Intense pricing competition in the Code Division Multiple Access handset market may put the squeeze on Qualcomm Inc.’s fiscal fourth-quarter results, some analysts said last week.
Qualcomm’s stock fell $23.50 to $168.69 Wednesday amid concerns over margins in its mobile-phone business. Shares rebounded somewhat Thursday and Friday.
The sell-off was sparked by an analyst report from Everen Securities that indicated Qualcomm, whose stock has skyrocketed during the last six months, likely will not exceed fourth-quarter expectations as dramatically as in previous quarters.
Banc of America downgraded Qualcomm from “strong buy” to “buy,” indicating that price competition from Nokia Mobile Phones and Motorola Inc. and unfavorable component pricing in light of component shortages are affecting handset margins.
Many other firms, such as Merrill Lynch, said concerns over component shortages were overdone and maintained their ratings. Merrill Lynch analyst Michael Ching said subscriber growth has been stronger than expected in the United States, South Korea and Japan, which should translate into higher CDMA royalties to offset any weakness in the phone business.
Qualcomm would not comment on the reports. The CDMA innovator said in a recent Securities and Exchange Commission filing that the component shortage would limit revenue growth from phone sales during the fourth quarter and possibly the first quarter of fiscal 2000.
Jeffrey Schlesinger, analyst with Warburg Dillon Read, said Qualcomm’s component-shortage and pricing problem is a company-specific problem. Other handset manufacturers have not faced the same issues.
“They don’t have the procurement strength that the big guys have,” he said. “Qualcomm’s estimated 10 million units per-year pales when compared to Nokia and Motorola, which are expected to produce over 68 million and 50 million units, respectively.”
Everen Securities’ analyst Mark Roberts, who reiterated his 1-1 rating on Qualcomm shares partly because of strong growth of CDMA technology worldwide, said handset gross margins are not improving as quickly as Qualcomm would like because of component shortages and price competition. Handset prices are eroding 25 percent to 30 percent per year compared with 15 percent to 20 percent per annum during the last several quarters.
Speculation has circulated since early this year that Qualcomm was looking to sell off its handset business as margins continue to fall. Roberts, who met with Qualcomm management last week, said Qualcomm will stay in the handset business as long as it is operating at break-even or is profitable and if the company is not losing market share at a rapid pace.
Schlesinger said South Korean CDMA handset vendors have become more aggressive in North and South American markets. He estimates that exports from these vendors increased from about 1.7 million units in the first quarter to 2.7 million units in the second quarter.
“It does not surprise us that Qualcomm is facing intense price pressure,” said Schlesinger. “This likely stems from aggressive pricing from Korean cdmaOne handset vendors as well as the ramping of new products from industry leaders Nokia and Motorola. Both Nokia and Motorola are pricing new products aggressively.”
Contributing to the problem, said Schlesinger, is that Qualcomm’s new products are limited to one platform, the mid-tier Thin Phone. Qualcomm is likely to pursue original equipment manufacturer agreements with other CDMA handset vendors to sell lower-tier handsets, he said.
