Text of WSJ article (QCOM / Korea) (negative view).
(Note Gregg Powers' name spelled incorrectly near end of article !)
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May 18, 1999
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.
Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved.
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