The Chips Are Down
But Qualcomm Snags SnapTrack, Charts Course
By Monica Alleven
Some of the air is seeping out of the balloon. But at the same time last week that Qualcomm was suffering stock deflation due to
anticipated slower chipset sales next quarter, it was making a strategically sane move for the long-term: using $1 billion-worth of
its puffed-up shares to buy wireless location technology developer SnapTrack Inc.
Investors went into a tizzy after Qualcomm forecast the second-quarter slowdown, pushing the shares down 16 percent on Jan.
26. But the SnapTrack deal might boost sales down the line when service providers are more likely to want location-based
services to fatten their own wallets.
Wireless location technology is a blooming field. Besides providing the means to find 911 callers and thus meet the FCC's 2001
mandate, such technology propels the market for wireless data. Traffic reports, driving directions and certain e-commerce are
more meaningful when delivered based on a caller's precise location.
In the near term, Qualcomm says the anticipated chip slowdown that freaked out so many investors is based on seasonal factors,
carriers' inventory re-balancing and the transition to newer chips. On top of that, Qualcomm's earnings conference call with
analysts produced some confusion. A few analysts reiterated their ratings or raised forecasts. Others downgraded the recently
high-flying stock.
The downgrades signaled the first real notion it's time for a breather. Salomon Smith Barney analyst Alex Cena, one of the first
analysts to slap a "buy" rating on Qualcomm back in February 1993, changed his rating from "buy" to "outperform." "It is
increasingly difficult to justify a price target well above our current $150," he says.
Analysts say the SnapTrack acquisition is a brilliant long-term move, both for the San Jose, Calif., GPS technology firm and for the
tenacious Qualcomm, which is digging itself deeper into intellectual property rights and high-margin royalties. SnapTrack's solution
is patented to operate on CDMA, GSM, TDMA and iDEN networks, representing another chance for Qualcomm to expand
outside its CDMA sphere.
For SnapTrack, which will be a wholly owned subsidiary of Qualcomm, the deal is a coup. The firm, with about 70 employees, has
been fighting for years to make a name for itself in the handset-based GPS market. Qualcomm was both a potential customer and
a competitor. Ellen Kirk, director of marketing at SnapTrack says: "They were a worthy adversary, and therefore will make an
extraordinary partner."
Qualcomm, which is selling its handset division, started talking with SnapTrack more than a year ago and at one point considered
using SnapTrack technology in its own handsets. Ultimately, it made more sense to acquire the company, whose patented
technology offers greater accuracy than competitors in the network-based solutions market, says Qualcomm President and COO
Richard Sulpizio.
Qualcomm's big push of late has been wireless data, and location is an essential element. The company, which started working on
a GPS solution with Lucent last summer, can leverage its High Data Rate technology to speed the entire process of finding callers.
Analysts say SnapTrack until recently still was talking about an initial public offering, but the deal with Qualcomm obviously was
too good to pass up. The $1 billion price tag raised some eyebrows within the industry, however. "It's an ambitious price," says
Stephan Beckert, analyst at The Strategis Group. If Qualcomm brings in, say, $2 or $3 per handset in licensing fees, it might need
to get the technology into some 333 million handsets to break even, Beckert figures. That could take some time; last year, the
industry as a whole sold about 270 million handsets worldwide.
But Deutsche Bank Alex.Brown analyst Brian Modoff, who reiterated his "strong buy" rating on Qualcomm last week, says
Qualcomm got the best of the location-technology firms with the acquisition of SnapTrack, which holds about 50 patents. Lower
power consumption and the ability to find callers accurately in urban areas are key benefits to SnapTrack's system, he says. SiRF
is the other major handset-based technology play in what's becoming an increasingly competitive industry. SiRF's big investors
include Nokia and Ericsson.
Overall, the market certainly looks promising. The Strategis Group projects about 121 million handsets will be sold with
handset-based location capabilities over the next five years. Wireless service providers need some sort of location system, either
network-based or handset-based, to meet the FCC's E911 mandate, which kicks in next year. And Strategis research shows
CDMA carriers are more likely to favor a handset solution than competitors that use TDMA.
Look for more data-related activities from Qualcomm. Security, transmission and applications all are important development areas.
Corporations have spent billions of dollars on their information technology systems, and that represents a huge potential business
for firms capable of supplying that information wirelessly.
SnapTrack didn't do a lot for Qualcomm's stock last week. Then again, it might be time for a breather. Later, Qualcomm can
come back with a breath of fresh air and re-inflate the balloon, this time with location-specific data.
Wireless Week, Jan 31. |
