Qualcomm Gets Some Bad Debt off Its Books

Qualcomm(QCOM) gave some rest to the weary.

Monday morning, the wireless technology developer announced that it had cleared up $200 million in outstanding commitments owed to it by Mexican telco Pegaso. Getting rid of a cash question mark that was blamed for an earnings miss two quarters ago doesn't exactly revive the prospects of the code-division multiple access, or CDMA, chipset maker. Not to mention that Qualcomm agreed to extend a new $140 million loan to Pegaso -- on top of the two existing loans that it believes will now be repaid -- which doesn't give the impression that Qualcomm is trimming its exposure.

But after a 48% drop in Qualcomm shares this year, investors will take any good news they can get.

Qualcomm is an avid investor in wireless carriers and handheld device makers, using its plentiful cash holdings to foster the adoption of CDMA technology around the world. The company has done a lot of work in Korea, China and emerging Latin American markets. Pegaso, a Mexican wireless network operator, illustrated some of the risk involved in that empire-building strategy, however, when it missed deadlines to repay loans last October.

At that time, Pegaso failed to meet milestones on $413 million in bridge loans, meaning the money was due. Pegaso was unable to repay the balance, and its failure to keep paying the interest on the loan hurt Qualcomm's fourth-quarter 2001 earnings. The company has another $264 million lent to Pegaso for equipment.

After beginning negotiations with Spanish telco Telefonica (TEF) in January, Pegaso worked out a deal to give Telefonica 65% of its shares, while existing investors would own 35%. The deal will enable Pegaso to repay enough debt to Qualcomm to reduce the CDMA provider's obligations by $200 million, though Qualcomm has agreed to extend $140 million in interim financing to Pegaso, should the telco need it. Qualcomm has a similarly tricky investment in Brazilian wireless carrier Vesper.

"Investors can take a bit of a sigh of relief," says W.R. Hambrecht analyst Peter Friedland. "It's a bit of positive information that investors can cling to. We do think Qualcomm should be making investments in Mexico, Brazil and India, which represent growth areas for CDMA. At the end of the day, investment is the right way to go. Of course, it would be nicer if those investments did not come under pressure."

Good news has been in short supply since Qualcomm ratcheted down its annual revenue growth projections from between 5% to 15% to a new, modest range of 4% to 8% when it reported second-quarter 2002 results on April 24. Mobile-phone industry participants had previously thought the sector would rebound mightily from 2001's downer year, but in the vein of market leader Nokia's (NOK) toned-down expectations, Qualcomm tempered its sales plans.

In response, the stock was downgraded by a couple of analysts, and Qualcomm shares began a 19% slide through Friday's close. Friedland sees this as a natural pullback from overly high investor expectations. He believes the company can provide solid 10% to 15% annual growth, while some on the Street have been cheering for more sprightly 25% to 30% growth. The new stock price reflects the lower forecasted level of sales growth, Friedland says.

Cleaning up its investment portfolio to the tune of $200 million didn't sway the markets; Qualcomm was up about 1% to $27.11 in midafternoon trading.

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