December 22, 1999 3:45 PM PST

Qualcomm narrows focus, sells handset business

Qualcomm agreed today to sell its mobile phone manufacturing division to Japanese handset maker Kyocera Corporation for an undisclosed sum, clearing the way for Qualcomm to focus on its more profitable businesses.

The two companies announced that they have reached an agreement to sell Qualcomm's CDMA phone business to Kyocera, including inventory, manufacturing equipment and customer commitments. In addition, Kyocera will purchase Qualcomm chipsets and software for the next five years, the companies said. The Japanese phone maker estimates it will double its production of wireless handsets to 16 million units next year as a result of the deal.

Although the companies did not reveal the financial terms, Qualcomm said it would take a $30 million charge for the first quarter of 2000 related to the alliance.

Aside from the boost it gives Kyocera in the U.S. market, the deal reflects the growing import of wireless technology, specifically wireless Internet-enabled cell phones, as the industry shifts from focusing on general purpose PCs to single or limited-function devices capable of accessing the Internet and providing two-way communications. In the last month, Microsoft and Palm Computing, for example, have struck deals to put their software on the Web-enabled phones of Ericsson and Nokia, respectively.

"Kyocera, already a leading CDMA phone manufacturer in Asia, has committed to build upon the foundation of our phone business to provide state of the art CDMA phones in North America," Irwin Mark Jacobs, chief executive of Qualcomm, said in a statement.

Qualcomm pioneered a new wireless transmissions technology called code division multiple access (CDMA). The success of CDMA-based phones, and the potential for high-speed wireless data services based on the technology, has made Qualcomm one of the world's hottest communications companies and one of the biggest gainers on the Nasdaq stock market this year.

Stock in Qualcomm slipped today to finish at 485.44, down 11.44 points. But shares in the company have outperformed even some of the hottest Internet upstarts. The company is soon set to split its shares on a rare 4-to-1 basis.

Under today's agreement, Qualcomm will create a new subsidiary that will contract its services to Kyocera's newly formed handset unit for three years.

The deal is designed to allow Kyocera entry into the North American phone market, company executives said. "Kyocera will now have a comprehensive global infrastructure for producing and delivering CDMA handsets," Yasuo Nishiguchi, president of Kyocera, said in a statement.

Qualcomm announced in September that it would sell its handset manufacturing business by the end of the year. At the time, analysts said Qualcomm was too small to compete effectively against larger players such as Nokia, Motorola and Ericsson, the three largest handset makers in the world.

Increased competition from Korean sellers, consolidation by the wireless service providers and a shortage of phone parts, has only contributed to the handset headaches.

"Their handset production was much less effective than people thought, at the same time that the market was shifting to favor only the largest, most diverse manufacturers," said Pete Peterson, a financial analyst with Prudential Volpe Technology Group. "This really trains them in on the areas where they're most profitable."

Analysts said Qualcomm was losing money by selling handsets and can be more profitable by simply making semiconductors and licensing its technology to others.

Qualcomm will continue to make money by selling CDMA chipsets to several phone manufacturers, while reaping royalty fees from phone and chipmakers that license its technology to make their own products.

Prudential's Peterson said Kyocera's acquisition of the Qualcomm phone business gives them a solid production facility in San Diego, with access to local CDMA engineers and other talent, as well as strong U.S. sales and distribution efforts.

Executives at Sweden-based Ericsson said they considered buying Qualcomm's handset business earlier in the year but opted instead to use Qualcomm-made chipsets in its own upcoming CDMA-based phones, which will hit the market for the first time next year. "We looked at all the possibilities," Jan Ahrenbring, Ericsson's vice president of marketing for consumer products, said, referring to several earlier negotiations with the San Diego wireless company.

Ericsson settled a patent lawsuit with Qualcomm earlier this year and acquired the company's wireless network infrastructure business, marking another example of Qualcomm's attempts to narrow its focus.

The company also is delving into wireless data technologies. Qualcomm is testing its new High Data Rate (HDR) technology in trials, and the company has teamed with Microsoft on a wireless data joint venture, though Wireless Knowledge has yet to make a splash.

 

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