My opinions regarding some of the excerpts from the Business week article posted earlier.
<<<<represents article text - have not figured out how to use fonts on this board >>>>
<<<<The spell appears to have been broken: Qualcomm shares have plunged 30% since the beginning of the year. Part of the reason is that the company warned in late January that phone-chip sales for its second quarter, which ends next month, will be disappointing. >>>>>
OK, can someone point to an instance where the company said that chip sales for Q2 would be ?disappointing?? I thought the company said that seasonal factors ?may? show that Q2 chip sales to be flat when compared to the robust, holiday season Q1. Does journalistic integrity allow for such a blatant misrepresentation of the facts?
<<<<<<<<``The Qualcomm story is easy to swallow, but we simply don't believe it's true,' says Hambrecht & Quist analyst Edward F. Snyder, who rates the stock ``market perform'--the equivalent of a hold.>>>>>>>>>>>>
This is beautiful. Snyder has had a hold on QCOM since May of last year and has used every tactic in the book to drive the price down. I think that In his 9 latest reports on QCOM, he has failed to come within 25% of actual earnings. My god, what would happen if a company missed earnings by 25%. As late as September of 1999 when Q was wrapping up it?s year, his prediction for 1999 earnings had ALREADY been met and Q?s actual earnings, reported in November, came within 5% from beating Snyder?s entire 2000 EPS prediction. EVERYONE in the industry recognizes Snyder for what he is. A large supporter of Motorola and a true foe of QCOM! If QCOM reports earnings next quarter of $125.00 a share, Snyder will most likely lower his rating and increase his yearly EPS prediction to $1.10. I just can?t understand how what he does is a) legal and b) how anyone whi reports on Telecom could take anything he says seriously. How many times does he have to be proven wrong before the industry blacklists him?
<<<<<<<<<<To understand the sudden change of heart, let's start with the rosy assumptions that drove Qualcomm's shares to dizzying heights. PaineWebber Inc. analyst Walter P. Piecyk, a prominent Qualcomm bull, predicted that royalty revenues from the company's code division multiple access (CDMA) wireless technology would mushroom to as much as $20 billion in 10 years. CDMA is one of three major wireless technologies competing with one another.>>>>>>>>
Not 3 major technologies in 10 years. Again, a misrepresentation of facts.
<<<<<<<<NEW MATH. Here's how Piecyk got to that number: He estimated that there will be 3 billion mobile phones and other wireless devices sold worldwide in 2010, and 85% of them would use technologies that Qualcomm has patented. After that, he projected that Qualcomm would get an average royalty rate of 4.5% on mobile phones and other wireless devices that cost an average $180. Crunch the numbers and--shazam!--Qualcomm is pulling in $20 billion in royalties at decade's end. When Piecyk put out his report on Dec. 29 and predicted the stock would hit 250 by the end of 2000, the stock soared. It rose 40% over the next four trading days before hitting a peak of 200 on Jan. 3.>>>>>>>>>>>>>
Piecyk was, indeed, wrong. He forgot to factor in ASIC royalties. The 4.5% is phone royalty only. For many devices the royalty is higher.
<<<<<<<<<Now for the new math. After taking a close look at the assumptions of Piecyk and other bulls, analysts are scratching their heads.>>>>>>>>>>
I agree with this statement. Then again, they were doing that before Piecyk?s assumption. And why is it an assumption if it comes from Piecyk, but an analysis if it comes from Snyder?
<<<<<<<<<First, some question whether there will be anything like 3 billion wireless phones and other devices sold in 2010. After all, that would mean nearly one phone or handheld sold that year for every two people in the world. To put that in context, mobile-phone sales totaled 222 million in 1999, and only 40 million were based on CDMA, Micrologic Research says. The research firm predicts that total sales will reach only 508 million in 2004, quite a ways short of 3 billion.>>>>>>>>>>>>>>
OK, this is the key here. One thing I have learned is to do my math before I open my mouth (or pen). First, let?s assume that the prediction for ?mobile phones? is accurate. Because a chip and royalties are associated with all wireless products, I prefer using estimates for wireless products, but because we hate speculating, let?s use these predictions ? which were, by the way, 20% off actual CDMA numbers. The report is a year old, I believe. So, is the writer saying that 508M phones will be sold in 2004. If QCOM has 20% of the ASIC sales on that, count 2.2B in earnings for ASICs alone. 40%=4.4B, etc.
<<<<<<<<<Even more suspect is the projection that Qualcomm will be entitled to royalties on 85% of those products. Companies such as Motorola and Ericsson are developing rival technologies and plan to neutralize Qualcomm's ability to leverage its patents to get high royalties. ``The intellectual property will be so spread out that Qualcomm won't have the power it has now,' says Yankee Research Inc. analyst Craig Ellingsworth. And Merrill estimates that Qualcomm's share of the CDMA chip market will drop from 90% last year to 50% in 2003. That's not even the worst of it. The royalties Qualcomm collects for each mobile phone or other device are headed for a fall.>>>>>>>>>>>>>>>
This is stated as a fact? How do they now that the royalties are headed for a fall. Is he talking about royalties or royalty percentages. To just say that royalties are headed for a fall indicates that wireless growth will halt. Is he insinuating this?
