QCOM Analyst Report:
thanks ruffian!
A.G.Edwards
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QUALCOMM Incorporated
SECURITIES RESEARCH • JULY 14, 2000
Buy/Aggressive
QCOM/Nasdaq/61 5/8 Price Objective as of 06/28/00: $96
Fiscal Year (Sept) 1996@ 1997@ 1998@ 1999@ CAGR* 2000E 2001E
Revenues (mil.) $814 $2,096 $3,348 $3,937 78.6% $2828 3718
EBIT. (mil.) $7.9 $94.9 $156.9 405.1 117.2% 1368 1836
Net Income (mil.) $21.0 $91.9 $108.5 200.9 60.6% 874 1138
Shares Out (mil.) 563.6 565.2 590.0 650.0 8.6% 808.1 846.4
Earnings Per Share* $0.04 $0.14 $0.21 $0.60 75.4% $1.04 $1.35
Price Range 4-7 4-8 5-8 6-185 -- --
P/E Range 63-156 40-228 22-43 9-125 -- --
*Excluding extraordinary items
@Historic results are not comparable because of the sale of the infrastructure
and handset groups.
Est. 1999-2001 EPS CAGR: 50.0% Sector: Technology
AGE Lists: Master *CAGR: Compound Annual Growth Rate
Associate: Greg Teets (x5823) Analyst: Dave Heger (x4094)
Next quarterly earnings report expected: July 19, 2000, after close
Qtr 1 Dec Qtr 2 Mar Qtr 3 Jun Qtr 4 Sept Year
1999 $0.08 $0.10 $0.19 $0.23 $0.60
2000E $0.25A $0.26A $0.27 $0.25 $1.04
2001E $1.35
Book Value Per Share: $7.15 Long-Term Debt/Total Cap.: 4.5%
FC: Access QBLUE for blue-sky status
Company Description: (San Diego, California) QUALCOMM is a leading supplier
of digital wireless communications products including intellectual property,
chipsets, and network infrastructure components based on its proprietary Code
Division Multiple Access (CDMA) technology. QUALCOMM receives royalties for
its CDMA technology from all makers of mobile handsets, infrastructure, and
devices. CDMA will be used as the foundation for the next generation of
wireless devices.
Investment Premise (Recommendation originated as a Buy/Aggressive on
05/30/00): Our thesis for recommending an investment in QUALCOMM shares is
that the company is uniquely positioned to benefit from the deployment of
third generation (3G) mobile wireless networks based on CDMA. We believe that
because of it strong patent portfolio and experience with CDMA chipsets,
QUALCOMM will receive royalties on all 3G infrastructure and handsets and will
remain the dominant supplier of CDMA chipsets. With the continued strong
outlook for mobile wireless subscriber growth, CDMA handset sales, and
infrastructure deployment, we rate QUALCOMMM share as Buy/Aggressive.
Attractive Features
Rapid growth in wireless, especially CDMA. During the past ten years, US
wireless subscribers levels have grown at a compound annual rate of nearly
50%. Global wireless growth is expected continue to grow at a compound annual
growth rate of 30% from 1999 through 2004. CDMA subscriber growth is growing
even faster. In 1999, global CDMA subscribers nearly doubled to 50 million
subscribers. The next generation wireless technology will consolidate the
diverse world standards into a CDMA-based third generation technology, which
will prolong the growth outlook for QUALCOMM.
Intellectual Property Rights. QUALCOMM holds patents on many critical aspects
of CDMA and advanced wireless networks. These patents and the associated
royalties and licenses generate significant earnings for QUALCOMM. Anyone who
wants to use CDMA technology must pay QUALCOMM for access to the technology.
All the major wireless manufacturers have signed license agreements with
QUALCOMM to use their CDMA patents. A royalty is paid to QCOM on any chip,
handset, or equipment manufactured that uses CDMA. The payment for handsets
and equipment is based on a low, single digit percent of the wholesale price
of the item. Additionally, QUALCOMM employs one of industry's largest block
of difficult to find CDMA and RF engineers. The deep talent pool in
QUALCOMM's engineering has consistently allowed it to develop new technologies
and bring them to market ahead of competitors.
Strong ASIC Unit. In 1999, nearly nine of every ten CDMA phones used a
QUALCOMM ASIC to support its communications functions. The ASIC chips are
used in base stations, handsets and support equipment to perform CDMA
functions. QUALCOMM generates better than industry margins on CDMA ASIC
chips. Besides the revenue stream generated through the chip sales, QUALCOMM
can also "double-dip" on royalty revenue. When the chip is used in a phone or
piece of equipment, the manufacturer owes QCOM a royalty. As the number of
CDMA handsets increases, QCOM can continue to ramp up production and increase
margins on its ASIC line.
