On Hold: Telecom's Deferred Comeback

Updated from 6:36 p.m. EST

Everyone expects the second half of calendar 2002 to hold great things for wireless developer Qualcomm (QCOM Quote), but the next two quarters look tough.

While there are new rollouts due this year for the company's trademark CDMA (code division multiple access) technology, Qualcomm trimmed 2002 guidance to reflect the signs of a slowdown for the wireless standard as the year begins.

By the summer, Qualcomm's two major U.S. carrier customers, Sprint PCS (PCS Quote) and Verizon (VZ Quote), will be rolling out next-generation networks nationwide, based on Qualcomm-backed CDMA 1X technology. New networks spawn millions of mobile-phone purchases, each one contributing royalties to Qualcomm and boosting CDMA.

But in the December quarter, which is the first quarter of the company's fiscal year 2002, the wireless technology developer's best customers showed signs of a slowdown. Lingering economic sluggishness led Qualcomm to lower its full-year forecasts across the board. The company cut revenue estimates to a range of $2.8 billion to $3.08 billion, just below current Wall Street forecasts, and said profits would hit between 90 and 97 cents a share, a dime below analyst consensus. Qualcomm's pro forma earnings will not include results from investment losses or gains in its Strategic Initiative unit going forward.

Additionally, Qualcomm had projected that 85 million to 95 million mobile phones would ship with CDMA technology in calendar year 2002, close to 20% of the total 2002 phone shipments estimated by phone makers Nokia (NOK Quote) and Motorola (MOT Quote). It reined in that estimate to 80 million to 90 million Thursday. Qualcomm expects average selling prices of CDMA phones to fall 10% in 2002, which would detract from the royalty payments it gets from licensees.

The company managed to overcome the downward pull of its carrier clients in the first quarter ended Dec. 31, narrowly missing Street estimates with $693 million in pro forma revenue and matching earnings expectations with a 23-cents-a-share pro forma profit. Qualcomm made 17 cents a share net profit calculated according to generally accepted accounting principles.

Consensus estimates called for $700.8 million in revenue, according to Multex.com. Qualcomm's revenue grew 7% from the first quarter of 2001 to this quarter, and its gross margins were up 4 percentage points to 66% year over year.

But Qualcomm's 2002 already has begun losing steam. The company cautioned investors that it would have profits of 19 cents to 21 cents a share in the second quarter of 2002, below current Street expectations of 24 cents a share. Additionally, Qualcomm expects a decline in the number of CDMA chipsets it ships, falling from 15 million in the first quarter to 13 million in the second quarter.

"There's no doubt that what we've heard before from other customers regarding Christmas sell-through is affecting our [quarter]," said Don Schrock, head of the CDMA Technology Group. Schrock also pointed to higher chip inventories in Korea as negatively affecting the company's quarter. Investors have feared that Qualcomm would suffer because of its poor holiday returns.

In the weeks leading up to the CDMA champion's results, customers Verizon and Sprint PCS preannounced an unexpectedly light holiday season, and Qualcomm's marquee Asia/Pacific carrier customer, KDDI, reported a dismal end of the year

As a lone bright spot, 6 million of the chipsets shipped in the first quarter were higher-priced versions based on next-generation technology. Despite an expected decrease in second-quarter chipset shipment, the company plans to send 7 million next-generation chipsets into the market.

Until wireless companies flip the switch on the new systems later in the year, though, Qualcomm investors could be in for an uneasy time.