Mark Roberts' (First Union) report on QCOM:
KEY POINTS
-- The European market may be slowly opening to QUALCOMM.
We believe that the EU is going to relent
and allow carriers to adopt any of the 3G technologies and not mandate only
W-CDMA.
-- We believe that ETSI, the EU standard setting body has voted to allow
European carriers to
adopt any of the proposed
ITU 3G
technologies. We have not been able to confirm the decision or the terms
with ETSI.
-- QUALCOMM will probably receive royalties on W-CDMA anyway. However, if
carriers in
Europe can opt to adopt
any of the ITU 3G modes it potentially could open the market for QUALCOMM to
also sell chips
and accelerate the timing.
-- We reiterate our Strong Buy on the shares.
DETAILS:
What has changed.
We have multiple reports that ETSI (European
Telecommunications Standards Institute) has approved a resolution endorsing
all three modes of the
ITU?s 3G standard.
ETSI had
historically endorsed deployment of only W-CDMA in Europe. If we have
correct information, there
are several
implications:
-- ETSI has said previously that they would only allow European carriers to
use W-CDMA. We
believe its position has
been an attempt
to try to keep U.S. manufacturers out of Europe because Ericsson and Nokia
are thought to be
ahead in the development
and deployment of W-CDMA while QUALCOMM, Lucent and Motorola are thought to
be ahead
in CDMA 1X and 3X
technologies.
-- The ITU (International Telecommunications Union) is in the process of
adopting a single CDMA
standard with three
modes: direct sequence
(W-CDMA), multi-carrier (1X and 3X) and a TDD (time division duplex) mode.
QUALCOMM
disproportionately benefits
if carriers adopt a bias toward 1X and 3X multi-carrier because it is
already developing chips for 1X
and 3X (they
essentially wrote the multi-carrier part of the standard).
-- The U.S. government as well as a few global carriers like Vodafone have
been pressuring the EU
to adopt the ITU
standard so: 1) carriers can have phones that work on networks everywhere in
the world and, 2) the
U.S. government wants
to open European markets to American technology.
We suspect that ETSI may issue a press release on its new position within
the next few days.
Implications. We think QUALCOMM will get royalties from manufacturers making
W-CDMA or
1X and 3X technologies.
However, by mandating W-CDMA in Europe, we believe carriers were locked into
a migration path
from GSM to GPRS,
to EDGE (maybe), to W-CDMA. In this migration path we doubt QUALCOMM would
see any
revenues out of Europe
until maybe 2003-4 for royalties on W-CDMA. However, if ETSI is going to
allow carriers in
Europe to adopt any of the
ITU CDMA modes, carriers may decide to go
down a migration path from GSM, to 1X MC, to 3X MC. If so, QUALCOMM is
likely to have the
opportunity to sell
chips as well as get
royalties. Additionally, we believe the economics of 1X MC are at least as
good as the economics of
EDGE perhaps better.
Consequently, if carriers begin to migrate toward 1X then both chipset sales
and royalties from
Europe may accrue to
QUALCOMM years faster than most investors currently expect. The upshot is
that QUALCOMM
could potentially realize
chipset and/or royalty growth not previously expected ? we have not factored
into our models 1X or
3X in Europe.
What we don?t know are the specifics and when the details will be released
by ETSI.< |