<<<<<<<<<<<<<<<< For one thing, the average price of a cellular phone is sliding--Snyder says the average price for a handset will drop to $130 next year, down from $180 this year. What's more, Qualcomm almost certainly will have to lower the royalty rate it charges as competitors start to offer their own CDMA technology.>>>>>>>>>>>
What the hell is he talking about? How can anybody except QCOM offer their own CDMA technology? Does anyone understand IPR? Are these new age technology idiots so hung up on internet companies with loads of potential competitors that they can?t take the time to read simple definitions in a dictionary. Unless the competitors can come up with a new technology, talk carriers into investing 10s of billions of dollars in new infrastructure for this new untested technology and call it something different than CDMA and MAKE IT WORK, there is NO new CDMA technology. If Panasonic, TI, LSI, Intel, Samsung, Nokia, Motorola, NEC, Philips, Hitachi, Fujitsu, Siemens and a host of others could not make a competitive chip to the MSM that Qualcomm had out three years ago, how the hell are they going to come up with a BRAND new CDMA technology in the next three years. My gosh, look at all the failures and look how far EVERYBODY is behind QCOM in a technology that is proven to work and already has a standard adopted to it. This is a ridiculous statement!
<<<<<<<<< While the company reaps about 5% of the price of a CDMA phone now, analysts such as Snyder believe that will fall to 1% to 2% in the future. Qualcomm's royalty rate could drop to as low as 3% in some cases by next year, says Gartner Group Inc. analyst Bob Egan. He argues that royalty rates could hit 2.5% soon thereafter and drop even lower within five years.>>>>>>>>>>>
What the hell are they talking about here? If the license says 5%, the cost is 5%. Qualcomm has no reason to re-negotiate the license. Is Hyundai going to threaten QCOM that they will stop making phones if they don?t lower the royalty rate. Great, I?ll bet LGIC would love to fill those orders. This is a ridiculous assumption! If carriers provide the service, they will demand phones which companies will continue to bid for. People need to understand the wireless food chain. Handset manufacturers don?t make the rules! Carriers and enabling technology do!
<<<<<<BOOM TIME? The bottom line is that Qualcomm's dreams of huge royalties are probably little more than that. ``I think it's unlikely the world will organize itself in a way to pay some company, whoever it is, $20 billion in royalty income,' says Dwight W. Decker, chairman and CEO of rival chipmaker Conexant Systems Inc. in Newport Beach, Calif. Ericsson says it has a strong CDMA patent portfolio, as do others. ``Qualcomm will not get rich off of Ericsson,' says Ericsson spokeswoman Kathy Egan. She derided the notion that Qualcomm would garner $20 billion in patent revenues as ``pure fantasy.'>>>>>>>>>>>
QCOM will get rich because of QCOM and ERICY will get rich because of QCOM. I also think that 20B is high, but I also didn?t think that CSCO would be a half trillion dollar company if you asked me 2 years ago. Get the point?
<<<<<<<< The question is: How many billions? This year, unit sales of CDMA mobile phones will grow by more than 50%, to some 65 million units. That figure could reach 95 million in 2001 and as much as 200 million in 2004, analysts say. >>>>>>>>>>>
200M phones a year. Do the math and you?ll see how cheap QCOM is.
<<<<<<<Skeptics such as Snyder put Qualcomm's annual royalty revenue at more than $1 billion by next year. That could double again by mid-decade if the use of mobile phones to tap the Web takes off.>>>>>>>>>>
If Snyder believes a Bil in royalties, then he must believe that actual earnings will be above 3.5B next year (include ASICs and other units). So if CSCO has 3B in earnings and is a 500B company, can we assume that QCOM is a 500B company next year? Foot in mouth?????.AGAIN!!!!
Article excerpts from the earlier posted article:
<<<<<<<By Steven V. Brull in Los Angeles, with William Echikson in Brussels
Copyright 2000 The McGraw-Hill Companies, Inc. All rights reserved. Any use is subject to (1) terms and conditions of this service and (2) rules stated under ``Read This First' in the ``About Business Week' area.>>>>>>
Ok, that was my rant Sorry for the length and the constant cursing; but this article is just another example of bad analysis. I have always thought that looking out 10 years was a bit speculative and always try and focus on today and the next year or two. QCOM stands up pretty well without going out 5-10 years. The examples I used at the beginning of the post were used to demonstrate the difference between handhled and wireless devices. Because I din?t want to open the gates to ?how realistic is that?? debate, I used very real situations. Most of which happen today. So I conclude that it may be wiser to not look at 1 in every 2 people using a portable phone, but instead to look at 1 in every 7 using at least 3 wireless devices. It?s not a ?is the glass half-full or half-empty? analogy, it is a FACT of industry evolution.
As always, this is all just my opinion.
- TRJ
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