Here it is (WSJ piece on Qualcomm) :
January 21, 1999
Qualcomm Aims to Boost
Wireless Profits in Year
By QUENTIN HARDY
Staff Reporter of THE WALL STREET JOURNAL
SAN DIEGO -- Qualcomm Inc. shook up the wireless world with a radical
technology. Now it wants to shake up itself.
The company is best known for a communications system known as CDMA,
an advanced wireless technology that was a hard sell to telephone makers and
service providers. But that effort paid off, giving Qualcomm steady revenues
from CDMA chips and from licensing the technology to other manufacturers.
Qualcomm then started making its
own mobile phones and network
equipment, but these high-cost
businesses have so far disappointed.
Richard Sulpizio, who last summer
became Qualcomm's president, this
week put phone gross-profit margins at
more than 20%, up from recent levels
in the "high teens" but still short of his
target of 25%.
The company also has a tradition of
going all out for technical
sophistication, sometimes missing
deadlines to design slightly better
products. But Qualcomm's scientists
and engineers are also stockholders,
Mr. Sulpizio notes, and they agree that
profits should improve.
"They see our stock at $57 in 1998,
and $57 the year before that, and the
year before that. That is unacceptable to them," he says. "We've stumbled a
little bit."
Earnings Exceed Estimates
Mr. Sulpizio vows to boost profit margins in 1999, and Qualcomm shares had
risen above $60 recently on expectations of good quarterly earnings. On
Tuesday, Qualcomm said net income for its fiscal first quarter ended Dec. 27
rose 32% to $48.5 million, or 65 cents a diluted share, from $36.8 million, or
50 cents a share, a year earlier. Per-share earnings were above analysts'
consensus estimate of 60 cents a share. Revenue rose 20% to $941.2 million
from $785.9 million.
The numbers were released after stock markets closed Tuesday. Qualcomm
shares closed Nasdaq Stock Market trading Tuesday at $66.50, up $2.625 a
share, and rose to $69 in after-hours trading. Wednesday, however, the shares
fell $4.50, or 7.3%, on Nasdaq to $62.00.
Analysts expressed concerns about Qualcomm's rate of revenue growth, and
noted that part of the quarter's net income came from a one-time sale of assets.
"They made their numbers, but not from operations," said Eric Zimits, an
analyst with Hambrecht & Quist LLC.
Qualcomm's growth hasn't been shabby. Its offices, labs and volleyball pits
here -- the company's style is as informal as it is aggressive -- are packed with
engineers and salespeople, drawn in part by cutting-edge technology. The work
force swelled from 1,262 in 1993 to 11,600 by the end of 1998.
Mr. Sulpizio, formerly Qualcomm's chief operating officer, said his push for
better margins includes curtailing the "hiring frenzy." He has also linked the pay
of his division chiefs to revenue and profitability at the units.
Possible Sale of Business
Analysts think Qualcomm may also sell either the handset or
network-equipment businesses. Both Mr. Sulpizio and Irwin Jacobs,
Qualcomm's founder and chief executive officer, say no deal is in the offing
but don't rule out the possibility. The phone business could go "if the price was
right," Dr. Jacobs says, "but I don't see that happening."
Others do. Brian Moldoff, an analyst with BT Alex. Brown Inc., says "there is
a huge amount of potential in the stock" if management were to shed the two
businesses and focus on profitability.
Qualcomm's businesses, which also include satellite-communications gear, are
united by CDMA, which stands for code-division multiple access. Originally
used for top-secret government communications, CDMA was adapted for
commercial use by Dr. Jacobs, a rare combination of scientist and
businessman.
Banking on CDMA
In the early 1990s, the former college professor argued that CDMA was the
best digital technology, just as the U.S. mobile-phone industry was about to
take up another digital standard. Qualcomm said, and still maintains in its
literature, that CDMA allows wireless companies to increase their number of
subscribers in a given amount of radio spectrum by 10 to 20 times over analog
cellular phones.
Rivals disputed those figures. Most service providers now say CDMA usually
delivers about five to seven times the carrying capacity of analog phones,
compared with about three times analog capacity for a rival digital technology
called TDMA.
But CDMA is nevertheless moving toward U.S. dominance. According to
market-research firm Dataquest Inc., the technology accounted for 31% of the
nation's 12.9 million digital-phone subscribers as of September, up from 21% a
year earlier. "By 2002, CDMA should easily have over 50% of the total," says
Matt Hoffman, a Dataquest analyst. Internationally, however, CDMA lags far
behind a standard called GSM, which is similar to TDMA.
Sales of CDMA chips and patent royalties enriched Qualcomm, to the point
that Qualcomm could afford to put its name on San Diego's football stadium.
Royalty payments could grow in coming years, analysts say, if Qualcomm's
technology prevails in a battle to set standards for a so-called third-generation
wireless technology now being considered.
Some Missteps
While CDMA thrived, Qualcomm sometimes slipped up elsewhere. It moved
into phones based on CDMA technology because other manufacturers were
slow to make them. But rivals subsequently entered the field and drove profit
margins down. And Qualcomm's products were sometimes made with inferior
grades of plastic or built with features -- like Internet browsers -- well ahead of
any widespread market need.
Competition remains stiff. Oy Nokia, the Finnish phone maker, is expected to
soon announce at least six types of CDMA phones, including inexpensive
models that can work on two different areas of radio spectrum-a capability that
would let the Nokia phone work across most of the U.S.
Next month Qualcomm is expected to release another promising low-end
CDMA phone, which weighs less than five ounces and fits in a shirt pocket. It
also will also soon introduce a phone built onto 3Com Corp.'s popular PalmPilot
electronic organizer, and it is also trying to migrate its phone technology into
cars and personal computers. The company also has a joint venture with
Microsoft Corp., called WirelessKnowledge LLC, that this week announced its
initial wireless data service.
'Infrastructure' Business
But Qualcomm still has problems with "infrastructure," industry slang for
equipment that manages wireless transmissions. The company was late to enter
the U.S. market, and targeted sales in developing markets, such as Asia and
Russia, that have been slumping.
Analysts peg Qualcomm's infrastructure revenue at less than $400 million. "We
need $800 million to $900 million for the business to be profitable," Mr.
Sulpizio says. "We weren't there last year. We won't be there this year."
The Qualcomm president hasn't identified the remedy for the equipment
business. "I can keep it going like this, shut it down, sell it, partner with
someone, or refocus it," Mr. Sulpizio says. "Right now I go to a lot of white
boards, looking at all those options."
Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved. |
