Wireless Technology Boosting Qualcomm
BY SARAH Z. SLEEPER
Investor's Business Daily
Wednesday October 16, 10:38 am ET
Wireless phone and gear companies have seen sales and share prices drop like stones during the prolonged slowdown.
Qualcomm Inc., the San Diego-based chipmaker, has been part of the carnage.
But on Sept. 19, a time when many tech companies were issuing warnings, Qualcomm raised its sales forecast for its fiscal fourth quarter ended Sept. 29. It's slated to release final numbers on Nov. 7.
The company, analysts say, is in a uniquely strong spot in the wireless market.
First, some see its patented code division multiple access, or CDMA, technology as higher quality than the other dominant wireless technology, global system for wireless communication, or GSM.
Second, sales of CDMA gear, for which Qualcomm gets royalties, are accelerating. GSM sales have slowed.
These factors put Qualcomm in a wireless cat-bird seat, say analysts.
"There's nobody they compete with," said John Bucher, an analyst with Gerard Klauer Mattison. Unlike L.M. Ericsson AB, Nokia Corp. and Motorola Inc., Qualcomm only licenses technology and sells chipsets. They don't make network hardware or cell phones. Sales of those items are in the dumps, with no quick improvement in sight.
Cell phone sales are expected to be about even with 2001. And Lehman Bros. says wireless network gear sales will fall 15% to 20% this year from last.
Gross profit margins for network gear makers are at an all-time low, Bucher says. A few years back, margins were in the high 30% to low 40% range. Now, companies are lucky to make half that, he says.
Nokia executives say the company's September-quarter sales will be lower than they earlier expected. It's slated to report on Thursday. Its gross profit margin for handsets is 19%, they say. Overall, it's even lower. The company blames poor network gear sales and write-offs.
Qualcomm, on the other hand, upped its chipset sales estimates from 18 million or 19 million units to more than 20 million for its fiscal fourth quarter. Analysts have since raised Qualcomm earnings estimates for the quarter and year.
The most meaningful number is Qualcomm's gross profit margin, says Bucher.
Decisions Paying Off
"They have one of the most profitable business models," he said. "Their gross margins are well over 60% and probably will remain that way."
Decisions Qualcomm made a few years ago, to stop selling cell phones and network gear, and sell only chips and licenses for the CDMA technology it invented, are paying off, he says.
Even Qualcomm's share price isn't suffering as much as other wireless companies. IBD gives Qualcomm a Relative Strength rating of 57, meaning its stock has performed in the top 43% of all stocks in the last 13 months. No. 1 cell phone maker Nokia has a 48 RS, and other rivals lag lower.
Motorola expects a $2.3 billion decline in sales for 2002. Its share price hovers at about 10. And Ericsson's sales are expected to drop a staggering $7.8 billion in 2002. In danger of being delisted, its share price is about 60 cents. Analysts expect a loss of 7 cents a share for the year.
"Our technology has a very high value today," said William Keitel, Qualcomm's chief financial officer. That's why sales are rising and more carriers are deploying CDMA even in a recession, he says.
U.S. Bancorp Piper Jaffray says that GSM sales are flat but CDMA sales have climbed 3% to 4% this year. CDMA makes up only 13% of the world market, while GSM holds about 70%. Bucher says CDMA's market share will grow.
Keitel points to CDMA deployments by Sprint PCS and Verizon Wireless Inc., as well as by carriers in Japan, China, South Korea and other countries. CDMA carriers pay less as they upgrade their networks than do GSM carriers, he says.
For example, Keitel says Sprint spent $800 million on its network upgrade for its new "Vision" CDMA data and voice services.
That averages out to $45,000 per cell tower, he says. AT&T says it spent $3 billion for its GSM network upgrade, or about $184,000 per tower.
Bucher and wireless consultant Andrew Seybold say U.S. CDMA carriers Sprint and Verizon beat other carriers in terms of quality of service, such as fewer dropped calls. Analyst Scott Ellison of International Data Corp. agrees, giving Verizon the most kudos for network quality.
U.S. GSM carriers, such as AT&T and Cingular Wireless, have less consistent service, say analysts. The California Public Utilities Commission is investigating Cingular after a rash of consumer complaints.
Seybold says there are two other ways that CDMA beats GSM.
First, when carriers upgrade to next-generation service, as some are doing now, CDMA users can still use their earlier-generation phones. With GSM, if the carrier upgrades the network to next gen, users must buy a new phone.
The other way CDMA beats GSM, says Seybold, is that it's more "spectrally efficient." That means it uses fewer cell towers and less wireless spectrum.
Collecting Royalties
That's not an issue in Europe, where all carriers use GSM and there's plenty of wireless spectrum. But for U.S. carriers battling the Federal Communications Commission for more spectrum, it's a big issue. "Networks that can support the most voice and data users in the U.S. are CDMA networks," said Seybold.
And if carriers here and abroad finally build third-generation networks that have been promised for so long, much of the CDMA vs. GSM debate becomes moot for Qualcomm, says Keitel. That's because the third generation for both technologies is CDMA-based. So Qualcomm gets royalties no matter what 3G technologies dominate the market.
That's one reason for Lehman's glowing commentary last month on Qualcomm.
It wrote that over the next several years, "The success of Qualcomm's core CDMA architecture should position the company to move from selling chips and collecting royalties from around 13% of the market, to selling chips, collecting royalties and developing applications for almost 100% of the wireless world."
biz.yahoo.com |
