|Here we go again just before earnings announcement:|
Falling phone prices put pressure on Qualcomm
Posted: 07/19/2010 8:22 PM
These should be great times for Qualcomm, as consumer adoption of smart phones that rely on the San Diego wireless giant’s technology continues to grow in the United States and abroad.
Yet Qualcomm’s shares are down about 25 percent from their peak price of $48.99 on Jan. 8. The company’s financial results have disappointed Wall Street for two straight quarters. And despite the continued rollout of third-generation wireless networks in huge markets such as China, Qualcomm forecasts revenue for its fiscal year ending in September at $10.4 billion to $11 billion — essentially flat to up 6 percent over 2009.
“It hasn’t grown as fast coming off the recession as one would have thought,” said Tavis McCourt, an analyst with Morgan Keegan in Memphis, Tenn. “It’s not as if the business has been disappointing. It’s growing. It’s just not as fast as one would have thought a year ago, when expectations were much higher for a very strong recovery.”
How can Qualcomm operate in a wireless market that’s so strong yet forecast financial results that are so pedestrian? The answer is complicated, in part because Qualcomm’s business is complicated.
Analysts and investors will be watching for positive signs Wednesday when Qualcomm releases financial results for the quarter. Expectations aren’t high. Many analysts will be looking for an end to declines in average selling prices for mobile devices, which have hamstrung Qualcomm’s financial results during the past two or three quarters.
“Handset average selling prices have been coming down a lot faster than what (Qualcomm) was originally alluding to,” said Aalok Shah, an analyst with D.A. Davidson in Portland, Ore.
The trend remains a worry for investors.
“You’re still seeing some pressure on average selling prices, and that has been a concern,” Shah said. “How much price pressure are we going to have going forward? If we start to see the average-selling-price declines level off, I think that is a positive sign.”
Qualcomm also faces increased competition from Broadcom, Mediatek, Marvell and other chip-makers seeking to expand their mobile phone footprint, which is hurting profit margins for Qualcomm’s chip business.
Qualcomm makes money in two ways. It sells chips used in mobile phones directly to phone-makers, and it dominates the radio chip market for Code Division Multiple Access, or CDMA, phones, its core technology.
Qualcomm also licenses its extensive technology portfolio to phone makers, who pay royalties to Qualcomm ranging from 4 to 5 percent of the wholesale price of the phone.
Because royalties are based on phone price, declines in the price hurt Qualcomm’s revenue. Prices averaged about $212 in 2008 and $200 last year. They plunged earlier this year, shrinking to $184. Qualcomm predicts average selling prices will end up in the $182 to $188 range for the company’s fiscal year.
For its part, Qualcomm says the lower price is linked to product mix rather than drastic declines in what wireless operators are paying for smart phones. Carriers sold a larger percentage of low-cost wireless data cards for computers so far this year, for example, which brought the overall average selling price down. The company thinks the product-mix issue is temporary.
The company also believes the future is bright. Subscribers for 3G wireless, where Qualcomm’s technology shines, total about 1 billion today worldwide. The number is forecast to reach 2.8 billion by 2014. CDMA subscriber growth in China alone is expected to top 580 percent over the next four years. Latin America and India also are surging growth markets for 3G.
This 3G growth worldwide should result in enough volume to fuel stronger revenue gains for Qualcomm, as rising volume more than makes up for price declines.
For now, though, prices are falling faster than volume is rising.
“Part of what plays into this is a year ago, everyone thought China’s transitions to 3G would happen a lot faster,” said McCourt, the Morgan Keegan analyst. “When India and China ramp up 3G in a big way, this will be a big large-cap growth stock again. It’s just taking longer than anybody thought.”
But Qualcomm’s growth prospects aren’t set in stone, said Vijay Rakesh, an analyst with Chicago-based Sterne Agee. It depends on just how price-sensitive the markets are in China and India.
“That’s a given,” he said. “In China, while that is a growth market for 3G, they have a propensity to use the cheap solution.”
In addition, the increased competition could create headwinds for revenue gains for Qualcomm.
“You see more and more players getting into this market,” Rakesh said. “The market is big. We see growth coming. The question is how does this market end up between Qualcomm, which is the incumbent, and all the new guys trying to get in?”
Mike Freeman: (760) 752-6751; email@example.com