Qualcomm Inc (QCOM)

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For whom the cell tolls

Results from TI, MOT and QCOM will tell Wall Street how strong demand for cell phones really is.
July 19, 2004: 1:09 PM EDT
By Paul R. La Monica, CNN/Money senior writer



NEW YORK (CNN/Money) - Walk down any street in America and you likely will bump into somebody yakking away on a cell phone. And that should be great news for cell-phone chip suppliers Texas Instruments and Qualcomm, and phone manufacturer Motorola.

TI and Motorola (MOT: Research, Estimates) will report their second quarter results after the bell Tuesday and Qualcomm is scheduled to release its fiscal third quarter results following the market's close on Wednesday.

Analysts expect TI (TXN: Research, Estimates) to post a nearly 260 percent earnings increase, to 25 cents a share, on sales of $3.23 billion, up 38 percent from the same period a year ago. Motorola's earnings are forecast at 18 cents a share, compared to just a penny a share last year, with sales predicted at $8.5 billion, up 38 percent from last year.


And Wall Street is anticipating a more than 60 percent increase in profits for Qualcomm (QCOM: Research, Estimates), to 53 cents a share. Sales are expected to come in at $1.3 billion, a 45 percent jump from last year.

Still, Wall Street has its concerns about the health of the wireless sector due to continued troubles at cell-phone industry leader Nokia, which last week issued its third warning since April.

Nokia is a big TI customer so its woes have hit TI's shares. Motorola is the world's second largest maker of cell phones and is a major customer of Qualcomm.

But many think that Nokia's problems are specific to it, namely that the company hasn't done a good job of getting phones that customers want on the market. It would have been worrisome if Nokia had said consumers were not interested in new phones. But that wasn't the case.

Motorola is expected to report strong gains in handset unit volume when it announces its latest results, a sign that is taking market share from Nokia.

"Consumers are moving up the ladder and buying more sophisticated phones. Demand is still strong," said Ted Parrish, co-manager of the Henssler Equity fund. Parrish said he recently bought shares of Nokia following its big price decline.

Demand is there, but chip companies may be better bets
Though demand may be strong, investors will need to keep an eye on Motorola's operating profit margins.


Shares of TI have taken a tumble this year but Motorola and Qualcomm have surged.
The problem, said Casey Ryan, an analyst with Wells Fargo Securities, isn't price wars, as many analysts fear. Rather, it's that cell-phone makers are spending more and more on advanced chips to provide sophisticated features, such as color screens, cameras and other multimedia functions.

"Companies like Nokia and Motorola are building a lot more feature rich phones and it's the increase in components costs that's starting to hurt them," said Ryan. "They're adding more chips per phone but are not getting corresponding price increases in the phones."

So while this might be a reason to be worried about profit growth for Nokia and Motorola, it should boost sales and earnings for TI and Qualcomm as well as other chip manufacturers.

Intel and AMD both reported strong results from their flash memory chip divisions last week. And M-Systems, an Israeli-based maker of flash memory chips used in cell phones, reported better than expected second quarter results Monday and lifted its earnings and sales guidance for the remainder of the year.


http://money.cnn.com/2004/07/19/technology/cellphones/