Concerns
Rapid Growth, Limited Visibility. Unlike Lucent or Nortel who have long
operating histories for their corporations and major product lines, both
QUALCOMM's market and operating history are limited. We believe that the CDMA
wireless market, is still in its early stages of growth, has not reached a
steady state of operation, and is therefore subject to volatility and risk.
This embryonic stage limits future visibility by making it difficult to use
historic trends to build projections. QUALCOMM's operating results have
shifted strongly upward following the sale of its infrastructure and handset
businesses; hence recent earnings growth appears abnormally high versus
historic results. Other issues like Globalstar, 3G rollout timeframes,
secretive handset makers, and government regulations complicate our modeling
efforts.
Slower Acceptance of CDMA QUALCOMM's current earnings estimates are based on
rapid, accelerating deployment of CDMA infrastructure and handsets. Should
the rollout of the services falter or customer demand decline, QUALCOMM's
future earnings growth could slow. Worldwide cellular subscriber levels are
projected to grow at 30% annually therefore the potential for a slowdown is
slight. In addition, penetration in many underdeveloped countries, especially
China and India with populations of one billion each, is very low.
High Profile Story, High Beta. Since its remarkable rise in 1999, QUALCOMM has
been a favorite for the popular media. Unfortunately, because the issues
surrounding QUALCOMM are complex, the media often misconstrues or makes
inaccurate statements about news items or related developments. Complex
issues and a confused media combine to give QUALCOMM a high beta. It is not
unusual for shares to rise and fall 10% in a single day.
Declining Handset Prices Since QUALCOMM's royalty stream is based on a
percent of the wholesale price of a handset, declining prices can take a cut
out of QUALCOMM's royalty revenue growth rate. Increasing volumes will more
than make up for the average annual price decline of 10% to 15%. We expect
that handset prices will eventually stabilize in the $125 to $150 range.
Recent Developments:
(07/12/00) In an attempt to clear up misinformation about the outlook for the
company and its position in 3G-CDMA. The full text of the press release is
printed below:
QUALCOMM Supports Global Deployment of 3G CDMA
QUALCOMM Benefits from Licensing and Chipset Sales for cdma2000 and WCDMA
QUALCOMM Incorporated. a pioneer and world leader of Code Division Multiple
Access (CDMA) digital wireless technology, today issued the following
statement concerning the introduction of third-generation (3G) IMT-2000
wireless technology based on CDMA.
"QUALCOMM fully supports the rapid introduction of 3G CDMA
technology, regardless of mode, in the new IMT-2000 frequency bands as
well as in existing cellular and PCS frequency bands in all regions of
the world," said Dr. Irwin Mark Jacobs, chairman and CEO, QUALCOMM.
"By 2003, the Company expects one billion digital wireless subscribers
in the world, the majority using GSM with CDMA second. For the next
billion subscribers, the Company expects CDMA to be the dominant 3G
standard. The principal 3G modes, WCDMA and cdma2000, incorporate
QUALCOMM's pioneering CDMA inventions, and are designed to provide
efficient voice and wireless Internet access, which we believe will be
the next large growth area for wireless networks. Both CDMA modes
represent revolutionary departures from the TDMA-based technologies
used over the past decade, including GSM."
"The transition to 3G CDMA has now started in existing spectrum.
Although technology choices for the IMT-2000 spectrum remain open, two
of Korea's largest operators, SK Telecom and KT Freetel, are preparing
to launch the world's first commercial 3G services by using cdma2000
to upgrade their existing networks. By the end of 2001, 3G services
will be widely available, since most cdmaOne(TM) operators around the
globe plan similar transitions to cdma2000 next year. Given the
anticipated growing demand for wireless Internet access, we expect
that operators utilizing non-CDMA wireless technologies will make
substantial new investments in 3G CDMA over the next several years.
cdma2000 readily supports overlays in existing spectrum. For
international roaming, phones supporting multiple technologies for
operation in all regions will become increasingly available at low
cost. Several operators are conducting trials of QUALCOMM's HDR
technology which efficiently supports mobile and fixed Internet access
up to 2.4 Mbps. HDR is now in the 3G standards process and the basis
for 1xEvolution (1xEV)."
"QUALCOMM continues to expand its substantial portfolio of CDMA
patents, including many patents essential to the deployment of any
commercially viable CDMA mobile system. QUALCOMM has now extended many
of its license agreements to cover all 3G modes. Under these
agreements, a licensee pays the same royalty rate to QUALCOMM for
WCDMA and cdma2000 equipment as for cdmaOne infrastructure, phones,
semiconductors and other equipment. Companies with licenses for WCDMA
include Samsung, Lucent, Ericsson, Nortel, Hyundai, LG, Sony, Hitachi,
ALPS, Matsushita, Maxon, OKI and Philips."
