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Qualcomm Surge Raises Eyebrows on Inventory

Some observers wonder if consumer demand will really support the sudden rush of handset-chip sales.

Yes, it's ecstasy today at Qualcomm (QCOM) - Get Qualcomm Inc Report, but agony could be just around the corner.

Pointing to a surge in royalty revenue and chip sales to handset makers, on Thursday Qualcomm

dramatically boosted its sales and profit estimates for the current quarter. The upside surprise cheered investors, pushing the share price up 10%.

But not everyone was ready to break out the champagne, it seems. Some industry observers say U.S. wireless companies have been stockpiling phones in anticipation of enormous demand. But they warn that if sales disappoint, the carriers may find themselves once again facing a massive inventory glut.

What's especially troubling is that, while holiday gift buying looks strong, there are no indications that new number portability rules have unleashed the expected torrent of phone sales. Bulls had seen a sales surge tied to a horde of people keeping their phone numbers while ditching their carriers -- and picking up new handsets as a result.

"So far, number porting is way below expectations," says Yankee Group analyst Roger Entner, referring to the number of customers moving their numbers to new service providers. "Nonetheless, there have been quite a number of orders for handset shipments. If nothing changes, wireless carriers will be sitting on a glut of handsets."

One Wall Street analyst, who asked not to be named, said confirming inventory levels is difficult at this point, but agreed that if the number portability turns out to be a dud, "then clearly there could be an inventory issue developing in the United States."

Gluts aren't unheard of in the wireless sector. Early this year, China was seeing strong shipments of phone chips and components, but it soon found itself flooded with phones as the SARS epidemic trampled demand. In June,



ushered in the news by warning of a sales shortfall.

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Returning stateside, it's worth noting that


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, the nation's largest wireless telco, is also the home of the largest code division multiple access, or CDMA, network. Qualcomm commands nearly 90% of the world's market for CDMA chips and patent licenses. It is also the supplier to Verizon handset makers Motorola,





Verizon does not discuss its inventory levels, but a company representative said December is the biggest month for phone sales and that inventory is higher this year than last. The rep declined to comment on whether the company had ordered extra handsets in anticipation of number portability, but she did say that "we are a service company and it is our job to meet our customers' demands."

And Yankee's Entner says the cell phone service providers are going out of their way to make sure they have phones on hand if new customers do show up.

"We know that wireless carriers have ordered handsets at unprecedented levels," says Entner, whose firm does research and consulting for all the telcos. "So probably all carriers will have excess inventory."

Qualcomm attributes a big part of the increase in chip sales to number portability, but a company representative said it wasn't clear whether the chips were going into handset stockpiles or if it was a sign of actual handset sales.

"It's the No. 1 question," said a Qualcomm spokesman. "We are still looking at reasons for the upsurge." With little or no handset sales growth coming purely from number portability, the bumper crop of chips could very well be going into surplus handset supply -- or, says the Qualcomm rep, a catch-up from low inventories going into the quarter.

Qualcomm has not given any outlook for business in 2004 and is expected to discuss that guidance when it delivers its first-quarter earnings report in January.

Analysts who suspect a phone oversupply early next year aren't optimistic about Motorola's prospects. The hapless Naperville, Ill., wireless shop was late to deliver a camera phone to the market this season and suddenly Thursday said

it ran short of component supplies for the new phones.

Given the popularity of phones from Korean rivals Samsung and LG, analysts said Motorola would likely see its No. 2 market share numbers fall this quarter.