"The Mighty Q" to its fans, Qualcomm is a San Diego company that invented and holds the patents for Code Division Multiple Access technology -- CDMA for short. This digital wireless technology is the standard for the coming third-generation (3G) communications universe. First generation is analog for voice only. Second generation is digital voice and limited data capability, and CDMA has only 13% of this market. (Yes, second generation is limited: The dark-suited guy in the Sprint ad only offers 14.4 Kbps Web access -- snooze!) But third generation is the Big Kahuna: mobile wireless Web connections at the revved-up rates of DSL and eventually two-thirds that of your cable modem. Repeat: CDMA, patented and licensed by Qualcomm, rules 3G.
If a manufacturer wants to make a 3G handset, it must employ CDMA technology based on Qualcomm patents and pay homage to the Qualcomm licensing god. No brag, just fact. Courts in the U.S., Europe, Japan, and Korea have upheld the patents, and the likes of Ericsson <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERICY)") else Response.Write("(Nasdaq: ERICY)") end if %>, Nortel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>, and Lucent <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> have agreements with Qualcomm. (Nokia can't hold out much longer; it's already buying CDMA-enabled chipsets from a Qualcomm licensee.) No matter if you use Qualcomm's own CDMA2000 technology, W-CDMA (Nokia, Ericsson, and NTTDoCoMo's flavor), or tutti-frutti CDMA, you play CDMA, you pay Qualcomm. Though we don't know the financial details of the licensing contracts, we can see that they're lucrative. Qualcomm's CDMA licensing business sports Q3 '00 numbers worthy of a Rule Maker: 63% gross profit margin, 41% net profit margin, no debt, and over $1.5 billion in cash and short-term investments. (Figures courtesy of Motley Fool Research analyst Bob Fredeen.) Yeah, baby!
But there's more.
On July 25, Qualcomm announced that it would spin off its integrated circuits and systems software businesses -- currently very profitable -- into a new company. Qualcomm will offer 10% of the Spinco (they really do call it that) shares in an IPO, and retain the other 90%. Freed of Qualcomm, Spinco will combine CDMA with competing technologies for handsets that can use CDMA, GSM, whatever for multiband roaming. Qualcomm will continue to develop its existing businesses, including cash cow QUALCOMM Technology Licensing (sign licensing agreements and bring in money), QUALCOMM Wireless Systems (OmniTRACS, which specializes in wireless truck tracking, and Globalstar, which provides wireless voice and data via low-earth-orbit satellites), and QUALCOMM Digital Media (Eudora E-mail, Government Systems, and Digital Cinema wireless movie distribution).
Even better, you don't have to pick between these two companies. Under current plans, Qualcomm will distribute its 90% of Spinco shares between April and August 2001 in a tax-free distribution to Qualcomm shareholders. Two mints in one! What a country!
At the beginning, I said that Qualcomm will rule until at least 2007. That's when the first of its patents runs out. Fortified with 400 issued and 600 pending patents, the CDMA cash machine won't exactly stop cold. But any technology investor needs to be prepared for a discontinuous innovation, and we're talking way more than a better mousetrap. Somebody -- who could be submitting patent applications right now -- will not just tweak CDMA, GSM, or TDMA, but concoct some snazzier, cheaper alternative that transfigures communications. Count on it; for any technology, the only question is when.
Do not despair! You, a true Fool, are not afraid of change but are armed and ready. You comb your companies' quarterly reports, especially the parts about the competition. You know how to evaluate any threat, because you and all cagey technology investors have read Moore, Johnson, and Kippola's The Gorilla Game and related books, and follow the Fool's Gorilla Game discussion board.
So when the New Thing arrives, you will remain calm. Even if New is cheaper, working, available, and taking over -- not just a financial journalist's headline for a slow day ("Repent Qualcomm Shareholders!") -- it still may not be time to sell. After all, Qualcomm's management won't have wasted its time splayed on the couch eating Doritos and watching Survivor. It will have artfully deployed its CDMA license fees in R&D and hatched the new technology itself or gobbled up the companies that did. No matter what, it will be enjoying its canny investments in other immensely profitable businesses. Check out the company's current ventures in Fool Phileo's Qualcomm Rule Breaker analysis. It's an impressive list, even without the recently announced Qualcomm-Ford Wingcast joint venture.
Repeat after me: To beat the market averages by investing in the worldwide communications revolution for at least the next seven years, there is no better investment than The Mighty Q -- Qualcomm.
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