Critique of SSB’s 4QCY02 QCOM Preview Report-
1. SSB expects Qualcomm to post a strong quarter and raise it’s guidance for both the March quarter and FY03.
2. By the numbers.
…CHIPSETS……………………………………………………
……….Q orig…… avg…..Q.rev….avg…..%inc…...SSB…%q2-q1
..Q1…...25 – 27….26.5 ….28.0+…28.2.….8.5%…. 28.2………….
..Q2…...20……….20.0…..24 -27...25.5….23.5%….24.7…87.6%..
…..EPS
……….Q avg…@8.5%+…...SSB…@87.6%
..Q1…...$0.365…$0.396…...$0.38………….
..Q2…................................$0.30…$0.33….
..FY03.. $1.175…….….. .....$1.20………….
SSB’s EPS estimates appear to be very conservative and inconsistent with the chipset growth metrics. Using the SSB’s Q1 chipset est of 28.2 million (could be light), the increase from Qualcomm’s avg guidance is 8.5%. Applying the 8.5% increase to Qualcomm Q1 guidance (avg) of $0.365 yields a revised EPS of $0.396, or 4% greater than SSB’s EPS of $0.38. SSB’s Q2 EPS estimate ($0.33) appears understated by $0.03 (10%) based on the relationship of their own chipset estimates which reflects Q2 at 87.6% of Q1 (87.6% X $.038 = $.0333). It should also be noted that the SSB Q2 chipset estimate of 24.7 is significantly skewed to the low end of Qualcomm’s updated December guidance of 24- 27 million. Further, SSB’s EPS estimate for the first two quarters of $0.68 represents 57% of their CFY total of $1.20. If one uses the adjusted EPS numbers for the first two quarters ($0.396 +$0.333= $0.729), it would represent 61% of their $1.20 FY estimate. In that Qualcomm chipset production has been ramping significantly over the last several quarters, and that the March quarter is generally the low point for the year, I would have to conclude that SSB has significantly understated Qualcomm’s FY03 EPS.
3. SSB remains concerned with Qualcomm’s growth prospects in the 2nd half of FY03 which they believe is based on “the riskier 2nd tier markets” of China, India, and S. America. SSB expresses concern with the lack of resolution in the WLL court proceedings and WCDMA rollouts. It appears to me that SSB is overly pessimistic regarding the Reliance and other CDMA WLL carriers intentions in India (It is my understanding that the Indian Supreme Court ruling was decidedly favorable to the CDMA WLL operators)and WCDMA rollouts as Qualcomm is forecasting less than 1 million WCDMA handsets out of their total CY03 estimate of 100 – 105 million.
4. SSB, under Risks, states that they could be UNDERSTATING Qualcomm’s growth potential and estimates if the 2nd tier markets materialize and either GSM1X or WCDMA show increased chipset sales. SSB continues to target Qualcomm’s long term growth at 10%. It appears to me that SSB fails to understand the basic growth drivers of CDMA and Qualcomm. I believe SSB is failing to consider many areas of growth.
NEAR TERM GROWTH DRIVERS SSB IS FAILING TO CONSIDER-
A. China Unicom subscribers growing from 7 million as Dec 02 to 20 million by Dec- ’03, a net increase of 13 million (180%) per Unicom’s target. The prior SSB report targeted China Unicom CDMA handset sales at 9 million for CY03.
B. India’s Reliance CDMA subscriber growth target of 1 million per month. The prior SSB report targeted India’s CDMA handset sales at 3.5 million for CY03
C. India’s other carriers efforts in rolling out WLL CDMA networks.
D. Other South East Asian countries announcing new CDMA networks (Vietnam, Indonesia, Thailand, Nepal, and Malaysia).
E. New and expanding CDMA 450 networks in Eastern Europe
F. The continued robust acceptance of 3G CDMA 2000 1X data services in Korea and Japan (KDDI)with upscale handsets featuring color screens and attached cameras that are driving a robust replacement/ upgrade market.
G. The 3G CDMA 2000 1X EV-DO networks recently completed in Korea providing streaming video and featuring Digital Video/recorder phones that are driving a second 3G high-tier handset replacement/ upgrade cycle. SSB’s prior report targets Korean CDMA handset sales at 13.5 million, a reduction of 362 thousand in unit growth.
H. Japan’s KDDI planned launch of 1X EV-DO services this fall which will spawn another high-tier handset replacement/ upgrade cycle. With these 3G CDMA networks providing much better services at lower costs for both services and handsets, KDDI should be able to further differentiate itself from DoCoMo and JPhone and begin to show significant crossovers (subscriber transfers) from the other two Japanese carriers. SSB’s prior report targets KDDI CDMA handset sales at 8.8 million, a reduction of 2.2 million from CY02.
I. The completion of 3G CDMA 2000 1X networks in the U.S. (PCS, VZN, etc) and the differentiation in services and cost advantages CDMA provides to those CDMA carriers. This will translate to better performing handsets with color screens and attached cameras that will drive a robust handset upgrade/ replacement cycle and eventually crossovers (subscriber transfers) from the GSM community. SSB’s prior report targets U.S. CDMA handset sales at 42.7 million, and increase of 6.7 million from CY02.
J. By mid-year 2003 a GSM/GPRS-CDMA2000 1X Qualcomm chipset (MSM6300) equipped handset will be available for sale to GSM carriers throughout the world. Thus,
Qualcomm’s market will not be limited to strictly to CDMA carriers.
LONG TERM GROWTH DRIVERS SSB IS FAILING TO CONSIDER-
SSB states that Qualcomm will command a strong valuation…”IF”…the wireless industry moves to the next growth phase by adopting data, as “all next generation wireless solutions are based on its patented CDMA technology”. It appears SSB does not expect 3G wireless to happen as SSB assigns Qualcomm a 10% long term growth rate. The metric I like to refer to when looking at Qualcomm’s long term growth potential is CDMA subscriber growth. At 2002 year end CDMA subscribers will number approximately 140 million with total world mobile wireless at over 1 billion. Most consultancy firms estimate the world’s total wireless subscribers at 2 billion by 2006 or 2007. If CDMA (CDMA2000/ WCDMA/ TD-SCDMA) accounts for just 50% (1B) of the worlds subscribers (2B) by 2007, an annual average growth rate (CAGR) of close to 50% would be required. SSB also fails to consider that Qualcomm will be supplying the MSM6300 chipset (world phone GSM/GPRS- CDMA2000 1x) to its vendors for mid 2003 handset sales. Thus, Qualcomm should command the world wireless handset market as it will be able to sell to virtually every carrier operating GSM/GPRS or CDMA networks.
In closing on a positive note, SSB, like most of the “analyst” community in their conservative estimates, is providing Qualcomm the ability to show earnings “surprises” for their quarterly EPS reports for FY03. Hopefully, this should provide upward share price momentum for the balance of the year. |
