Lehman Brother's analysis of Q3/99 .......part 1
lehman.com
Headline: QUALCOMM: 3Q99 Beats, Excellent Outlook, Ests & Target Increased Again, I
Author: Tim Luke, Mark Sue (212)526-4993
Rating: 1
Company: QCOM
Country: SEO CUS
Industry: TELECM
Ticker : QCOM Rank(Old): 1-Buy Rank(New): 1-Buy
Price : $158 1/4 52wk Range: $160-19 Price Target (Old):$165
Today's Date : 07/20/99 Price Target (New):$200
Fiscal Year : SEP
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EPS 1998 1999 2000
QTR. Actual Old New Old New
1st: 0.29A 0.33A 0.33A - -E - -E
2nd: 0.13A 0.41A 0.41A - -E - -E
3rd: 0.17A 0.68E 0.75A - -E - -E
4th: 0.27A 0.76E 0.88E - -E - -E
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Year:$ 0.85A $ 2.18E $ 2.37E $ 3.02E $ 3.80E
Street Est.: $ 2.05E $ 2.06 $ 2.77E $ 2.79
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Price (As of 7/16): $158 1/4 Revenue (1999): 3.6 Bil.
Return On Equity (99): N/A Proj. 5yr EPS Grth: 35.0 %
Shares Outstanding: 148.0 Mil. Dividend Yield: N/A
Mkt Capitalization: 23.42 Bil. P/E 1999; 2000 : 72.6 X; 52.4 X
Current Book Value: $6.86 /sh Convertible: YES
Debt-to-Capital: 99.8 % Disclosure(s): C, A
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* Post close yesterday wireless equipment leader QUALCOMM reported very
strong third quarter 1999 EPS of $0.75 (excluding one-time charges) coming in
comfortably ahead of both our high-end estimate of $0.68 and consensus
estimate of $0.63.
* Excluding operating expenses and one-time charges related to the
infrastructure business now sold to Ericsson, EPS would have reached $0.86
indicating QUALCOMM's substantial EPS leverage going forward. Based on our
confidence in QUALCOMM's earnings outlook, we are once again taking our high-end
estimates sharply higher. Our estimates for fiscal 1999 and fiscal 2000
increase from $2.18 and $3.02 to $2.37 and $3.80, respectively (calendar 1999
and calendar 2000 EPS are now $3.00 and $4.00).
* Third quarter 1999 revenues of $911 million (excluding royalties) were
broadly in line with our estimate of $934 million. ASICs drive growth was up
110% to an estimated $305 million, with impressive ASIC book-to-bill of 1.2.
Royalties were also strong at $93 million versus our estimate of $83 million.
Handset sales of approximately $420 million, versus our $450 million
estimate, were impacted by some component issues (1.7 million units flat with
second quarter 1999) with management suggesting that some shortages may
continue in fourth quarter 1999 -- however, we maintain our conservative
handset estimate of $470-480 million for fourth quarter 1999.
* QUALCOMM's gross margins surged to 35.3% versus 28.3% in second quarter
1999 while operating expenses moved sharply lower reflecting infrastructure
wind down and lower handset advertising. Operating income increased to 14%
versus 5% in second quarter 1999. Meanwhile, balance sheet strengthened with
cash increasing and receivables and inventories moving lower.
* With CDMA clearly gaining rapid momentum around the world, visibility
continuing to strengthen for second half 1999 and Street estimates moving
sharply higher, QUALCOMM remains a top pick in wireless equipment. Our new
price target increases to $200 from $165, or 40 times our new calendar 2001
EPS estimate of $5.00.
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Strong Third Quarter 1999, Impressive Earnings Leverage, Estimates Go Sharply
Higher Once More
Post close yesterday, CDMA innovator QUALCOMM reported very strong third
quarter 1999 EPS of $0.75 versus $0.14 in third quarter 1998 coming in
comfortably ahead of the consensus estimate of $0.63 and our high-end
estimate of $0.68. Excluding one-time charges related to the sale of the
company's infrastructure business to Ericsson and operating expenses related
to the business now sold to Ericsson, EPS for the quarter would have been an
impressive $0.86. This impressive figure now provides a clear indication of
QUALCOMM's earnings leverage going forward.
We now look for QUALCOMM's earnings to move sharply upwards from these levels
in fiscal 2000. We think third quarter highlights included extremely strong
chipset sales, the ramp of the new ThinPhone, strong royalty payments and
improving gross and operating margins. The improved visibility and strong
earnings leverage lead us to raise our high-end EPS estimates once again.
Our EPS estimates for fiscal 1999 and fiscal 2000 increase from $2.18 and
$3.02 to $2.37 and $3.80, respectively. Our new calendar 1999 and 2000
estimates are $3.00 and $4.00. We believe Street estimates will move
substantially higher this morning from current consensus levels of just $2.06
and $2.79 for fiscal 1999 and fiscal 2000.
Strong Revenue Growth Continues, Broadly In Line With our Estimates
Revenues (excluding royalty payments) in third quarter 1999 came in at $911
million broadly in line with our high-end target of $934 million. Chipset
sales were extremely strong during the quarter reflecting very robust demand
from handset manufactures in Japan, Korea, the United States, and Brazil.
QUALCOMM shipped a record 11 million MSN chipsets (bringing the total to date
to 50 million) up from 9 million in second quarter 1999. We estimate that
chip sales soared from around $230 million in second quarter 1999 to over
$300 million in third quarter 1999. The chip division closed the quarter
with an impressive book-to-bill ratio of 1.2 providing strong visibility into
the next quarter. QUALCOMM's Omnitracs division also showed good progress in
third quarter 1999 reaching $75 million while Contract Services to the
GlobalStar project exceeded our estimate of $82 million by $6 million. We
look for this line to trend lower going forward as the project nears its
launch.
While QUALCOMM does not break out its revenues by segment other than for
contract services and royalties, we believe sales by division may resemble
our estimates below.
($ in Millions)
Revenues Forecast Actual
OmniTracs $75.0 $75
CDMA Chipsets $285.0 $300
Infrastructure $30.0 $25
Globalstar $10.0 $10
Handset $450.1 $412
Other $3.0 $1
Contract Services $82.4 $88
Total $934.9 $911
Licensing & Royalties $85.0 $93
Concerns Over Component Shortages for Handsets May Be Overdone
Management confirmed QUALCOMM shipped over 1.7 million CDMA handsets during
third quarter 1999, in line with the second quarter 1999 unit level and
bringing the total to date to over 12 million units. During the quarter,
handset shipments were impacted by component shortages which have been
experienced by numerous handset vendors and which limited revenue growth to
around an estimates $410-$425 million versus our estimate of around $450
million. While removing some upside from an otherwise excellent quarter, we
believe management's concerted efforts are likely to ensure sequentially
higher unit shipments in the fourth quarter in a range of approximately 1.9
million to 2 million with revenues of over $470-$480 million. We are
encouraged by management's confirmation that the strength of demand for
components in the wireless handset area should be seen as potentially
restraining some of the upside of the company's forecasts for the phone
division rather than negatively impacting current expectations.
The handset unit's profitability has been favorably impacted by the rollout
of the new lower cost ThinPhone which is now likely to increase its
contribution to overall handset sales from third quarter 1999's 20% level to
an estimated 50% in fourth quarter 1999. We believe gross margins are likely
to continue to improve looking ahead for the unit from a current estimated
level of %-24%. During the conference call, management highlighted that its
production goal is for 1 million phones per month by the end of fiscal 1999,
which represents an improvement on earlier guidance of 1 million phones by
the end of calendar 1999
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