New Jacobs -- Same Qualcomm?

By Olga Kharif For Qualcomm (QCOM), it's the end of an era. In 1985, exactly 20 years ago, inventor Irwin Jacobs founded this wireless powerhouse at home in his den. Today, some of the world's most advanced cell phones and wireless networks use Qualcomm's technology and chips. Its sales in fiscal 2004, ended in September, reached $4.9 billion, up 27% from 2003. Some industry folks have even dubbed the company the "wireless Intel."

On Mar. 8, founding father Jacobs, 71, announced that he would relinquish his CEO role on July 1, while staying on as chairman. But the position is staying in the family. Jacobs' son, Paul, 42, who previously managed Qualcomm's cell-phone-chip business, will inherit the title.

WHERE NEXT? It's a generational change that has inspired some nervousness among Wall Street observers who admire Qualcomm's single-mindedness.

Another change on July 1: the departure of President Tony Thornley, 58, who has served as loyal helper to the elder Jacobs. Steve Altman, 43, a 15-year Qualcomm veteran who has overseen the technology licensing unit, will take Thornley's place. The elder Jacobs and Thornley both say they have planned their departures for months.

As a new generation of executives comes to power, investors and analysts alike hope the new top brass will refrain from drastically altering the face of Qualcomm. Some worry that Paul Jacobs and Altman might take it into new, riskier directions just as its core businesses are gaining steam.

FLAT BREW. Altman sounds reassuring, however: "I don't think you're going to see a lot of major changes at all. You'll see the company drive in the exact same direction."

Yet, since he joined Qualcomm full time in 1990, Paul Jacobs has had a track record of spearheading many initiatives that have been decidedly out there. He has been hyping Brew, a software platform for providing services to mobile phones. But after years of hard work, Brew still accounts for less than 10% of revenues, according to analyst estimates, and isn't considered a success.

Most recently, Jacobs has spearheaded Qualcomm's work on MediaFLO, a special network that aims to be streaming video clips to cell phones in a few years. The business, which has little to do with Qualcomm's core expertise in wireless network technology and chips, might eventually get spun off from Qualcomm, Jacobs said several months ago. But while mobile TV is much hyped, its business value is yet unproven.

GENES OR SMARTS? Ditto for the value of cell-phone displays, which Qualcomm apparently wants to license or make. Last fall, Paul Jacobs led the $170 million acquisition of Iridigm Display, which has developed a new technology for handheld devices that uses existing light to create color. Promising as this technology sounds, Qualcomm has never been in the display business. And it might spend a lot of money trying to gain traction there, as it makes the technology available in 2006.

Indeed, shareholders might get higher returns if Paul Jacobs simply concentrates on the businesses his dad created, rather than try to make Qualcomm a more diversified company, say some analysts. "I'd be disappointed if they were one," says Peter Hofstra, an analyst with AIC funds, which bought the stock three weeks ago. Still, some worry that Paul Jacobs might try to prove he can add new business lines in an effort to quiet anyone who might think he owes his promotion more to nepotism than to ability.

Fortunately, any such missteps would likely be offset by the incredible boom in Qualcomm's core businesses: chips for cell phones and royalties for the wireless network technology called code division multiple access (CDMA) that Qualcomm invented. Irwin Jacobs is leaving right on the brink of an explosion in its market. In fact, Qualcomm recently upped second-quarter earnings guidance and expanded its stock repurchase program.

RIDING THE WAVE. Qualcomm is going gangbusters in emerging markets such as China, India, Mexico, and Brazil, where many users are gaining access to cellular service for the first time. Moreover, Qualcomm's sales could jump in the second half, thanks to increasing deployment of its technology in Europe and North America, says Michael Mahoney, portfolio manager with EGM Capital hedge funds in San Francisco.

Telco Vodafone (VOD) is accelerating the build-out of its next-generation wireless network, using Qualcomm's CDMA technology, allowing for faster data speeds and more voice traffic. Sprint (FON) and Verizon Wireless are aggressively rolling out the technology as well.

As a result, while only about 25% of the world's cell phones were using CDMA last year, 45% of them will by 2008, estimates Ken Leon, an analyst with rating agency Standard & Poor's in New York City. That means Qualcomm's royalty revenues, as well as chip sales (and the company holds 97% market share in CDMA chips today), will skyrocket in the next five years.

HONOR THY FATHER. Even if Qualcomm's market share falls a bit in the next few years as rivals including Texas Instruments (TXN), Nokia (NOK), and Freescale (FSL) nip at its heels, that share would likely stay above 90%, says Leon. After all, the world's fastest-growing handset vendors, like LG and Samsung, are Qualcomm's top customers.

Basically, Paul Jacobs is set to preside over a period of incredible growth. That, and about $8 billion in cash and equivalents, will allow him to try new adventures without upsetting the apple cart.

Yet, Paul Jacobs might make more shareholders happy -- at least for now -- if he concentrates on the businesses his father created, rather than try to create his own legacy. Kharif is a reporter for BusinessWeek Online in Portland, Ore.

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