Uh, has anyone heard of the guy listed in the last paragraph of this piece?
The Wall Street Journal Interactive Edition -- May 18, 1999
Heard on the Street
Qualcomm Catches Static
Over Fuzzy Korean Signals
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. |
