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San Diego’s Largest Public Company Remains a Work in Progress

QUALCOMM INC.

CEO: Paul Jacobs.

Revenue: $10.9 billion in FY 2010; $10.4 billion in FY 2009.

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Net income: $3.25 billion in FY 2010; $1.6 billion in FY 2009.

No. of local employees: 12,000.

Headquarters: Sorrento Valley.

Year founded: 1985.

Company description: Developer and maker of advanced wireless technologies.

Key factors for success: Attraction of top-level engineering talent; major emphasis on research and development; continuous focus on innovation.

For San Diego’s largest and most successful public company, it’s not just about growing top line, or bottom line. It’s about growing the entire market.

Qualcomm Inc. has an enviable but also a precarious position as a clear leader in high-end semiconductors for wireless devices. But its other key business, collecting royalty fees from the licensing of its technology, is under pressure.

“As we transition from 3G to 4G, Qualcomm’s patent portfolio becomes less relevant,” said John Jackson, an analyst with CCS Insight, a market research firm, referring to third- and fourth-generation wireless products. “They have relatively fewer patents that are related to 4G technology.”

The good news is that transition only recently began and will likely take about a decade to complete, Jackson said.

In the near to medium term, he says, things are looking “pretty darn good.”

That could be an understatement given the numbers Qualcomm exhibited over the past five years on its way to locking up the No. 1 position on the San Diego Business Journal’s List of Largest Public Companies. Its revenue grew 46 percent; per-share earnings increased 36 percent; and its market cap grew 32 percent to about $82.5 billion, far above No. 2 Sempra Energy, which had a market cap of $12.6 billion.

Those gains weren’t the largest among all San Diego public firms, but considering Qualcomm’s size of about $11 billion in sales, the results are in a league of their own.

A Shift in Position

Joel West, a business professor at San Jose State University who is writing a book on Qualcomm, said Qualcomm is in the midst of a strategic business shift from being mainly a cell phone chipmaker to a mobile device components company.

He pointed to the acquisition of Atheros Communications Inc., a Bay Area maker of Wi-Fi chips, that was completed in May, and was the company’s largest since its $1 billion purchase of SnapTrack in 2000.

It’s a sign that Qualcomm is looking at other business lines that include both software development and new products, West said.

At Qualcomm’s shareholders meeting in March, CEO Paul Jacobs said the company is looking to expand into making chips that offer wireless connectivity, linking devices such as televisions, tablets and printers, as well as local area networks.

It’s also getting into new product development, having set up a plant in China to make a new type of screen for smart phones and tablets called Mirasol that reflects the sun’s rays and uses less battery power than rival technology.

A Page From the Playbook

But Qualcomm’s past strategy portends it likely won’t stay in the manufacture of product very long. That is what it did when it got into making early cell phones — first with Sony and later with Kyocera Corp. — and with its infrastructure business. The company got into manufacturing to understand how the technology worked, noted Sanford Ehrlich, the Qualcomm executive director of the Entrepreneurial Management Center at San Diego State University’s College of Business Administration. Once that happened, Ehrlich said, it usually sold off the business.

While it’s obviously expanding its diverse business lines, Qualcomm’s primary focus remains making chips that go into most cell phones and base stations, and a growing number of smartphones and other wireless devices.

Bill Davidson, senior vice president of global marketing, said sometime last year, Qualcomm passed Texas Instruments Inc. as the largest wireless chip manufacturer in the world.

“We’re now selling more than 1 million chips a day,” Davidson said, referring to 2010’s total output of 399 million chips.

A Portfolio With Returns

As for its patent business that accounts for about a third of the company’s revenue stream and two-thirds of its profit, Qualcomm takes a dramatically different approach than most, he said.

“Most companies who hold patents use them as defensive weapons,” Davidson said. “At Qualcomm, and this came about by accident, we’ve created a franchise around the licensing program that provides an ongoing revenue stream.”

Jackson, the CCS analyst, says the Atheros deal is a clear acknowledgement that Qualcomm needs additional technology to be an effective competitor in a dramatically revamped mobile marketplace.

Instead of battling the likes of telecom giants such as Ericsson, Nokia, Motorola, Siemens AG and Alcatel-Lucent, the company will likely be competing against the likes of Intel Corp., Apple Inc., Google, Facebook and Amazon.com Inc., he said.

“It’s these relatively new mobile media companies with cloud-based business models that are now setting the agenda,” he said.

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