Lehman Brother's analysis of Q3/99 earning's report....part II
lehman.com
Headline: QUALCOMM: 3Q99 Beats, Excellent Outlook, Ests & Target Increase Again, II
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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Royalties Surge
Royalty payments in third quarter 1999 reached an impressive $92.7 million
which included $6 million in license fees, versus $77 million in the prior
quarter, outpacing even our high-end expectations of $85 million. As CDMA
momentum continues to grow in the United States and abroad, we expect royalty
payments to grow at their healthy pace and, for fourth quarter 1999, we look
for total royalty payments of $97 million.
Gross Margins Continue to Improve
Gross margins improved in third quarter 1999 coming in at 35.3% versus 28.3%
in the prior quarter and 23.7% in the same period a year ago. Improving
gross margins were helped by sales mix and engineering efficiencies in both
the new generation of chipsets and the new lower cost ThinPhone. Looking
ahead we expect further improvements in overall gross margins to
approximately 36.5% by the end of fourth quarter 1999.
Operating Margins Improve as Expenses Move Sharply Lower
Strong revenues and improving gross margins allowed QUALCOMM to achieve
record earnings leverage with operating income improving to 13.5% of sales
versus 4.5% in the prior quarter and 0.8% in the same period a year ago. R&D
came in at $93.8 million or 10.3% of sales versus $99.7 million or 11.6% of
sales in second quarter 1999. Meanwhile, sales and marketing expenses were
trimmed to $50.3 million, or 5.5% of sales, versus $53.2 million or 6.6% of
sales in the prior quarter, reflecting lower levels of investment in handset
advertising with consumers. G&A expenses at the end of third quarter 1999
were $53.3 million or 5.8% of sales.
While QUALCOMM closed third quarter 1999 with an effective tax rate of 35%,
the company suggested that the tax rate is likely to trend upwards. For
fiscal 2000 we are estimating a tax rate of 36%.
Balance Sheet Metrics Improve
QUALCOMM closed third quarter 1999 with cash and equivalents of $448.2
million versus $204.6 million in the prior quarter with the boost in cash
coming from the sale of the infrastructure segment to Ericsson and cash from
operations. Accounts receivables declined to $786.8 million versus $873.7
million in the prior quarter despite the increase in sales and also declined
to a impressive 83 days in averages versus 96 days in average in the prior
quarter. Inventories at the end of third quarter 1999 were also trimmed to
$212.9 million and continued their decline to close at 36 days in average
versus 44 days in the prior quarter.
Separately, QUALCOMM recently announced that it will file a registration
statement to offer 4 million additional ordinary shares with an additional
600,000 for over-allotment. We expect QUALCOMM to use the proceeds for
general corporate purposes and working capital requirements.
Stock Opinion: Price Target Raised, Reiterate Buy
With CDMA hitting its stride and strong visibility increasing into fourth
quarter 1999, we are once again raising our high-end EPS estimates for
QUALCOMM. Our EPS estimates for fiscal 1999 and 2000 increase to $2.37 and
$3.80, respectively. Our revenue estimates (excluding royalties) are $3.65
billion in fiscal 1999 and around $4.34 billion in fiscal 2000. We are
currently looking for royalty revenues to increase from $214 million in
fiscal 1998 to around $311 million in fiscal 1999 and as high as around $450
million in fiscal 2000. With QUALCOMM's gross and operating margins likely
to provide considerable leverage, we believe these estimates may prove
conservative and we believe our estimates may move steadily higher over the
balance of calendar 1999.
We remain encouraged by the strong growth prospects for both QUALCOMM and the
global CDMA market. We believe the current strong CDMA growth and continued
wireless buildouts is a testament to benefits of CDMA technology. In the
United States, we believe the highly successful one-rate plans offered by
many major carriers such as Sprint are likely to continue to drive rapid CDMA
subscriber growth. Overseas, the removal of uncertainty of standards should
help several large new markets such as Japan, Brazil, India and China gain
momentum in 1999. We also believe QUALCOMM will benefit from increased
royalty revenues as the existing CDMA market expands and as a converged
global third generation wireless standard based on CDMA begins to be
deployed.
We continue to view QUALCOMM as a highly attractive investment vehicle in the
wireless equipment sector. Our 1 Buy rating and our new 12-month price
target of $200 is based on QUALCOMM achieving a multiple of around 40 times
our new high-end calendar 2001 estimate of $5.00.
BUSINESS DESCRIPTION: QUALCOMM provides advanced communications systems and
products based on digital wireless technology. These include the OmniTRACS
systems and digital wireless telephone systems based on CDMA technology.
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