QCOM Analysis:
Thanks tekboy!
Briefing.com and Chase H&Q (Snyder) on QCOM
QUALCOMM (QCOM) 68 3/8 +4 3/4: QUALCOMM traded up strongly today after
announcing it will spin-off its chip-set division known as QUALCOMM Spinco.
We view this announcement as positive in that it will unlock the value
of the company's technology segment which consists mainly of a portfolio of CDMA patents. QUALCOMM's Technology Licensing (QTL) division generates revenue by collecting royalty
payments from handset makers that license QUALCOMM's technology. Spinning off Spinco leaves QUALCOMM as a company which will put up much better numbers. QTL grew its
top line 38% yoy with a pre-tax margin of 87% in the June quarter. For every dollar QTL adds to the top line, $0.87 will flow to the pre-tax line. Assume a 38% tax rate and that translates to $0.54 EPS growth for every dollar of sales growth. Currently, QTL represents 24% of QUALCOMM sales but will represent almost half after the spin-off as QUALCOMM will keep its other existing businesses, including QUALCOMM Wireless Systems (OmniTRACS and Globalstar), and QUALCOMM Digital Media (Eudora, Government Systems and Digital Cinema). QTL's muscle will be more firmly felt with this higher weighting. QUALCOMM will assign a portion of its patents to Spinco, without compromising its existing licensing and royalty business as QUALCOMM will have little or no need for cross-licenses following the spin-off of Spinco since it earlier exited its wireless infrastructure and phone businesses. Spinco's chip-set business is much more like a traditional semiconductor firm with slower growth rates. In the June quarter, sales were up only 6% yoy despite shipping a higher volume of chip sets. This lower growth rate has been holding down QTL's ability to command higher p/e ratios. The company expects that it will complete its divestiture of Spinco by August 2001 by distributing all of the shares of Spinco to the holders of QCOM. -- Robert J. Reid, Briefing.com
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Company: QUALCOMM Inc.
Price: 66.75
Recommendation: Buy
Date: 7/25/00
1 of 2 QCOM: Chipsets Spin-off Removes Cross-Licencing Restraints: Upgrade to BUY.
* Qualcomm announced this morning plans to spin-off its ASIC business.
* We view the decision positively and expect the stock to appreciate on the
news.
* Post spin-out, two major divisions remain at Qualcomm -- licenses and
royalties, and a division containing OmniTracks (truck fleet management),
satellite operations, and infrastructure
* Spinning off the chipset business enables Qualcomm to shield much of its
cdmaOne IP from cross licensing to GSM IP holders, among others.
* Until now, Qualcomm was vulnerable to patents held by other companies that were
essential for building chipsets for 3G systems.
* This move will yield a better net royalty rate for Qualcomm on W-CDMA in our opinion.
* The revenue for the remaining company will be split about 50/50 between the
two divisions, but the licensing division will account for a significantly
greater portion of both earnings and growth.
* No change to estimates. Upgrade to BUY. Establish Target Price of $80.
1999 A 2000 E 2001 E
Q1 EPS $0.08 $0.25A $0.25
Q2 EPS 0.10 0.26A 0.30
Q3 EPS 0.19 0.27A 0.28
Q4 EPS 0.23 0.24 0.29
FY EPS 0.60 1.02 1.12
FY REVS (M) 3,936 3,156 3,074
CY EPS 0.76 1.02 1.18
CY P/E 88x 65x 60x
FY Ends Sep Current Price $66.75
52-Week Range $33-200 Market Cap (M) $51,250
Shares Out (000) 805,507 Book Value $7.17
Net Cash/Share $1.94 3-Year EPS Growth 25%
CY01 P/E-to-Growth 240%
Spinning off ASIC business frees the company of most cross-licensing
requirements, allowing it to strike more favorable licensing agreements.
Currently, Qualcomm's licensing business is encumbered by the ASIC business.
