Coverage of Q1 earnings from the SD Union-Tribune.
Handset profit margins
soaring
Qualcomm reports record sales
despite infrastructure drag
By Mike Drummond
STAFF WRITER
January 20, 1999
Qualcomm yesterday reported record first-quarter sales
and historically high profit margins in phone handset sales,
but revenues from its ailing infrastructure division
continued to drag at overall earnings.
The San Diego wireless phone giant reported net income of
$48.5 million on revenues of $941.2 million or 65 cents a
share, compared with profits of $36.7 million on sales of
$785.9 million or 50 cents a share for the same period last
year.
The company beat Wall Street estimates of 60 cents a
share.
Qualcomm boosted profit margins of its handset sales in
part by paying less for components, company officials said.
The company reported 20 percent margins on handsets,
compared with previous margins in the mid-to upper teens.
"This puts them in the realm of respectability," said Pete
Peterson, analyst with Volpe Brown Whelan.
Qualcomm stock closed up 4 percent at $66.50 yesterday.
The company's San Diego phone-manufacturing plant
operates nearly round the clock and can crank out about
600,000 handsets a year. The company's newer plant in
Brazil can produce about 25,000 handsets a year.
For the quarter, the company shipped a record 1.6 million
phones and more than 5 million of its semiconductor chips
used in wireless phones.
Company officials said they expect to sustain improved
margins by keeping operating expenses in check and by
rolling out new breeds of phones, some of which will be
on display at a telecommunications trade show in New
Orleans early next month.
Qualcomm chief executive Irwin Jacobs told analysts
yesterday that the company's wireless phone technology,
called code division multiple access or CDMA, is
"positioned to further expand around the world."
That expansion, however, is in doubt.
Qualcomm is at war with Swedish rival Ericsson over
which company's CDMA technology will become the
standard in future species of phones capable of
accommodating bigger digital files and Web browsing and
other computing functions.
The European Telecommunications Standards Institute
favors Ericsson's brand. At the urging of Qualcomm, the
U.S. government last month sent a letter to European
regulators requesting they not mandate a standard and
effectively block Qualcomm from competing in the
lucrative European market.
This week the head of the Brussels-based European
Commission rejected the claims made in the U.S. letter and
said that the market will dictate the coming standard.
Meanwhile, Jacobs said the company will continue to
invest in its troubled infrastructure business even as it
loses money.
Last week a consortium that includes Qualcomm won
licensing rights to provide basic phone service in Brazil
this year in a deal that covers 16 Atlantic coastal states and
the city of Rio de Janeiro. Qualcomm will be installing
infrastructure or base stations.
Yet deployment of those base stations won't be enough to
turn a profit for the division, which the company
acknowledges will have to make between $800 million
and $1 billion a year to break even.
The company recently unveiled new base stations that
consume less space, thus have lower attendant costs.
Qualcomm hoped that these new stations would help
increase margins.
"Theoretically, there is room there for that to happen," said
Peterson, the analyst.
Qualcomm had been hoping to sell its base stations --
closet-sized equipment that keeps wireless phones
connected to a central communications grid -- in Asia. But
continuing economic woes there has delayed those plans.
Economic trouble in Russia and Latin America also
slowed deployment of the systems.
Rumors circulated that the company was interested in
selling the division or entering into a partnership with
another company. Qualcomm officials denied the division
was for sale, but conceded it had been discussing
partnerships.
"We're not thinking about exiting the business at this time,"
Jacobs said, adding that he believes demand for the base
stations will increase "as the world emerges from
economic crisis."
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