Thread ---update from Argus Research on "Q"---
News Analysis 1/26/2000
We think that the price drop in Qualcomm stock in after-hours trading offers a good buying opportunity in the
QCOM shares. Short-term traders focused solely on seasonal fluctuations in handset and chip set shipments
and ignored the robust long-term opportunities that Qualcomm can exploit in the wireless world. We are
reaffirming our BUY-recommendation with a 12-month target price of $230.
The results for the first quarter of fiscal 2000 ended December 26, 1999 showed continued very strong
demand for Qualcomm?s CDMA phones and chip sets that power the phones. Net income rose 265% to
$177.2 million or $0.23 per diluted share, compared with $48.5 million or $0.08 per diluted share in the year
ago quarter. Revenue rose 19% to $1.120 billion. Excluding a charge of $24 million related to the sale of the
handset manufacturing business to Kyocera, the pro forma EPS was $0.25.
During the past quarter, Qualcomm Consumer Products (QCP) shipped 2.2 million handsets, compared to 1.9
million in the 4Q of fiscal 1999 and 1.6 million in 1Q of fiscal 1999. Because QCP is not profitable, when its
sale to Kyocera is completed, which is expected by the March quarter, the company?s operating margins and
net profitability will improve. Excluding the one-time charge and the operations of QCP, the pro forma EPS
would have been $0.27.
The operating results are showing dramatic year-over-year improvements because of two factors: one, the
tremendous increase in the volume of shipments of both handsets and chip sets; and two, the absence of the
money-losing CDMA infrastructure business, which was sold in June 1999 to Ericsson. Gross margin widened
to 42.1% from 32.8% last year. As a percentage of revenue, expenses for Selling, General and Administrative
(SG&A) declined to 9.1% from 12.8%. The operating margin expanded to 23.2% from 8.3%.
Within the operating units, the year-over-year gains are also very impressive. Revenue for Qualcomm CDMA
Technologies (QCT), which designs and sells chip sets, rose 82% to $352.4 million and operating margin
widened to 36% from 33%. Revenue for Qualcomm Technology Licensing (QTL), which holds and manages
the portfolio of CDMA intellectual property, rose 140% to $177.6 million while operating margin improved to
92% from 84%.
Looking forward, management cautioned that shipments of phones and chip sets would decline in fiscal 2Q
versus fiscal 1Q due to seasonal factors, inventory balancing by customers to cope with shortage of certain
components, and the transition from older chips to newer chips. While we prefer to look at the long-term
picture, some traders decided to take some short-term profits.
In addition to the sheer growth of wireless phone users, the most important factor for Qualcomm?s future is
the development of equipment based on 3G (Third Generation) standards. These standards will enable faster
data transfer rate on the handsets, making Internet access a viable wireless function, and higher call capacity
on a local network. Both of these factors further drive wireless usage, in minutes used and number of
subscribers. Qualcomm is designing key components of 3G equipment. Once Qualcomm has completed the
sale of the handset business, it will be able to focus on its high margin businesses: namely, designing and
selling chips sets, deriving royalty payments from its portfolio of CDMA patents, and developing new
wireless applications for all sorts of handheld devices. The QCOM shares traded midday at $128-3/4, down
20-1/4. (DT)
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