"Although we support all modes, QUALCOMM believes that cdma2000
provides a more capable, spectrally efficient, timely, lower risk and
lower cost path to all 3G services. Relatively small changes (i.e.,
chips and software upgrades) are required to existing commercial
infrastructure and subscriber equipment to incorporate cdma2000
technology, and the chipsets are currently in the hands of
manufacturers. Although QUALCOMM supports all modes of 3G CDMA, the
Company believes that carriers deploying cdma2000 technology have a
major economic and time to market advantage over carriers deploying
WCDMA. Therefore, we will continue to examine opportunities to invest
in carriers where the competition has not elected to use cdma2000."
"QUALCOMM supports both cdma2000 and WCDMA modes with chipsets and
system software. The Company plans to focus on multi-mode, multi-band,
multi-network capabilities as these future market requirements
develop. Drawing on QUALCOMM's unequalled experience in supplying the
highest quality and most reliable CDMA chipsets with extensive
features, the Company is now shipping cdma2000 chipsets to
manufacturers and expects to begin sampling its WCDMA chipsets and
system software in 2001."
--------------------------------------------------------------------------------
Additional Information Available Upon Request
A.G. Edwards & Sons, Inc. • One North Jefferson • St. Louis, MO 63103
Member New York Stock Exchange
A.G.Edwards
--------------------------------------------------------------------------------
QUALCOMM Incorporated
SECURITIES RESEARCH • JULY 14, 2000
Buy/Aggressive
QCOM/Nasdaq/61 5/8 Price Objective as of 06/28/00: $96
Fiscal Year (Sept) 1996@ 1997@ 1998@ 1999@ CAGR* 2000E 2001E
Revenues (mil.) $814 $2,096 $3,348 $3,937 78.6% $2828 3718
EBIT. (mil.) $7.9 $94.9 $156.9 405.1 117.2% 1368 1836
Net Income (mil.) $21.0 $91.9 $108.5 200.9 60.6% 874 1138
Shares Out (mil.) 563.6 565.2 590.0 650.0 8.6% 808.1 846.4
Earnings Per Share* $0.04 $0.14 $0.21 $0.60 75.4% $1.04 $1.35
Price Range 4-7 4-8 5-8 6-185 -- --
P/E Range 63-156 40-228 22-43 9-125 -- --
*Excluding extraordinary items
@Historic results are not comparable because of the sale of the infrastructure
and handset groups.
Est. 1999-2001 EPS CAGR: 50.0% Sector: Technology
AGE Lists: Master *CAGR: Compound Annual Growth Rate
Associate: Greg Teets (x5823) Analyst: Dave Heger (x4094)
Next quarterly earnings report expected: July 19, 2000, after close
Qtr 1 Dec Qtr 2 Mar Qtr 3 Jun Qtr 4 Sept Year
1999 $0.08 $0.10 $0.19 $0.23 $0.60
2000E $0.25A $0.26A $0.27 $0.25 $1.04
2001E $1.35
Book Value Per Share: $7.15 Long-Term Debt/Total Cap.: 4.5%
FC: Access QBLUE for blue-sky status
Company Description: (San Diego, California) QUALCOMM is a leading supplier
of digital wireless communications products including intellectual property,
chipsets, and network infrastructure components based on its proprietary Code
Division Multiple Access (CDMA) technology. QUALCOMM receives royalties for
its CDMA technology from all makers of mobile handsets, infrastructure, and
devices. CDMA will be used as the foundation for the next generation of
wireless devices.
Investment Premise (Recommendation originated as a Buy/Aggressive on
05/30/00): Our thesis for recommending an investment in QUALCOMM shares is
that the company is uniquely positioned to benefit from the deployment of
third generation (3G) mobile wireless networks based on CDMA. We believe that
because of it strong patent portfolio and experience with CDMA chipsets,
QUALCOMM will receive royalties on all 3G infrastructure and handsets and will
remain the dominant supplier of CDMA chipsets. With the continued strong
outlook for mobile wireless subscriber growth, CDMA handset sales, and
infrastructure deployment, we rate QUALCOMMM share as Buy/Aggressive.
Attractive Features
Rapid growth in wireless, especially CDMA. During the past ten years, US
wireless subscribers levels have grown at a compound annual rate of nearly
50%. Global wireless growth is expected continue to grow at a compound annual
growth rate of 30% from 1999 through 2004. CDMA subscriber growth is growing
even faster. In 1999, global CDMA subscribers nearly doubled to 50 million
subscribers. The next generation wireless technology will consolidate the
diverse world standards into a CDMA-based third generation technology, which
will prolong the growth outlook for QUALCOMM.
Intellectual Property Rights. QUALCOMM holds patents on many critical aspects
of CDMA and advanced wireless networks. These patents and the associated
royalties and licenses generate significant earnings for QUALCOMM. Anyone who
wants to use CDMA technology must pay QUALCOMM for access to the technology.
