Post From Rich>
1. Divesting a division that accounted for 33% of your revenue and 0% of your earnings WILL make a
considerable difference in earnings going forward, especially when the margins of your other
businesses is 30-90%. We will not know the true effect of this until CY Q3, although we will see some
of it this quarter. Not to mention that Q will have to account for the money they will receive for the HS
division (twas not strictly an ASIC arrangement).
2. Chips. OK, people don't seem to agree with the seasonal aspects of phone sales and how it effects
chip sales. This is something I know for a fact after 7 years on the carrier side of this business. To
think that CDMA phone sales will increase by proprtionate number compared to Chips sales is plain
wrong. If new subscriber growth is 18% per quarter and replacement phones are increasing by
between 30-60% (60 is Nokia's number, not mine), how can chip sales only increase 3% per quarter?
The reality is that for every 3 phones sold, 4 chips are sold (that is very conservative - most HS
manufacturers use NPV values of 2 sold=3 chips). Not everyone has a clean inventory as NOK and
Dell. Due to seasonal factors, companies do indeed load up on baseband chip inventory. They start in
early summer and continue to hoard until November. The fact is that manufacturers HAVE to load up
on chips. The risk of not receiving supply prior to the busiest time of the year is unthinkable.
Understanding this and realizing that what I am saying is industry FACT, not hopeful thinking, you must
revisit your numbers. CDMA subscriber growth increased 30M in 1999, yet QCOM sold 50 Million
ASICs. Now, if we agree that subscriber growth will increase by 40M in 2000 and we use a
conservative replacement percentage of 30% then we can conclude that ASICs sales will easily
exceed 75M (62.5M new sub ASICs, and 30% of 75M = 23M and give Q a conservative 70% of that
= 16M for a grand total of 62.5+16=78.5M. Again, these are conservative numbers.
3. Now, royalties are a fun thing to calculate. It's like compounding interest. If CDMA growth= 80%,
then we should see an increase of royalty earnings of 80%. Opps, forgot about replacement phones.
100% of the 30% upgrades for total CDMA subscribers. 95% margin on royalties my friend (have to
pay accountants to count all the money)
4. New licencing Fees. 2000 marks the first time in 3 years that QCOM will be licencing new
technology. Remember that having a CDMA license, gives you NO rights to HDR. Every QCOM
licensee will negotiate new licenses to include this technology. Margins on these licenses will be huge
as always and will start to pile in at the end of the year. This is the first opinion that I have wrote in this
post.
5. China. Although you can't count on the infrastructure being complete by September, you can count
on the fact that HS suppliers will be making phones and will have phones available in the event that it
does. Absolutely no one will take the risk of not having enough phones to gain early market entry. It will
be a fist fight between all HS manufacturers to gain an early edge. What this means is quite simply,
whether China happens on time or not, QCOM will sell ASICs for that market in the year 2000. Most
of these sales will occur in the next quarter. The beauty of this is that in 2000, we will enjoy 3 overly
robust quarters where in a typical year, we would only enjoy 2. Having said this, you can guarantee an
extra 4 million phones will be made, thus adding to royaltiues and a minimum of 4M more ASICs.
In conclusion, I think that it is a bold statement to say that we can expect no upside to this year's
estimates. You could have made the exact same arguement during this time last year.
OK, that was to much writing. Sorry!
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