Qualcomm Has a Good Day, but Korean Worries Persist

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The news out of San Diego-based

Qualcomm

(QCOM) - Get Report

couldn't be any better today: The company won a $240 million contract to supply its new 800-megahertz Q phones to a number of telephone companies, including

AirTouch Communications

(ATI) - Get Report

. The news sent the stock up 4 3/4, or 10%, to 51 3/8 on volume that was more than double the stock's daily average.

But the day couldn't end before whispers of problems about the wireless communications company emerged from the

BancAmerica Robertson Stephens

tech conference. One money manager there, speaking on the condition of anonymity, said that Qualcomm's partners are now receiving 30,000 subscriber cancellations per month in Korea.

"Our customers have had some order cancellations, and have even postponed shipment in some cases, but that number you have shouldn't be assumed to be true," says Julie Cunningham, vice president of investor relations for Qualcomm. "The subscribers are falling off on the carrier side

in Korea, so the loss in sales there does not necessarily add up to a similar loss for us."

Still, the high rate of phone cancellations will surely affect Qualcomm's stock in the near-term because the earnings have already been added to the December quarter's balance sheet. So now those Korean earnings are not only going to be flat for awhile, but they are going to be significantly down from the December quarter.

Qualcomm has already indicated that it was suffering from weakness in Korea. On Feb. 5 the company warned that earnings would fall shy of expectations in the current fiscal second quarter, largely due to problems in Korea. The stock lost more than 12% the following day, closing at 47. Among the Korean problems was the cancellation of a previously announced phone order.

The spate of bad news has drawn a bevy of short sellers. According to the most recent Nasdaq figures, from January, the company had reported short interest of 10.4 million shares, up from 7.4 million in December.

More cancellations from Korea would be bad news for Qualcomm because analysts were expecting the company to receive 30% to 35% of its total earnings from Korea this fiscal year, says Raj Srikanth, an analyst with

Schroder

. The company had a 350% increase in year-over-year earnings in its last quarter, thanks to a huge upswing in cell phone sales.

"The company received a huge boost in earnings thanks to Korea in its December quarter because each time one of its partners sells a phone, Qualcomm receives some royalty income on it," explains Srikanth. "These sales don't make up a big chunk of revenue, but it helps the company's earnings per share enormously."

But Korea's currency crunch and economic crisis have led to problems throughout the business sector. One casualty looks like cell phone contracts. Srikanth, along with analysts from

Merrill Lynch

and

Cowen

, downgraded Qualcomm to a hold on Feb. 6 after a conference call with the company in which Qualcomm hinted that poor results in Korea would negatively affect the company over the next one or two quarters. It seems as if the results are seeping in, and they aren't encouraging.

Staff reporter

Kevin Petrie contributed to this story.