First Union Securities Covers QCOM
By: First Union Securities
12/5/00 7:53:05 AM
Morning Notes:
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QCOM: CROSS-LICENSING WITH TI, MII SUPPORT IN CHINA - STRONG BUY
QUALCOMM, Inc. (QCOM-NASDAQ)
PRICE: $90
52-WEEK RANGE: $200-22
KEY POINTS
-- Yesterday QUALCOMM announced a patent cross-licensing
agreement with Texas Instruments covering both companies’ patent
portfolios. The worldwide agreement gives QUALCOMM access to
TI’s DSP and Analog patents and gives TI access to QUALCOMM’s
CDMA patents.
-- Under this agreement, QUALCOMM gains access to TI’s GSM
and TDMA patents that it needs to commercialize a W-CDMA
chipset and to TI’s core DSP technology. We believe this agreement
reduces QUALCOMM’s risk of infringing TI’s vast patent portfolio.
-- We suspect this agreement is royalty-free for both companies,
though no financial details were provided and neither company will
confirm our belief.
-- Separately, QUALCOMM announced the company QUALCOMM
has signed a Memorandum of Understanding with China's Ministry of
Information Industry, which supports QUALCOMM's agreement with
China Unicom signed in January 2000.
-- Despite the share price approaching our conservative $90 price target (using our modified CAPM),
we reiterate our Strong Buy rating on the shares. We suspect that there are more good news
announcements coming over the next few months that could change the risk profile of the
company’s earnings, resulting in multiple expansion and a higher long-term earnings growth rate.
DETAILS
Yesterday, QUALCOMM made two announcements, which are incrementally positive.
MII Announcement
QUALCOMM announced that China’s Ministry of Information Industry has signed a Memorandum of
Understanding (MOU) with QUALCOMM. Through this MOU, the MII is affirming its support of the
QUALCOMM-China Unicom agreement signed in January 2000. In the Unicom agreement, QCOM
and Unicom established the licensing terms under which Chinese manufacturers could produce
CDMA products. We believe this MOU is simply the official blessing of the terms of the Unicom
agreement, which terms remain as when signed. We view the announcement as another step
toward China’s introduction of CDMA in the near- to medium-term. We, however, continue to look
for announcements of signed contracts since nothing in China, it seems, is absolute until it’s done.
Texas Instruments Agreement
Under this agreement, QUALCOMM gains access to TI’s DSP and Analog patents, including GSM
and TDMA patents that it needs to commercialize a W-CDMA chipset and to TI’s core DSP
technology. Though no financial details were provided, we believe this agreement is royalty-free for
both companies. Citing confidentiality of the agreement, QUALCOMM management would not
confirm our belief.
For investors who may question the need of this agreement, we offer three reasons why it makes
sense:
(1) We believe the cross-licensing agreement represents a favorable step for QCOM and Spinco
toward commercialization of a W-CDMA chipset. We have not modeled any W-CDMA chipset
revenues for QUALCOMM, which has stated it would not be satisfied with less than 50%
marketshare for W-CDMA chipsets. We continue to remain conservative here.
(2) We believe the agreement reduces QUALCOMM’s risk of future infringement litigation between
TI and QUALCOMM. Historically, Texas Instruments has been as avid a protector of its intellectual
property as QUALCOMM. TI’s infringement suits against DRAM manufacturers in the 1990’s
represent examples of TI’s efforts. A few years ago, Samsung, for example, settled with TI for
upwards of $1 billion. At the same time QUALCOMM’s patents have never been successfully
challenged either.
(3) We think the result of the TI agreement could be a new long-term competitor to Spinco. We
doubt that TI will get access to any of QUALCOMM’s CDMA reference designs, development tools
or access to QUALCOMM personnel for development assistance. Granted TI has tremendous
engineering resources, but so do Intel, LSI Logic, and VSLI, and none of these three has
successfully penetrated the merchant CDMA chipset market to date even though they are
licensees of QUALCOMM.
In addition, the agreement does not result any direct financial impact since royalties paid to
QUALCOMM are base on the final handset price from its manufacturer. Chipset royalties from
merchant chipmakers are nominal.
Despite the share price approaching our conservative $90 price target (using our modified CAPM),
we reiterate our Strong Buy rating on the shares. We suspect that there are more good news
announcements coming over the next few months that could change the risk profile of the
company’s earnings, resulting in multiple expansion and a higher long-term earnings growth rate.
We continue to believe a license agreement with Nokia covering 3G CDMA versions is likely over
the next quarter or so.
Additional information is available upon request.
First Union Securities, Inc. maintains a market in the common stock of QCOM. An author of this
note owns stock in QCOM.
QUALCOMM is on the Analyst Action List.
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