Can Qualcomm Keep Its Head Above the Handset Quicksand?

Investors are growing nervous about its yearly estimates for CDMA phone sales.
By Tish Williams ,

Qualcomm (QCOM) - Get Report investors are getting mighty nervous.

The mobile-phone chipset maker significantly lowered expectations for its fiscal third quarter ending June 30 when it

reported second-quarter results April 25. It expects to ship only 14 million chipsets this quarter after booking 16 million in the second quarter. It slashed earnings predictions to 21 cents a share, a number analysts have mirrored in their consensus judgment, according to

Multex.com

. Qualcomm representatives would not comment on whether the company planned on updating guidance before its quarterly earnings report.

Despite those reductions, Qualcomm hasn't lowered the expectation that vendors will ship 80 million code-division-multiple-access (CDMA) handsets this year. Qualcomm generates royalties from handsets that use technology held in its CDMA patents -- current versions as well as third-generation handset specification CDMA 2000. Given that

Nokia

(NOK) - Get Report

lowered worldwide handset expectations, some wonder whether Qualcomm's handset estimate is too high. And if it is, does that mean it will miss its earnings estimate? Investors so far have voted with their dollars, taking the stock down 17% last week.

"There are so many moving parts on Qualcomm, it's impossible to predict whether they're going to miss the quarter based on any single piece of data," cautions analyst Matt Hoffman at

Wit SoundView

, which hasn't done underwriting for Qualcomm.

One of those moving parts is CDMA chipsets that go into cell phones. In a world where the projected number of mobile phones shipping this year keeps declining, the number of chipsets that are needed could fall. As analyst Peter Friedland at

WR Hambrecht

estimates, CDMA phones made up 13% to 15% of year 2000's mobile-phone shipments.

Doing the math, if Qualcomm were to hit its 80-million CDMA phone target, CDMA would have to make the unlikely jump to 19% or 20% market share. Before Nokia's warning, investors were already in a tizzy about projections after

RadioShack

said May 30 that

Sprint PCS

(PCS)

and

Verizon

(VZ) - Get Report

-- a big CDMA customer -- weren't meeting handheld sell-through numbers. Nokia backed that up with its downcast predictions for the broader market. Add Maalox and stir.

There are also concerns about the shipment of equipment for CDMA networks. Mobile giant Verizon has been talking publicly about investigating W-CDMA (wideband CDMA) technology. Just the hint that Verizon is moving from the Qualcomm-friendly CDMA 2000 upgrade technology to the competing W-CDMA technology -- typically the upgrade path for European favorite GSM (global systems for mobile communications) networks, not CDMA networks -- has investors groaning, no matter whether it would be practical or possible for Verizon.

Nokia rears its ugly head again in the debate because the market is unsure whether Nokia will pay royalties to Qualcomm on W-CDMA infrastructure. Nokia is a big equipment player and the biggest handset supplier in the world by far, and investors would like Qualcomm to get royalties from Nokia on W-CDMA -- Qualcomm asserts that it holds patents essential to W-CDMA networks. Nonetheless, Qualcomm and Nokia do not have a licensing agreement for W-CDMA, leading Qualcomm to state its willingness to legally defend its patents if a vendor such as Nokia decides to sell W-CDMA products without a license. Whoopee, legal wrangling! W-CDMA is an irritant to the investor.

All of which leaves investors to wonder about Qualcomm's numbers. Earningswise, the company's 21-cent per-share expectation appears low enough -- Qualcomm earned 29 cents in the second quarter.

Lehman Brothers

boosted the stock in early trading Monday by remarking that the technology provider could hit its "modest expectations," sluggish handset market be damned. (Lehman has done banking for Qualcomm.)

But there is a real threat that the company's royalties for the year could fall with the declining estimates for 2001 handsets. And while the European carrier-spending slowdown Nokia mentioned isn't in the CDMA-friendly territory Qualcomm rules, weakness in Asia on top of U.S. carrier stinginess would be bad for business. Qualcomm's not going to calm down anytime soon.

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