When Qualcomm negotiates a license today, it must take into consideration the
patents essential held by the other company for its ASIC business (such as GSM
IP). Spinning off the ASIC business (SpinCo) with a minimum amount of
cdmaOne IP, enables the remaining licensing and royalty business to command a
royalty from all W-CDMA OEMs without cross-licensing as none of Qualcomm's
remaining businesses would need GSM technology. This is a smart move by
management and tacit admission that without the spin-off Qualcomm would likely
get a much lower net royalty rate on W-CDMA from Motorola and/or Nokia (both
hold GSM IP) than the company received for cdmaOne in our opinion.
Metphoric Illustration (concept only, numbers, dates and company's are
hypothetical)
Today: Qualcomm possess 10 patents essential for W-CDMA products, no GSM
IP and a chip business that has to license GSM technology in order to build
products for the coming 3G systems.
2Q01: Qualcomm spins out the ASIC group, giving the new entity (SpinCo) 3
of its essential patents.
3Q01: SpinCo obtains essential GSM IP from Motorola and/or Nokia. The
cross-licensing agreement gives Motorola and Nokia access to all of SpinCo's
IP which are the 3 essential patents it obtained from Qualcomm on the
divestiture.
4Q01: Nokia and/or Motorola strike new license agreements with Qualcomm
for access to the remaining 7 essential patents. Qualcomm is no longer in the
chip business and therefore does not require any GSM IP. The company does not
need to cross-license anything from Motorola or Nokia and therefore receives a
higher net royalty payment.
Source: Chase H&Q:
The new ASIC entity (SpinCo) will likely move aggressively to license GSM
technology and become a leading manufacturer of next generation ASIC for cdma
and 3G systems. With Rich Sulpizio as CEO and Don Schrock as President and
COO, SpinCo will likely become a dominant supplier of ASICs for next
generation cellular technologies. We expect the company will move quickly to
license GSM IP and launch products for 2.5G and 3G GSM systems. It seems
unlikely the company will become a supplier of legacy GSM ASICS (GSM900,
GSM1800 or GSM1900) as the market for these products is mature and the margins
lower than for the cdmaOne ASICs the division currently produces. If divested
today, we believe SpinCo would likely trade with a market capitalization in
the $12 - $17 billion range, based on the multiples and growth rates of
comparable communications IC companies. SpinCo would also be free to acquire
other chip, software and technology companies without the cdma-only penchant
endemic at Qualcomm.
In addition to freeing the company of most cross-licensing requirements, a
larger percentage of revenue would be derived from royalties which should
garner a higher multiple. The multiple on pure IP stocks is significantly
higher than Qualcomm receives today. The remaining business will consist of
royalty and licensing revenue (approx 50%), OmniTracs (satellite fleet
tracking), Globalstar and some infrastructure business (apprx. 50%). Though
the new organization will likely receive a larger multiple given the higher
percentage of royalty revenue, growth rate in royalties will still be slow
this year due to Korea and which would impact limit the multiple as would the
difficulties at Globalstar.
New organization positions Qualcomm to move into W-CDMA ASICs while still
collecting a premium royalty on W-CDMA products; upgrade to BUY with a $80
price target. Divesting the ASIC business while retaining most of the core
cdmaOne IP in Qualcomm enables the company separate the more operational
business from the royalty business. SpinCo will now be able to obtain GSM IP
that is essential for its expansion into W-CDMA while Qualcomm (less SpinCo),
continues to collect royalties on CDMA patents required to build W-CDMA
products.
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Table 1: P/E Multiple Implied Valuation
2001E 2001 P/E Implied
Earnings Comp Market
($000s) Average Value ($M)
Royalties $431,938 227.4x $98,228
Chips 291,052 39.9x 11,622
QWS 149,803 15.9x 2,384
Total $872,793 128.6x $112,235
Table 2: Sales Multiple Implied Valuation
2001E 2001 P/S Implied
Sales Comp Market
($000s) Average Value ($M)
Royalties $822,407 55.5x $45,656
Chips 1,572,110 8.7x 13,624
QWS 739,193 2.0x* 1,478
Total $3,133,710 19.4x $60,758
Source: Reuters and Chase H&Q Estimate
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