Expenses were significant for Qualcomm Inc. in the second quarter, deeply affecting its earnings and sending its stock down 10 points.
The San Diego company said it expects to build up its supplier side and manufacturing capabilities in coming quarters, and it defended the ability of its Code Division Multiple Access technology from Wall Street doubters.
Qualcomm is an inventor of CDMA technology that opted to build a factory and become a manufacturer of CDMA infrastructure and handsets. Last fall, the company also created a business unit to provide Application Specific Integrated Circuits for CDMA products.
Those moves have been costly. Research and development expenses rose from $18 million a year ago to $35 million in the second quarter. Sales and marketing nearly doubled. Licensing fees have gone up and down.
And in concert with those changes, the softness in the U.S. trucking industry led to lower unit shipments for Qualcomm’s OmniTracs division, from 10,000 units in the second quarter 1995 to 8,300 units in this year’s second quarter.
The total result is a drop in earnings from 15 cents per share in the first quarter to 2 cents per share in the second quarter; Earnings were 11 cents per share in second quarter 1995.
Wall Street has reacted strongly, especially since analysts expected an increase in earnings. Qualcomm’s stock dropped to about $32 a share last week; it traded at about $41 a share in early April.
Qualcomm said it believes “the same factors that affected the results for the second quarter may affect the remainder of 1996.”
“Cellular phones for the 800 MHz market have become quite stable and we expect to ramp up through summer, and by the last quarter hope to see a fairly steady flow through the manufacturing process,” said Dr. Irwin Jacobs, Qualcomm chief executive officer.
Phones for 1900 MHz CDMA may be built up in the last quarter or early next year. Qualcomm has a $460 million backlog for CDMA products, which includes a $200 million order from Sprint Spectrum for 1900 MHz CDMA products. Jacobs confirmed that the Sprint contract contains significant penalties for late delivery, but said the company expects to recognize revenue from the sale during next year’s first quarter.
During the second quarter, Qualcomm Personal Electronics shipped 40,000 CDMA phones, primarily to Hong Kong and Korea. Operators there have commercially deployed CDMA systems using 8 kilobit vocoder technology.
Operators in North America, such as Bell Atlantic Nynex Mobile and BCTel Mobility in Vancouver, Canada, are building 13 kilobit vocoder networks.
While overseas operators have launched CDMA commercially, North American operators are hesitating. Jacobs said the problems are not related to CDMA technology.
“I don’t believe there are technical challenges that have to do with CDMA, but with rolling out new commercial equipment,” Jacobs said.
Motorola Inc. supplied the CDMA equipment used by AirTouch Communications, which has been fine-tuning its CDMA system for more than six months.
“We hope the delays will come to an end, but the infrastructure equipment was manufactured by others, so we don’t directly control that,” Jacobs said. A prime objective of Qualcomm this year is to ensure successful commercial deployment of CDMA.
Qualcomm manufactured some of the infrastructure equipment Nortel is using to construct the CDMA system for BCTel Mobility.
“The CDMA air interface hasn’t changed since the standards process. The technology has been stable. There are large amounts of hardware and software that is going through a software tuning stage, but not in the sense of changing CDMA characteristics,” Jacobs said.
Interference with analog transmission was solved quite a while ago, he said. “The challenge is not to just bring out existing generations, but new generations, newer power chips and features. There will be a number of technical challenges to come with the next generation,” Jacobs said.