All the major wireless manufacturers have signed license agreements with
QUALCOMM to use their CDMA patents. A royalty is paid to QCOM on any chip,
handset, or equipment manufactured that uses CDMA. The payment for handsets
and equipment is based on a low, single digit percent of the wholesale price
of the item. Additionally, QUALCOMM employs one of industry's largest block
of difficult to find CDMA and RF engineers. The deep talent pool in
QUALCOMM's engineering has consistently allowed it to develop new technologies
and bring them to market ahead of competitors.
Strong ASIC Unit. In 1999, nearly nine of every ten CDMA phones used a
QUALCOMM ASIC to support its communications functions. The ASIC chips are
used in base stations, handsets and support equipment to perform CDMA
functions. QUALCOMM generates better than industry margins on CDMA ASIC
chips. Besides the revenue stream generated through the chip sales, QUALCOMM
can also "double-dip" on royalty revenue. When the chip is used in a phone or
piece of equipment, the manufacturer owes QCOM a royalty. As the number of
CDMA handsets increases, QCOM can continue to ramp up production and increase
margins on its ASIC line.
Concerns
Rapid Growth, Limited Visibility. Unlike Lucent or Nortel who have long
operating histories for their corporations and major product lines, both
QUALCOMM's market and operating history are limited. We believe that the CDMA
wireless market, is still in its early stages of growth, has not reached a
steady state of operation, and is therefore subject to volatility and risk.
This embryonic stage limits future visibility by making it difficult to use
historic trends to build projections. QUALCOMM's operating results have
shifted strongly upward following the sale of its infrastructure and handset
businesses; hence recent earnings growth appears abnormally high versus
historic results. Other issues like Globalstar, 3G rollout timeframes,
secretive handset makers, and government regulations complicate our modeling
efforts.
Slower Acceptance of CDMA QUALCOMM's current earnings estimates are based on
rapid, accelerating deployment of CDMA infrastructure and handsets. Should
the rollout of the services falter or customer demand decline, QUALCOMM's
future earnings growth could slow. Worldwide cellular subscriber levels are
projected to grow at 30% annually therefore the potential for a slowdown is
slight. In addition, penetration in many underdeveloped countries, especially
China and India with populations of one billion each, is very low.
High Profile Story, High Beta. Since its remarkable rise in 1999, QUALCOMM has
been a favorite for the popular media. Unfortunately, because the issues
surrounding QUALCOMM are complex, the media often misconstrues or makes
inaccurate statements about news items or related developments. Complex
issues and a confused media combine to give QUALCOMM a high beta. It is not
unusual for shares to rise and fall 10% in a single day.
Declining Handset Prices Since QUALCOMM's royalty stream is based on a
percent of the wholesale price of a handset, declining prices can take a cut
out of QUALCOMM's royalty revenue growth rate. Increasing volumes will more
than make up for the average annual price decline of 10% to 15%. We expect
that handset prices will eventually stabilize in the $125 to $150 range.
Recent Developments:
(07/12/00) In an attempt to clear up misinformation about the outlook for the
company and its position in 3G-CDMA. The full text of the press release is
printed below:
QUALCOMM Supports Global Deployment of 3G CDMA
QUALCOMM Benefits from Licensing and Chipset Sales for cdma2000 and WCDMA
QUALCOMM Incorporated. a pioneer and world leader of Code Division Multiple
Access (CDMA) digital wireless technology, today issued the following
statement concerning the introduction of third-generation (3G) IMT-2000
wireless technology based on CDMA.
"QUALCOMM fully supports the rapid introduction of 3G CDMA
technology, regardless of mode, in the new IMT-2000 frequency bands as
well as in existing cellular and PCS frequency bands in all regions of
the world," said Dr. Irwin Mark Jacobs, chairman and CEO, QUALCOMM.
"By 2003, the Company expects one billion digital wireless subscribers
in the world, the majority using GSM with CDMA second. For the next
billion subscribers, the Company expects CDMA to be the dominant 3G
standard. The principal 3G modes, WCDMA and cdma2000, incorporate
QUALCOMM's pioneering CDMA inventions, and are designed to provide
efficient voice and wireless Internet access, which we believe will be
the next large growth area for wireless networks. Both CDMA modes
represent revolutionary departures from the TDMA-based technologies
used over the past decade, including GSM."
"The transition to 3G CDMA has now started in existing spectrum.
Although technology choices for the IMT-2000 spectrum remain open, two
of Korea's largest operators, SK Telecom and KT Freetel, are preparing
to launch the world's first commercial 3G services by using cdma2000
to upgrade their existing networks. By the end of 2001, 3G services
will be widely available, since most cdmaOne(TM) operators around the
globe plan similar transitions
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