Merrill today on Q:
Investment Highlights:
· The company reported operating EPS of $0.75,
well above consensus expectations of $0.63.
· Revenues were basically in-line with our
estimate but gross margins were much higher
than expected.
· We are raising our fiscal 1999 EPS estimate
from $2.15 to $2.42 and our fiscal 2000 EPS
estimate from $3.05 to $3.80. Based on these
revised estimates, we are raising our 12-18
month price objective to $178 based on a P/E
multiple of 43-times calendar 2000 EPS
estimates.
Fundamental Highlights:
· June quarter results were driven by strong
royalty payments and ASIC sales. Results
could have been even better were it not for
some component supply shortages.
· QUALCOMM completed the sale of its
infrastructure business in May. Excluding
this, the company had operating EPS of $0.86.
· There continues to be tremendous margin
leverage in the operating model. We are
assuming only a gradual improvement in
component supply availability, which should
have a modest positive effect on gross margins.
Highlights of June Quarter Results
QUALCOMM reported a 15% increase in revenues to
$1.00 billion versus $875.5 million, in-line with our
expectations. Communications Systems revenues increased
by 9% to $823.6 million versus $758.6 million, license and
development fees grew by 87% to $87.9 million versus
$46.9 million, and revenues from contract services
increased by 33% to $92.6 million versus $69.9 million.
The company reported EPS of $0.59. However, the reported
results included non-recurring charges of $117 million
associated primarily with the sale of the terrestrial CDMA
wireless infrastructure business. Excluding these charges,
operating EPS were $0.75 versus $0.14 a year ago,
substantially above consensus expectations of $0.63.
Gross margins were about 3 points better than expected.
Gross margins improved in each of the company's product
lines, except the wireless infrastructure business, which
was recently sold to Ericsson.
As for the balance sheet, cash and equivalents were
$448 million as of June 27, 1999, about $244 million
above the previous quarter. Accounts receivables were
$787 million (111 days sales outstanding compared to
118 in the preceding quarter) and inventories were
$213 million (11.1 inventory turns ratio).
Business Trends
June quarter results contained contributions from the
wireless infrastructure business that was sold to Ericsson on
May 24 th , 1999. Management indicated that excluding the
infrastructure business, revenues would have been
$966 million, EPS would have been $0.86, and gross
margins would have been 42%. This means the
infrastructure business recorded revenues of $38 million and a
net loss of $19 million in the first two months of the quarter.
Even including two months of money-losing contributions
from the infrastructure business, QUALCOMM reported
operating results that were far better than consensus
estimates. The primary contributors were higher royalties
and better than expected ASIC sales.
Strong royalty payments reflect the growing adoption of
CDMA worldwide. In the first half of 1999, there were
4 million CDMA subscribers added in Korea and 1 million
CDMA subscribers added in Japan. The U.S. also
continues to be a solid CDMA market.
In ASICs, the company shipped 11 million MSM phone
chips in the quarter versus 9 million last quarter. We
estimate ASIC sales at about $300 million, a 20%
sequential improvement. This performance was also
reflected in the much better than expected gross margins.
The pipeline for ASICs continues to be strong, as reflected
in an ASIC book-to-bill ratio of 1.2 in the June quarter.
We expect ASIC revenues to increase modestly in the
September quarter.
The June quarter results could have been even better, if the
company were not experiencing some component
shortages for its handsets. As a result, QUALCOMM only
shipped about 1.7 million phones in the June quarter, flat
with the preceding quarter and about 100,000 units below
our expectations. And while gross margins on handsets did
improve on a sequential and year-over-year basis, the
improvement could have been even better with higher
volumes.
We believe that the component shortages are an
industry wide problem, and are indicative of the
stronger than expected demand for CDMA handsets.
We expect component availability to gradually improve,
with QUALCOMM shipping 1.9 million phones in the
September quarter. Gross margins should also improve
modestly as more Thinphones are shipped. The higher
margin Thinphone only represented about 20% of the units
shipped in the June quarter.
Assuming a gradual improvement in component supply
availability, we would expect continued 15-20% growth
in sales and a modest expansion in gross margins.
Based on this, we are raising our fiscal 1999 EPS estimate
from $2.15 to $2.42 and our fiscal 2000 EPS estimate from
$3.05 to $3.80.
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