Qualcomm Inc.’s financial results came in line with consensus estimates last week, but the company expects falling chip sales because of slower handset sales anticipated in South Korea.
Marc Cabi, managing director with Credit Suisse First Boston, downgraded Qualcomm to a “hold” rating, and reduced the company’s estimates for the September quarter from 27 cents a share recorded for the third fiscal quarter to 24 cents per share. Cabi noted continued weakness in Korea and a lack of newly launched CDMA markets.
Qualcomm President and Chief Operating Officer Richard Sulpizio told analysts the company predicts a 2 million to 3 million decrease in chipsets sold in September because of slower growth in South Korea. The Korean government ordered operators to stop subsidizing handsets effective June 1. Korea accounts for 20 percent to 25 percent of total CDMA phones in the CDMA market, said Sulpizio.
“Even if the ban is not reversed, we believe the strong demand for wireless will be big,” said Sulpizio. “Any impact will be short-term. [Korean] carriers are implementing installment financing to spur growth … Growth could increase if Japan or South America posts stronger growth.”
Qualcomm also defended itself again over its patent position for third-generation wideband CDMA technology. The company’s stock has come under fire as investors become increasingly nervous that more operators are planning to adopt incompatible W-CDMA technology in lieu of cdma2000, 3G technology based on today’s standards. Qualcomm reiterated that it receives the same royalty rates regardless of which flavor of CDMA operators choose. Some analysts have been concerned that Qualcomm doesn’t hold as strong a position in IPR for W-CDMA technology.
Recently, the Japanese Patent Office and the European Patent Office upheld the validity of three of Qualcomm’s patents covering features of Code Division Multiple Access systems.
The Japanese decision covered Patent No. 2763099, entitled “Spread Spectrum Multiple Access Communications System Using Satellite or Terrestrial Repeaters,” which Qualcomm claims is essential to all commercial CDMA standards, including W-CDMA and cdma2000.
The European decisions upheld Qualcomm’s patents on “Dual Distributed Antenna System,” and “Method and Apparatus of Providing Audio Feedback Over a Digital Channel.”
Qualcomm also indicated it will be a first-mover and leader in the W-CDMA chipset market.
“We’re progressing to chipsets that support multimode, multiband and multinetwork,” said Dr. Irwin Jacobs, chairman and chief executive officer of Qualcomm. “We expect more announcements on new chips in the not-too distant future.”
Qualcomm, however, needs to obtain licenses to GSM technology in order to produce the multimode chips. Since GSM operators initially will launch W-CDMA technology in islands of coverage, they will require GSM/W-CDMA handsets.
“There are IPR issues,” said Jacobs. “We’re working on a variety of strategic opportunities. We’ll be making announcements soon … We expect that any of the phones will be multimode, and that W-CDMA as well as multicarrier (cdma2000) have to tie back into both the networks, GSM and ANSI-41.”
Qualcomm noted that many companies have tried to produce current-generation CDMA chipsets, only to fail. It believes the same will be true in the W-CDMA market, although it recognizes that players like Motorola Inc. and Nokia Corp. will develop their own chipsets.
Motorola and Nokia also are two key vendors that have not licensed W-CDMA technology from Qualcomm. Jacobs said Qualcomm is in discussions with both vendors, but he had no indication when deals might be hammered out.
“They do have certain rights to earlier patents, but not a full range to date,” he said.
Jacobs indicated other vendors are attempting to reduce its intellectual-property-right position to the W-CDMA standard, which he believes might weaken the standard. He noted that others may add IPR rights to what Qualcomm already owns, which could increase the cost of W-CDMA technology.
License, development and royalty fees totaled $174 million, up 38 percent in the third quarter of 2000, compared with $126 million the previous year. Cabi expects Qualcomm’s licensing business to still see a year-over-year 20 percent increase in revenue growth in the coming quarter, despite the slowdown in Korea. The company should benefit from one-time fees for new license agreements.
Revenue reached $713.5 million in the quarter. Qualcomm shipped 15 million phone chips, compared with 11 million the previous year.
Qualcomm also announced an amendment to Toshiba Corp.’s existing CDMA subscriber unit license agreement granting Toshiba a license under Qualcomm’s CDMA patent portfolio to develop, manufacture and sell subscriber units for all modes of the 3G CDMA standard, including cdma2000 and W-CDMA.
Prior to the amendment, Toshiba’s agreement only covered cdma2000 standards.
