ONE YEAR IN REVIEW: Qualcomm Then and Now
Cha2 suggested that we celebrate the first anniversary of my "buy report" on Qualcomm by comparing "then" with "now." Considering that I'm reasonably certain he was the one who first made me aware of the potential importance of Qualcomm years ago when we both participated in a Fool folder, I'm especially grateful that he dropped today's honor in my lap.
Just as the original report was quite long, this one will be lengthy also. Still, I think you'll enjoy it. I hope so.
Sadly, I do not have the opportunity to privately run this report by him as I promised. As I type this, I realize that I had planned to post the final product on April 4, the exact anniversary of my first Qualcomm report. I'm not comfortable waiting until then because it is on that day that I will leave my computer for four days. Any discussion that takes place or questions that might be asked deserve my immediate attention. Therefore, I realize at the last minute that it's better to post this a few days earlier than planned, eliminating the opportunity to allow Cha2 to review it. My apologies, Cha2.
On with the report.
THEN: "The single biggest revelation for me was to learn that adoption of CDMA is clearly in the early stages of the tornado, growing at more than 30% per quarter for four consecutive quarters." Though I can't find the exact post, I believe I corrected that to read that it was for three consecutive quarters. The fact is that the sequential growth of CDMA subscribers of the three previous quarters was 104%, 33% and 81%, respectively, in order of the earliest to the most recent quarter.
NOW: The tornado continues. As can be expected, as the base of CDMA subscribers gets larger and larger, the rate of growth gradually slows. The rate of growth of the four most recent quarters (again beginning with the earliest quarter) comparing year-earlier stats is as follows: 209%, 177%, 157%, and 118%. The more revealing perspective is that more CDMA subscribers were added to the roster in 1999 than in the previous time since the product was first commercially available. While the biggest disappointment for me about CDMA subscriber growth is that the most recent quarter, the important seasonal quarter of gift giving, was less than I expected, it is just one quarter among decades of quarters to come.
THEN: "The second biggest revelation ... was that CDMA has the lead in the U. S. in both geographic coverage and size of population in those areas." At the time the only nation-wide CDMA network was Sprint's.
NOW: When some question why MCI paid so much to acquire the company, I have to believe that part of it was based on the buyer's appreciation of the importance of Sprint's CDMA network. Next week the Bell Atlantic/Vodafone merger is expected to close, making it the second nation-wide CDMA network. (Though I believe this is accurate, this is an area I'm not especially strong in. Please don't hesitate to correct me if I've got it wrong.)
THEN: "There are all sorts of arguments about why Chinese authorities might or might not standardize on CDMA. No one has a crystal ball, but it is a major event that they have authorized the build-out of a CDMA-based network."
NOW: The timing of this anniversary report is especially interesting in context of the recent discussion that governments all over the world control biotech companies in ways other industries aren't controlled. Even so, it's imperative that we acknowledge the extent to which governments are influencing or controlling factors with regard to adoption of CDMA in certain parts of the world. We continue to witness the attempt to leverage China's desired membership in the World Trade Organization, a factor which has the potential to affect decisions by the U. S. government which in turn might influence decisions made by the Chinese government. We've very recently seen the Chinese government "accused" of thwarting imminent development of CDMA networks in China only to have the Chinese authorities completely deny it weeks later. That the Chinese government authorized one business to negotiate CDMA royalties on behalf of all Chinese businesses does show that adoption by the milions of Chinese is not immune to that government's powers over the CDMA value chain.
THEN: "The fallout we expected from the [Ericsson] deal has come to fruition. Industry insiders and pundits are all saying unequivocally that the deal makes it easier to arrive at a world-wide standard (which some now say might come as early as November). When ever it happens, it will make the pie grow and everyone's slice of the pie along with it."
NOW: Though there have been wins in the form of acceptance by the standards bodies, the more important wins continue to occur in the marketplace both in the free world and the non-free world. The purchase of Qualcomm's handset division by Kyocera is important. Relative to the importance of CDMA being accepted as a standard, that Kyocera had to agressively compete for the division speaks volumes. Qualcomm's CDMA is clearly the standard of its sector of the wireless world.
THEN: "I have come to the conclusion that Ericsson caved, in every sense of the word. ... [A] major international competitor just became a partner who openly and desperately depends on the Q's success. This is a great lesson found in the required reading of Value Chain 101."
NOW: Last month Motorola and Qualcomm ended a three-year legal battle resulting in a cross-licensing agreement. I believe Cha2 is right when he reminds us that "the MOT settlement is very much like the Ericsson one on a smaller and narrower scale in that it removes a major roadblock and foot dragging by MOT, but even more importantly diminishes the FUDers by one. Nokia and DoCoMo are the FUD manufacturers now." I would add that complete, unhindered access to CDMA is vital to Motorola's ability to compete with Nokia. The market factors causing these international companies with far more resources than Qualcomm to capitulate is important enough that they could be the subject of an entire post. (Anyone wanna volunteer?) They certainly need to be added to the case histories in the next teaching of Value Chain 101.
THEN: "Microsoft depends on Qualcomm to include Windows CE in its handhelds. Sun depends on Qualcomm to include PalmPilot technology in its handhelds. They are so dependent on Qualcomm that neither was able to negotiate an exclusive deal."
NOW: Have Kyocera, Softie and Sun stuck by those agreements originally negotiated with Qualcomm? Heck if I know.
THEN: "There has been a mild debate [in the folder} about whether the Q is a potential or established gorilla. If it's not the established gorilla of the CDMA space, who is?"
