Qualcomm Loses Again

Yesterday it was announced on the Barron's web site that Qualcomm (QCOM) had lost Motorola (MOT) as a customer. Motorola has long included Qualcomm chips in their handset products. That relationship has ended. Freescale Semiconductor, a current Motorola supplier, will be picking up the slack short-term and Texas Instruments (TXN) will become the eventual long-term replacement.

We have written a number of previous posts on Qualcomm since the company became part of the TradeRadar model portfolio. Selection of QCOM was in large part based on long term expectations that its patent portfolio would allow it to prosper as telecom companies made an expected shift toward Qualcomm's technologies as they migrated to "3G" WCDMA standards. We made the point that to a certain extent we were "buying on bad news" as Qualcomm stock was down mostly due to its legal situation. Since then we have taken Qualcomm management to task for the ineffective handling of the lawsuits in which the company has been involved. Their stubborn and unyielding approach to the Broadcom (BRCM) mess has led to fines, ITC rulings preventing importation of handsets containing Qualcomm chips and various other indignities.

Now we have the news that one of the top five cell phone manufacturers in the world has opted to design Qualcomm chips out of their products. This appears to be based on a business decision, not a technical incompatibility problem.

This latest debacle is in addition to the ongoing dispute Qualcomm is having with Nokia (NOK), the world's largest player in cell phones, who feels Qualcomm's royalty charges are too high. The contract at issue here expired in April of this year and currently languishes in arbitration. Separately, the two companies are now suing each other over patent infringement.

Lately Qualcomm has shown a talent for alienating some of its largest customers and stomping on the toes of its rivals. How long can current Qualcomm management continue to stagger from one problem to another without taking accountability and either changing course or handing in a resignation?

Disclosure: QCOM is in our model portfolio; none of the other stocks mentioned are part of our holdings.

Comments

[Ruski:]

I am once again astonished that this seems to come as some sort of "a big surprise" to so many investors in the US. From an European perspective this has been evident for many years and the question has, in my mind, only been - how long can Qualcomm continue doing things the way they have until they have everybody in the industry food chain against them?
And now it seems we are finally getting to that point. And it sure has taken much longer than I personally thought. Glad I didn't short it too early.

Going forward, with
1) Current trends of CDMA IS-95 networks gradually but surely being phased out
2) Qualcomm's so called critical patents in the growing WCDMA world being questioned
3) Nokia's new (and old) 3G WCDMA chipset partners building scale (and more and more of the other top 5 handset vendors turning to the same names for chips ...)
4) and finally, Qualcomm's overall royalty schemes being critized and questioned (as relics from ancient history ...)

... I can not conclude anything else than that the stock is likely to be very volatile and potentially a very dangerous long position. In the bigger picture their business model seems to be running on fumes.

2007 Sep 12 07:34 AM

[Trade Radar...:]

I share your frustration. In Qualcomm's defense, I have read that their patent portfolio has doubled but their royalty payments have remained at the same level for years. Still, Qualcomm's management needs to learn how to adapt to changing times and how to work with their customers. It seems they are wasting their assets.

2007 Sep 12 04:30 PM

[Sol Rosenberg:]

More good news for San Diego real estate.

2007 Sep 13 02:21 AM

[Tomas:]

It should be pointed out the Qualcomm will still get royalties from Motorola weather or not it is their chips in the phones. Also abou Qualcomms royalty rate. Companies like Nokia, Motorola and Ericcson wanted to decrease the royalty rates each party collects for wcdma so they could make a more profitable phone, but Qualcomm does not sell phones so why would they lower their royalty rate???

2007 Sep 14 04:12 PM