Qualcomm roaring through nationwide telecom slump

SAN DIEGO -- Eight years ago, when Qualcomm Inc. introduced its signature technology for cell phones, few outsiders believed it would go anywhere.

Today, Qualcomm's technology fuels 13 percent of the world's wireless subscribers, and the company is feverishly working to expand into new markets including India and China.

With ambitious forecasts for growth abroad, record revenue and its first-ever quarterly dividend for shareholders, Qualcomm ranks as one of the few consistent success stories in the embattled telecommunications industry.

Its stock has risen steadily in the past six months -- for the first time since the 2000 tech-market bust. The company further buoyed its shares by announcing plans to buy back $1 billion in stock.

But can the good times last? Even Qualcomm's most optimistic cheerleaders aren't taking anything for granted.

"Qualcomm is a beacon of light in a sea of wireless misery," said Brian Modoff, an analyst for Deutsche Bank Securities. "They've got growth. They're not competing with other vendors. They're generating very good returns. I think that what we don't have a good answer on is how sustainable this is."

Commercialized in 1995, Qualcomm's code division multiple access technology, or CDMA, is one of only a few standards used worldwide to convert speech into digital information for transmission over a wireless network. CDMA assigns a code to the bits of information to distinguish each call, a process that allows more callers to share the airwaves.

"When they first started with CDMA, only people in San Diego believed it would work out," said analyst Roger Entner of the Yankee Group, a telecommunications research firm. "They have proven the world wrong."

CDMA is now the most popular cell phone standard in North America.

It is used by Verizon Wireless, with 32.5 million subscribers, and the No. 4 U.S. carrier, Sprint PCS, which has about 17 million. The technology also dominates the cell-phone-rich market of South Korea. Last year, the number of CDMA subscribers grew by 31 percent.

Having sold off its phone-manufacturing business, Qualcomm now enjoys the fruits of its near monopoly on CDMA. By owning 90 percent of CDMA patents, Qualcomm benefits every time a CDMA-based chip is sold or a mobile operator uses its standard.

That probably puts the company in "the best position of anybody in wireless today," said Craig Mallitz, an analyst with Legg Mason.

Stymied standard

But even with 13 percent of the world's 1.1 billion cell phone subscribers, according to the CDMA Development Group, the standard has been somewhat stymied by rival GSM, or global system for mobile communications. Largely helped by a European Union mandate making GSM the continent's standard, GSM comprises nearly 70 percent of the world's wireless users.

These days Qualcomm is putting up a fight for Europe, however. The continent's next generation of phones will use a Qualcomm-designed technology that will send royalties back to San Diego, albeit at a lower rate than what the company draws for CDMA. Qualcomm also hopes that by next year it will fire off a new chip that lets users on a GSM network roam onto a CDMA network.

Still, some analysts say Qualcomm simply can't keep churning out extraordinary revenue gains such as the 57 percent year-over-year increase the company posted in its most recent quarter.

"I think their decision to introduce a dividend is very telling," Entner said. "Basically it means that Qualcomm is maturing, it's a success story. But it is now no longer growing as fast as it once did. It's a function of large numbers. You cannot double in size forever."

Qualcomm's co-founder, chairman and chief executive, Irwin Jacobs, acknowledges that growth will take time, especially as the company works to penetrate new markets and to secure upgrades in its established bases.

"There's obviously a long way to go," the 70-year-old CEO said in a recent interview. "It gives us time to grow our technology."

The company, which has 8,000 employees, attributes its recent success to rapid sales of its next-generation wireless networks and chips, and expects the market for upgrades to stay strong. Next-generation technology that is designed to increase network capacity and boost high-speed data services is being snapped up by users in CDMA's mature markets of North America, South Korea and Japan. This technology now accounts for about 80 percent of Qualcomm's chip sales.

In India, Qualcomm has invested $200 million with Reliance Industries Ltd. to develop a CDMA-based network covering 95 percent of the population. Reliance hopes to sign up 7 million subscribers by the end of this year, an ambitious goal considering India has a total of only 10 million cellular users.

In China, the "Horizon" CDMA network run by China Unicom signed up 7 million users last year and is expected to add another 13 million by the end of 2003.

Qualcomm also is pumping out a host of wireless products, most notably its BREW software, which allows subscribers to update their phones over the air with the latest applications, allowing for sophisticated games or watching videos. Along with Qualcomm's EV-DO chip, which allows for faster data transmission, BREW is seen as a potential balm for debt-strapped wireless carriers looking to get more money out of each subscriber and appeal to business users who access e-mail or the Internet via their phones.

Jacobs tries to manage expectations -- Qualcomm is forecasting slightly lower revenues and chip sales for the current quarter -- but overall, brims with confidence that his long-term targets will be met.

Still, some see the goals as overly optimistic.

"If the stars align correctly, the wind blows from behind and the sun is in right place, then yes," Entner said. "But from our perspective the growth figures are a little bit lofty."

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