spins on QCOM handsets business:
backward: QCOM should get out of handsets before NOK kicks their ass.
forward: NOK's CDMA handsets suck, so QCOM should exploit their lack of a strong CDMA presence by growing their own handset biz (much like MSFT did the fatal end run on WordImperfect, which more or less ignored Windows early on and didn't have a competitive Windows version to go head to head with Word for Windows 2.0).
backward: Handsets, being a royalty game (refers to king/prince/serf model (not license royalties) as opposed to a gorilla/chimp/monkey model which is a gorilla game--see siliconinvestor.com, will always be a lower margin business than ASICs and are inconsistent with Q's IPR gorilla gambit.
forward: Handsets are a great "Trojan" horse whereby QCOM can not only help fuel CDMA growth in the absolute sense (helping ensure sufficient supply of entry-level models at reasonable prices throughout CDMA markets), but can use strong cash flow from IPR revs to subsidize forays into killer apps such as advanced data terminals (pdQ being a start); again, ala MSFT using enabling tech (Windows) cash flow to fuel royalty game play. This has a synergistic effect, whereby development of killer apps (data terminals, and from there, applications for data terminals) fuels adoption of enabling tech (CDMA), and adoption of enabling tech expands market scalability and therefore leads to more players in the applications market. Interestingly, there seems to be a kernelling of enabling tech and apps, viz., PalmPilot applications, which rest on PalmPilot platform serving as enabling tech, which rests on pdQ serving as CDMA (handset) "application", which rests on CDMA air interface enabling tech. Distinctions may blur over time...Also known as seamless integration...also known as taking over.
backward: Still, poor cash flow from cap-intensive handset business means QCOM will remain treated like an equipment manufacturer w/low ROIC and won't get the high run-rate PE it "deserves". Imagine if QCOM had totally funded or bought out a startup like PHCM with its billion-dollar offering recently, instead of using it to (perhaps) build out a "dreaded bricks and mortar" handset plant.
Moreover, handset business entails "dependency" on suppliers, who, unable to keep up with demand, end up having an ill effect on short-term quarterly results which the market does not like--witness the recent plummet in stock price, which is attributable to parts shortages.
forward: Handsets may remain justified on a "grow the market" basis. Some say, Why would NOK throw serious money into R&D for handsets selling to a "midget" standard like CDMA when same bucks can be spread over a broader GSM base. If handsets is your main business, it might not make sense! That is where QCOM differs from all other handset makers in the CDMA market. For other makers, their main concern is the viability of their own business; to the extent that CDMA market growth adds to that viability, great, but the initial viability (or prospects) thereof needs to be there. Otherwise, Hello GSM. In contrast, for the QCOM handsets business, the main concern can be seen within QCOM's broader context of overall CDMA growth. Therefore, handsets themselves can be a somewhat lousy business on an operational basis, but still be a great business on a strategic basis.
backward: There is an inherent contradiction in QCOM being in the handset business, which is the same business as its ASIC customers. That's why, some say, MOT and NOK make their own, sucky ASICs, since they don't want to be feeding the mouth that bites the hand. How can you expect them to compete wholeheartedly when QCOM is making the market harder to compete in?
forward: That may be an issue in the longer term, when the market is much larger. Then again, maybe not! If the market gets big enough, fast enough, competitors will have a crow feast. QCOM's direct participation in the handset business probably gives it valuable information regarding ASIC design (WAG alert), in addition to the strategic considerations mentioned above.
backward: Management should sell handsets and watch the stock rocket up!
forward: Maybe so, but it's unlikely that the business would fetch a high price on the market today. After all, QCOM handsets are right now entering a new product cycle, and it may take several quarters for the R&D on those products to be reflected in sales trends. To sell now would be like seeding a plantation and selling before the crops come up. The buyer might just say, Gee, I don't wanna pay much for just a buncha dirt! Any positive effects from divestment in the short term would likely be from operational "leavening" ala Ericsson agreement--a multiple expansion based on QCOM's further recategorization as an "IPR" firm, with a higher ROIC. If this sort of financial engineering were considered necessary, in the short term it might make more sense to spin off the business ala LWIN, with the idea that the new handset company could continue to benefit current shareholders through stock appreciation as its "value" becomes apparent. A spin-off would eliminate the "competing against your customers" conundrum, but (assuming a true Chinese wall went up between QCOM and the new handset entity in the process) QCOM would cease to have operational control and would stop getting any "feedback" benefit for ASICs.
JMTC! |
