Investors looking at
fourth-quarter earnings report will be seeking a clear signal on the wireless sector.
The San Diego cell-phone chipmaker is due to post financial results Wednesday after the market's close. Shares of the beloved tech titan have hit some turbulence in recent weeks after gaining 50% this year.
It seems a new broadcast venture, a new accounting approach and a potential slowdown ahead in the superheated handset market have tempered the enthusiasm for Qualcomm lately.
The fun ended last week, when a rare downgrade to sell from Morgan Stanley helped depress in the stock. Analyst Louis Gerhardy highlighted a few concerns in a remarkably contrarian view that's certainly not shared by the Qualcomm bulls.
Chief among the challenges for Qualcomm is a potential sales slowdown in code division multiple access, or CDMA, phones next year. With all the attention on this year's record sales of mobile phones, 2005 estimates were pushed to the back burner. That is, until now.
The big concern for Qualcomm watchers is the length of the phone replacement cycle. If people decide to upgrade their phones only every two or three years, 2005 might shape up as an off year, since many users already have a color screen camera phone. That would mean the bulk of Qualcomm's sales growth will have to come from new markets such as China.
And on Monday, Qualcomm said it was starting a wireless network subsidiary called MediaFlo that will provide video and audio broadcasts to mobile devices. Qualcomm plans to use about $800 million to build the network. At some point the venture will be spun off, but analysts like Gerhardy see it as a potential distraction for the company.
Unrelated, but adding to the anxiety in recent weeks, was Qualcomm's decision to change its royalty accounting starting last quarter. Striving for greater transparency, Qualcomm has stopped guessing at royalty payments and will instead report the revenue as it is recorded. Under its previous practice, Qualcomm estimated future-quarter royalties and booked the estimate ahead of time as revenue.
The shift will cut after-tax earnings by $298 million, or about 11 cents a share, in the fiscal fourth quarter ended Sept. 26.
Excluding the one-time royalty adjustment, analysts are looking for Qualcomm to post earnings of 29 cents on sales of $1.4 billion.
Still, the bulls aren't exactly stampeding away from Qualcomm. The wireless standard-bearer is squarely in line to receive fortunes in royalties as nearly every telco moves to some version of CDMA.
Beyond that, there are two wild cards that may turn out to be wild successes for Qualcomm. One is
pending data upgrade decision; the other is rival
potential need to buy Qualcomm chips.
Nextel is evaluating a fast data technology from closely held
, but it could easily go instead with Qualcomm's evolution-data-only, or EV-DO, solution. Lots of royalties hang in the balance. And handset giant Nokia acknowledged last month that it has been a disappointment in the CDMA market, vowing to improve fast. That leaves some wags to wonder if the big Finn will be forced to buy phone chips from Qualcomm to catch up.
To be sure, there's little chance that Qualcomm's earnings report Wednesday will reveal much on those two fronts. All the same, investors will be happy to hear the company's outlook for fiscal 2005.