NOW Hopefully that requires no comment.
THEN: It's too early to call Qualcomm the gorilla of the larger space wireless space.
NOW: Still true.
However, this time next year we might be discussing the coming of a second tornado, the adoption of HDR. Whereas the focus of CDMA growth has been about voice being pushed through the bandwidth, the advent of HDR as a tested and demonstrated product allowing data transmission using CDMA technology is already past tense. And just last week the first voice was heard being transmitted using G3-compliant CDMA technology. I mention these two developments in voice and data in the same paragraph because I'm reminded of what Cha2 has been impressing upon us throughout the last twelve months -- that Qualcomm is at the nexus of voice and data transmission.
THEN: "We have to get out the microscope to see the Q's profit margins."
NOW: With the sale of the infrastructure division and the handset division, that is no longer the case. An in-depth discussion of profit margins would be premature. They are increasing at such a rapid rate due to the sale of the two divisions that it will be more informative in my mind to wait until we see the level at which margins finally settle in. The big picture is that despite decreased estimates of revenue due to the sale of the divisions, profits are expected to increase.
THEN: "Qualcomm's PSR despite the huge run-up is still less than 3.0. Compare that to Cisco, Softie and Intel at 18, 28 and 8, respectively."
NOW: My how things change! Qualcomm's PSR is now 26 thanks to the market's greater appreciation for the company's prospects. The PSR of Cisco, Softie and Intel at 36, 25, and 16, respectively shows that the market has certainly caught on to Qualcomm's opportunities. Relative to those three Gorillas of Gorillas, Qualcomm's stock is now priced more in line with theirs than it was this time last year.
THEN: It's truely hard to know how fast Qualcomm will grow in the next five years but most people seem to be thinking it will be at or in excess of 50% annually."
NOW: I believe it's even more difficult now to assess how fast the company will grow. I think growth rates will be sporadic. Adoption of product will likely be less predictable on a quarter-to-quarter basis as the impact of Internet-based PDAs, HDR, and adoption of voice-based CDMA in various parts of the world changes. My understanding is that most people are inclined to think earnings will grow more in the range of 30% annually.
THEN:"My thinking is to look at the next five years as a blip in time and, instead, look at the next fifteen. Doing that, I come to the conclusion that now is a great time to pick up the stock despite the recent run-up."
NOW: It's just my personal opinion, but I still feel the same way. I believe that even those who bought the stock at $200 will be amply rewarded over the very long term if their patience prevails.
THEN: "Qualcomm is far from a one-product company. There are many CDMA patents offering various market opportunities."
NOW: Add CDMA-based smart cards to the long list of products. Cha2 can speak to the importance of that much more eloquently than I can, but I do know he believes it makes roaming among non-CDMA based cells.
THEN: "The buzz of late that probably has the biggest opportunity is that the Q is working on a microprocessor (MSM4000) that will allow hand-held computers and handsets use the same microprocessor. That will lower costs substantially because two different microprocessors are currently needed."
NOW: I'm caught off-guard here. Someone please bail me out. I simply don't remember the current status of MSM4000.
THEN: "The buzz of late that has the most sex appeal (because all of us can relate to it) is that Qualcomm has a stake in the future of digital movies. Rather than sending reels of celluloid to movie theatres, digital files will be transmitted by satellite. Qualcomm may be coming to the theatre nearest you."
NOW: Since then, the most recent Star Wars film was shown in two theatres using digital files created from the celluloid. One theatre used Digital Cinema's technology (Q's subsidiary) and the other one used Texas Instrument's technology. I haven't followed this comparatively far-off product closely, but I did notice during last week's Academy Awards show that an actress mentioned that an entire movie has been recorded using digital technology, not film.
THEN: "The various partnerships in place have potential also."
NOW: I also don't follow the partnerships closely. My general impression is that Wireless Knowlesge (the joint venture with Softie) was frustratingly slow to get off the ground for most of the year and we can hope that recent agreements will help move things forward at a greater pace.
The minority ownership in Globalstar continues to look more promising than this time last year. The full complement of satellites were not yet launched. They're now in place though the company continues to operate in an environment of bad press due to Iridium's impending bankruptcy should a white knight not step up to the plate. Does anyone know if Iridium shut down their service to customers yet? The issue of Globalstar's past-due payables to Qualcomm in the amount of $500 million continues to be the biggest single red flag associated with the Q.
SUMMARY: This time last year we couldn't possibly have imagined how much money the infrastructure business was losing and couldn't have had appreciation for the increased profits Qualcomm would enjoy as a result of Ericsson's purchase of it. Similarly, though some of us wanted the handset business to be sold, that could have happened three to five years later than when it actually happened.
Those are great examples of why I believe in the long-term holding of a great company such as Qualcomm instead of trying to time the improving fundamentals and the market's reaction to them. The most recent example is reaction to the disclosure announced at the annual shareholders' meeting about the amount of money paid by Kyocera for the handset division. Many people were immensely disappointed and predicted a much lower stock price. I don't want to mention any names, but of the two people sitting in front of me who were confidently making that prediction, one was wearing a Zuit soot and the other is renowned for having a difficult time trying to pour an unopened bottle of Opus an hour later. :) Four days later, the stock closed higher than the close the day before the sale price was disclosed. One month later, the stock is 12% higher than the pre-disclosure price.
I suspect that over the years to come there will be similar stories we will be able to tell that will begin with the phrase, "I had no idea ..."
--Mike Buckley |
