Negative Article on QCOM in today's WJS--- Co. will not give info on
Korean Sales.
Heard on the Street
Qualcomm Catches Static
Over Fuzzy Korean Signals
May 18, 1999
By ROBERT MCGOUGH and QUENTIN HARDY
Staff Reporters of THE WALL STREET JOURNAL
Qualcomm, the wireless-technology highflier, is catching some static from
money managers and analysts over unclear signals it is sending about its
crucial Korean phone market.
Qualcomm stock has nearly quadrupled this year. Wall Street loves the
San Diego company's pioneering wireless technology, which is gaining
market share around the world. Many argue it will be the core of the next
generation of wireless phone/Internet devices. And in its fiscal second
quarter ended in March, Qualcomm had record operating profit of 41
cents a share (adjusted for a 2-for-1 split), far surpassing analysts'
consensus estimate of 30 cents a share, according to First Call.
But there's a catch. Qualcomm's terrific quarter corresponded with a
short-lived bubble in the Korean domestic cellular-phone market, one that
ended April 1. Sales of Korean wireless phones -- all of which use
Qualcomm's so-called CDMA technology and chips, and generate
royalties to Qualcomm -- peaked at 2,035,000 units in March, then
plunged to 836,000 units in April, according to the Ministry of Information
and Communications. (Merrill Lynch estimates the March peak figure at
2.9 million units.) And there has been some significant insider selling.
How much of Qualcomm's great earnings in the March quarter were due
to the Korean bubble? Wall Street doesn't really know. And Qualcomm
isn't saying. Analysts estimate that 40% of the nine million chips shipped by
Qualcomm in the quarter went to Korea; Qualcomm also wouldn't discuss
that.
All this frustrates some analysts and investors. Even fans of the stock, such
as Chip Morris, manager of $5 billion T. Rowe Price Science &
Technology Fund, are disturbed. "Without better disclosure on the
profitability of the different business segments, there's significant uncertainty
with regard to the sustainability of current levels of profitability."
Profits won't be a problem, contends Irwin Jacobs, Qualcomm's chairman
and chief executive (and no relation to the corporate raider of the same
name). He brushes aside criticism over disclosure. "Have you ever met
anyone who didn't want more information?" Mr. Jacobs asks. "The whole
wireless area looks very positive; CDMA looks very positive."
The uncertainty nevertheless could add up to short-term indigestion for
Qualcomm, some money managers say, though the prospects for the
longer haul remain bright. Brian Hayward, manager of $870 million
Invesco Worldwide Communications Fund, says it's possible that there
could be a blip in Qualcomm's earnings in the current quarter due to the
popping of the Korean bubble. "But it would be a buying opportunity," he
says.
What's clear is the reason for the huge jump in phone sales. The Korean
government told Korean wireless phone providers to stop subsidizing the
sales of phones. Subscribers loaded up with cheap phones in advance of
the April 1 prohibition.
Royalties to Qualcomm in the quarter were huge. Such royalties are nearly
pure profit; thus, they're a disproportionate contributor to the company's
overall profits. Operating profit for the March quarter was $65 million. In
the quarter, Qualcomm received $77 million in royalties -- up 73% from
$44 million in royalties received in the December quarter.
"Korea has slowed down internally," Mr. Jacobs concedes, but he says
that exports by Korean manufacturers remain robust. Qualcomm insists it
has been very conservative in estimating its royalties. Mr. Jacobs won't say
how much of the $77 million in royalties in the March quarter came from
Korea. Nor will he say what portion of the company's operating profit in
any period came from Korea.
Korea is no small potatoes to Qualcomm. Early on, Korea decided to
exclusively use Qualcomm's CDMA technology for its phones, making it a
huge market for Qualcomm. Moreover, Korean companies are big
manufacturers of cell phones using Qualcomm's chips. In fact, during the
Asian crisis, Qualcomm's stock plunged, largely due to its exposure to
Korea.
Meanwhile, some Qualcomm
executives sold a chunk of stock in
late April. On April 26, Richard
Sulpizio, Qualcomm's president,
sold 25,000 shares, including sales
made through the exercise of
options, leaving him with direct
ownership of 4,241 shares. And
from April 23 through 26, Anthony
S. Thornley, Qualcomm's chief
financial officer, sold 65,000 shares,
including options sales, leaving
himself with 1,021 shares owned.
Qualcomm says both men continue
to hold big stakes in Qualcomm through options. Counting vested options
mentioned in Qualcomm's proxy statement, Mr. Sulpizio sold just 14% of
his stake. Mr. Thornley says he still holds about 39,000 shares through
vested options.
Analysts and money managers still believe Qualcomm has a bright future.
Qualcomm pioneered commercial use of CDMA, a mobile-phone
technology that sprays digital conversations across the radio spectrum
from one phone, then reassembles them on the other side. This involves
some heavy physics and engineering. Benefits include tremendous
efficiency, and also the fastest possible transmissions, for things like
wireless videoconferences, or high-speed Internet surfing.
The company struggled for several years to prove its concept to a
skeptical market. Once CDMA was established as a standard in the U.S.,
Qualcomm undertook expensive moves into the manufacture of handsets
and radio base stations. The infrastructure business involved competing
with the biggest wireless hardware companies in the business, and
ultimately proved a disaster for company earnings. That could also be a
blessing in disguise. In March, Qualcomm announced the sale of its
infrastructure business to Sweden's Telefon AB LM Ericsson, once the
company's most vocal critic among competitors. That sale, which indicated
CDMA would become even more pervasive and Qualcomm was looking
out for its bottom line, sparked this spring's rally in Qualcomm stock.
With the Ericsson deal, "we have convergence of a standard in
third-generation wireless, around CDMA technology," says Greg Powers,
president of Private Capital Management, a Naples, Fla., company that is
a major holder of Qualcomm stock. "We're talking about Qualcomm
supplying the world, either through intellectual property or chips."
--Michael Schuman in Seoul contributed to this article.
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My Note: 12 insiders selling 766000 shares, they know about the slowdown in the coming Quarter. -ng- |
