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Paul Jacobs of Qualcomm (QCOM) isn’t in front of the firing squad yet, but probation is probably closer than farther away………….

Paul Jacobs may not have too many more quarters at Qualcomm (QCOM) if things don’t get better soon.  What happens when sons take over dad’s business?  They are scrutinized and have to do better than pop ever imagined.  That couldn’t be more true if it is a public company.  Things haven’t gone to hell in a handbasket, but they aren’t exactly firing on all cylinders and Qualcomm isn’t a company that investors will accept mediocrity. 

Look back to a Business Week article from Summer of 2005.  Be careful what you wish for, because you might get it.    If we take what he said at face value, then the bottom line might not be good enough for Wall Street.  Qualcomm is a different company now than it used to be.  Its patents are more challenged, its technology is deemed older and more constrained by many, its massive growth days are hard to replicate, and it might still be perceived as a family-dominant company.  Irwin Jacobs is still Chairman and he is in his early 70’s.  Paul is in his early to mid-40’s and has the CEO title.  Its president is Steven Altman, who is an attorney; and it very recently named Sanjay Jha as the additional Chief Operating Officer of the company.  It is hard to know if this recent COO post is the beginning of something or if it transitionary, and we certainly don’t want to go rumor mongering. 

For the year-ended SEP 24 2006 QCOM’s revenues and net income from operations grew to $7.526 Billion and $2.47 Billion, up from $5.673 Billion and $2.143 Billion in 2005.  Fiscal 2007 expectations from Wall Street are for revenues to post $8.5 Billion (company guided $8.1B to $8.6B) and Fiscal 2008 is expected to see revenues of $9.6 Billion (based on loose models that are highly subjective). 

The issue is that the legal battles have heated up and the company is not quite as vocal and not quite as robust in presentations as it once was.  It isn’t fair to expect them to post the same old growth rate expectations seen in years before, but the street models are still looking for growth.  The company has current and expected WCDMA deals coming in Chin-dia and elsewhere that are expected to contribute greatly toward growth in 2007, 2008, and beyond; but the ongoing issues with Nokia and what may be a slower handset market in 2007 are hard to ignore.  The company is also having patent cases that are not going in their favor (recent ITC patent ruling in favor of Broadcom), Nokia royalty payment cessations, recent commission investigations in Japan, and some guidance offered about 45 days ago that signals lower than expected  revenue ahead that should further impact later year revenue models.  It is also competing in more areas as each next-generation wireless and wired technologies are converging at rapid clip.

This is more than a year later from the CEO father to son transition, so it is probably too late to consider these recent misses as unearned runs for the pitcher.  Paul asked to be judged by the bottom line, but for shareholders that translates to share prices.  It is unlikely he would get the boot immediately and any real position change would probably be more transitionary rather than anything Machiavellian, so please don’t take this as a call for a drastic and ill-prepared demand.  It isn’t exactly like Paul hasn’t gotten to take out some dynasty dollars either, so he won’t be in the poor house if he was nudged out.

The boutique "BUY" rating that was given this morning wasn’t any game-changer.  The stock is still up about 10% from when Paul assumed control, but shares currently sit down close to 10% from the beginning of the year and down over 25% from the recent highs seen this may.  The stock has gone up 10% since summer lows.  The good news is that recent acquisitions of RF Micro’s Bluetooth assets and Airgo’s technology may all help it get back some lost ground in Bluetooth and Wi-Fi, plus acquisitions in other WiMax and speeds for mobile gaming and communications may all still help the company keep its mojo.

It may be too soon to call for an outright departure and the recent COO change may be the execution of some change.  It is not fair to expect the exponential growth seen in years before, and that is not the point.  But this issue over who is CEO may become more front and center if the company doesn’t show some improvements in the next couple of quarters.  If the acquisitions that were dilutive to earnings do not look to pay off, we won’t be the only ones pointing out that the company may need fresh leadership.

Jon C. Ogg
December 14, 2006

This is part of "THE 10 CEO’s THAT NEED TO GO" series from 24/7 Wall St.  Jon Ogg can be reached at [email protected]; he does not hold securities in the companies he covers.