Tim Luke on Q
INVESTMENT CONCLUSION
* We believe growing evidence that some carriers currently using TDMA and
iDEN technology may be considering upgrading to Qualcomm`s 1X-CDMA
technology as they migrate to data enabled networks may be viewed as a
major strategic positive for QCOM. We reiterate our Buy rating.
SUMMARY
* Respected journal `Telephony` has reported this week that Bell South
International in Brazil is considering migrating to 1X-CDMA technology in
order to provide wireless data ahead of its rivals. We believe success in
Brazil could potentially lead US parent Cingular(SBC/Bell South) to
consider 1X.
* In addition, our checks indicate US carrier Nextel is also considering a
migration to 1X-CDMA. It appears operators are increasingly skeptical
about
the outlook for rival EDGE technology.
* While we do not expect major decisions until early CY01, our checks
indicate
QCOM is in discussions with all major TDMA carriers regarding 1XCDMA.
Separately, Sprint PCS has selected QCOM`s SnapTrack technology for
location based services.
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TDMA & iDEN Operators Considering Migration To 1X-CDMA Technology,
Potentially Important Positive for QCOM
We are encouraged by growing evidence that several major carriers that are
currently using TDMA based technology may be considering using QUALCOMMs
1X-CDMA approach as they plan their upgrade strategies towards data enabled
networks. We believe that the possible switch of any of these TDMA-centric
networks to 1X-CDMA technology could provide a major strategic positive for
Qualcomm, since it would expand the end market for its 1X-CDMA chipsets and
potentially expand the companys royalty pool. While we do not expect any
major announcements to be made until next year, any decisions by non-CDMA
operators to use the 1X-CDMA architecture could potentially lead to the
upward revision of our estimates.
Bell South International In Brazil Weighing 1X-CDMA;
We believe that Bell South International may be one of the carriers looking
to use 1X-CDMA to overlay its existing TDMA network in Brazil. In an
environment where new spectrum is unlikely to come available 1X-CDMA may
provide Bell South International with an approach that both doubles voice
capacity and offers data speeds of up to 144kbps. An article published this
week in respected telecom trade journal Telephony suggests Bell South
International is considering deploying 1X-CDMA as a way to offer high speed
data services ahead of any of its rivals in Latin America.
Opening The Door To Cingular? EDGE May Be Challenged
We consider that a successful deployment of 1X-CDMA by Bell Souths Brazilian
arm could potentially open the door for US giant Cingular (SBC/Bell South)
to
consider to 1X-CDMA. Our industry sources lead to us believe that several
TDMA operators are increasing skeptical about the prospects for the
development of rival EDGE technology which has been promoted as a potential
upgrade for by vendors such as Ericsson and Nokia. Our checks indicate that
increasingly operators such as Cingular may, therefore, be faced with the
choice of either selecting a W-CDMA Third Generation System or choosing
QUALCOMMs 1X-CDMA architecture for their data upgrades. We believe that
for
operators that are unlikely to obtain new spectrum 1X-CDMA may be an
attractive option since it enables a gradual overlay.
Nextel Also Weighing 1X-CDMA
We believe that Nextel is also considering using 1X-CDMA as an overlay to
its
current iDEN. Given the lack of momentum behind EDGE technology it appears
that Nextel may look to either deploy W-CDMA technology or overlay 1X-CDMA.
During discussions with our wireless services colleagues led by John
Bensche,
Nextel executives indicated that they are increasingly skeptical about the
development of EDGE. The company is apparently exploring the possibility of
obtaining two new 5 MHz bands at 800 MHz and 900 MHz (currently ILT spectrum
which would require clearing) on which Nextel might be able to deploy
1X-CDMA.
1X-CDMA Offers Elegant Upgrade Of Existing Spectrum
We consider technology decisions by leading operators are being driven by a
number of factors. In situations where capacity is tight and no new
spectrum
is likely to be made available 1X-CDMA may be especially attractive.
1X-CDMA
enables operators that are capacity constrained to progressively migrate
their networks to higher speed data. They can potentially clear a 5 MHz
band of spectrum to begin offering service. 1X-CDMA potentially offers data
speeds of up to 144Mbps while doubling voice capacity.
Timing Is Everything, EDGE Timelines Appears Uncertain
We believe that one of the key drivers for carriers to consider deploying
1X-CDMA is that the technology is already available with all three major
Korean operators currently building out networks. In the US, Sprint PCS and
Verizon are planning to offer commercial service using 1X-CDMA by the summer
of 2001. By contrast the timelines for the deployment of EDGE appear
somewhat vague and AT&Ts goal of launching initial service by early 2002
could
prove elusive in our view. Any further slippage in the rollout of EDGE
could
potentially put pressure on operators such as AT&T that have been firmly
endorsing the technology to review their strategy.
Sprint PCS Selects QUALCOMM`s SnapTrack Solution for Position Determination;
Verizon Trialing
Separately, Sprint PCS announced that it will use QUALCOMM`s MSM3300
chipset,
which uses GPS technology acquired through the purchase of SnapTrack earlier
this year, to meet the FCC`s E-911 mandate. The FCC required carriers to
submit their location determination technology selections either handset
based or network based - by November 9th. Additionally, Verizon announced
that it will continue to trial QUALCOMM`s solution, along with those from
Allen Telecom and US Wireless.
The location system, called gpsOne, is tightly integrated into QUALCOMM`s
MSM3300 chipset. We believe that Sprint`s decision to select QUALCOMM`s
solution is a strategic positive for the company. We also believe that the
announcement provides additional visibility into the transition to the
higher
margin MSM3300 chipset.
Stock Opinion: Remains A Core Wireless Holding, Reiterate 1 Buy
We continue to view QCOM as a core holding in wireless equipment with its
leverage to CDMA growth and the development of new data enabled wireless
networks. We believe that investors are likely to be encouraged by
managements recent confirmation of its guidance for both the first fiscal
quarter and full year 2001.
Given QCOMs leadership position in the fast expanding wireless merchant chip
market, coupled with a rapidly expanding royalty stream, we believe that the
shares should trade at a premium to those of leading communications IC
plays.
We note that Qualcomm is planning to spin off its CDMA chipset division
with
an IPO roadshow expected to begin in CY1Q01. We are reiterating our 1 Buy
rating and our price target of $100-120 or approximately 70x our CY01
estimate
of $1.30 to $1.35. |
