Great results are great, except if you can’t count on repeating them.
Thus when a company posts big jumps in revenue, profit and unit shipments and raises guidance for the year, but both the CEO and president preface their remarks to analysts by delivering nearly identical warnings about legal uncertainties and their unquantifiable effect on future earnings, there may be an actual problem.
Uncertainty, in a nutshell, is a problem for Qualcomm Inc., and the company said as much during last week’s conference call to discuss earnings. The vast majority of analysts’ questions focused on the company’s legal uncertainties and the cost and timeframe for resolving them. Qualcomm executives said, in effect, that costs and timing could not be predicted. One analyst, out of more than 10 on the call, offered congratulations on the company’s performance.
The company’s ability to innovate in the lab and execute in the market-while a potential avalanche of legal and regulatory troubles looms overhead-is remarkable. But CEO Paul Jacobs prefaced his remarks about the company’s great quarterly results by reviewing the “overhang” and acknowledging that predictions were out the window.
Clearly, Jacobs wished to signal to investors that Qualcomm does not underestimate the threat to its business model and to its market momentum from its many legal entanglements-you have to acknowledge a problem before you can solve it.
Yet Jacobs was unable to give any solid forecast for when the period of legal uncertainties would end or how great a financial impact resolutions might have on the bottom line. In his remarks, Qualcomm President Steve Altman felt compelled to deliver virtually the exact same message before likewise extolling the company’s performance.
“Before discussing our performance . let me start by commenting on our continuing legal issues,” Jacobs told analysts and investors. “We are disappointed with the rulings on behalf of Broadcom both in Santa Ana and in front of the ITC. We continue to believe that the rulings are wrong and are pursuing all avenues to reverse and to mitigate the effects of these rulings, including working with our partners who may obtain a license from Broadcom.”
Jacobs was referring to a federal court ruling in Santa Ana, Calif., during the quarter that found Qualcomm infringed on three Broadcom Corp. patents and a case before the U.S. International Trade Commission that found Qualcomm infringed on a fourth Broadcom patent.
“Unfortunately,” Jacobs added, “given the threat of injunctions against certain of our products, the next few months represent a crucial litigation time frame and we can’t predict the outcomes at this time.”
“Let’s talk about the business,” Jacobs added. “We had another outstanding quarter .”
Stellar results
Briefly, in its fiscal third quarter, Qualcomm racked up $2.33 billion in revenue, up 19% from the year-ago quarter, and $798 million in net income, up 23% from the year-ago quarter. The company shipped a record 65 million CDMA chipsets in both CDMA2000 1x EV-DO and W-CDMA technologies during the quarter. It raised its guidance for the entire fiscal year 2007, from a range of 373 million to 393 million units to 378 million to 398 million units, with revenue and earnings expected to rise several percentage points over previous guidance.
iSuppli Corp. said that, according to its analysis, Qualcomm had replaced Texas Instruments Inc. as the top revenue-producing chip vendor in the world, though chip analyst Will Strauss at Forward Concepts said he questioned iSuppli’s conclusion.
Fast-moving developments may have undercut Qualcomm’s customary bluster.
Broadcom just weeks ago struck a licensing deal with Verizon Wireless to void the ITC’s ban on the importation of new models of 3G handsets containing Qualcomm’s chips. And the Broadcom-Verizon Wireless licensing deal opened the door for other carriers and handset vendors to strike a similar deal. These developments may undercut legal arguments made by Qualcomm and its allies that the ITC ban would harm the public interest, the national economy, public safety and even national security, according to Strauss.
Due to the terms of Qualcomm’s agreements with its partners, the former may be liable for the latters’ cost of any subsequent licensing agreements with Broadcom to avoid patent infringement. Qualcomm executives acknowledged they were in talks with Verizon Wireless over the latter’s costs in licensing Broadcom’s patents, but disputed that those costs could be as much as $6 per imported handset. Verizon Wireless had joined Qualcomm in asking for a presidential veto of the ITC decision, but abandoned that quest after cutting its deal with Broadcom.
Qualcomm acknowledged last week that the window for a presidential veto ends Aug. 6, after which, it suggested hopefully, its appeal in federal appeals court could move ahead. Meanwhile, Qualcomm said, the outcome of its dispute over cross-licensing with Nokia Corp.-which could cost it five cents per share in earnings next quarter-might well depend on the outcome of numerous legal actions involving a variety of industry players including Nokia, TI and Broadcom, among others, that will be heard in court in the next few months.
Meanwhile, no love has been lost between Qualcomm and Broadcom as the latter appeared to outmaneuver its rival with behind-the-scenes negotiations with Verizon Wireless and other parties affected by the ITC import ban.
“A comprehensive settlement between us and Broadcom is unlikely,” said Altman.
