Wireless technology kingpin Qualcomm (Nasdaq: QCOM) issued revised guidance today, slightly increasing its expected fourth-quarter revenue and earnings along with full fiscal-year financials. The company stated that the improved outlook gave it confidence that it would hit the high end of -- or just slightly above -- its previous guidance in each area.
The news was refreshing on one front -- it settled some nerves in the market that Qualcomm would follow Texas Instrument's (NYSE: TXN) cue and cite upcoming weakness in semiconductor sales to wireless device makers because of its customers' trimming inventory levels. Instead, it followed Nokia's (NYSE: NOK) upbeat outlook in maintaining that mobile phone sales volumes are still looking up. Qualcomm now sees calendar year 2004 mobile phone sales using its technology to be in the range of 170 million to 176 million units, more than the earlier view of 161 million to 168 million.
But Qualcomm's stock took a hard hit this morning, falling as much as 7% at the opening bell. What really got the market in a tizzy was a statement from Qualcomm about royalty recognition: It may change how it books ongoing royalty from its licensees. The change could impact its reported fourth-quarter income by as much as $298 million.
The $298 million slug in the chest would come if Qualcomm chose to convert all of its licensees' income to an as-reported basis of accounting rather than the current method of project and adjust. Currently, Qualcomm estimates earned royalty income from licensees' sales in the current quarter and then adjusts this amount three months later when the licensees actually report their past-quarter sales to Qualcomm.
The company is now questioning its ability to accurately project sales of some of its licensees. Its press release gave several reasons for this, but it ultimately boils down to this: Qualcomm does not own the code division multiple access (CDMA) chipset market anymore, and it has less visibility in the wideband CDMA market.
In the past, Qualcomm sold almost all the CDMA chips to vendors making mobile phones. This gave it great visibility into how many handsets its customers were planning to sell and actually selling, so it could fairly accurately predict how much royalty it would earn. With many other vendors such as Samsung now producing its own CDMA and WCDMA chipsets, Qualcomm has less visibility into how many phones are being made and sold with its technology inside.
Ultimately, the potential change doesn't amount to a hill of beans -- the company still commands the lead in CDMA technology, and the level of royalty has not changed. Smart investors have known for a long time now that Qualcomm will be giving up its near monopoly of the CDMA chip market in return for increased royalty on higher product volumes from suppliers. It's a natural development of a maturing market, one that Qualcomm is still well positioned to capitalize on.
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Fool contributor Dave Mock likes to project how many millions he'll make in future quarters, but he always seems to come up short. He owns no shares of companies mentioned here, but he has authored a book on the company, The Qualcomm Equation.
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