That is, there is not now, and will not be in the future, any need for QC to restate anything. This is a "normal" contractual dispute about money where one side thinks its due more and the other side (i.e. Qualcomm) believes that it has performed exactly within the terms of the contract. This disagreement has no implications for the company's current or near-term business prospects and most likely will be settled "behind the scenes" as it is largely immaterial.
Finally, the Cowen analyst been out suggesting that the Korean government intends to make it illegal for Korean wireless operators to subsidize the cost of handsets (i.e. pay Samsung $600 for the phone and sell it to the consumer for $100). He is apparently deriving this thought process for the government's stance on intra-chaebol subsidies. These subsidies occur when a healthy Korean company, within an conglomerate, loans money to, or other subsidizes, a failing Korean company, thereby weakening the entire concern. The Korean government has correctly observed that these cross-linkages have severely damaged many conglomerates and obstructed the discipline of market forces. Of course, the Cowen analyst has failed to note that handset subsidies are a normal business practice throughout the wireless industry worldwide. Such handset subsidies are nothing more than a marketing incentive by the carrier to induce subscribers to sign up. Moreover, even if such subsidies were outlawed in Korea (which is unlikely), carriers would respond with other incentives (such as free airtime etc.). There obviously is a huge difference between normal marketing practices and a Korean bank subsidizing the losses of a related-party construction affiliate. Apparently our friend at Cowen has failed to distinguish between these very different conditions.
I suspect, my friends, that this is a 'bear raid'. The shorts have been burned badly to date and this concentrated dissemination of innuendo and outright falsehoods has created something of a panic in a sloppy market. QC's management is emphatic in their response to the fact-basis (or lack thereof) of these rumors. I hope that there is nothing more sinister at work here. But I remained concerned that this outright attack on QC's stock price has occurred shortly after the company responded to ETSI and refused to license its IPR for W-CDMA.
Best regards,
Gregg |
