07:04am EDT 26-Jul-00 Lehman Brothers (Luke, Tim 212-526-4993) QCOM
Today`s Date: 07/26/00
Ticker: QCOM Fiscal Year: 9/30
Price: 63.63 52wk Range: 200 - 34
Rank(New): 1 - Buy Target(New): 120
Rank(Old): 1 - Buy Target(Old): 120
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EPS 1999 2000 2001 %Change
Act. Old New St.Est Old New St.Est
2000/2001
1Q 0.08 0.02 0.25A 0.25A - -E - -E 0.28E
213 - -
2Q 0.10 0.02 0.26A 0.26A - -E - -E 0.30E
160 - -
3Q 0.19 0.02 0.27A 0.27A - -E - -E 0.33E
42 - -
4Q 0.23 0.24E 0.24E 0.25E - -E - -E 0.37E
4 - -
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Yr. 0.59 1.03E 1.03E 1.03E 1.35E 1.35E 1.30E 75
31
P/E 61.8 47.1
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MARKET DATA FINANCIAL SUMMARY
Shares OutStanding (MM) 751.5 Revenue (B) 2.8
Mkt Capitalization (B) 47.8 Five-Year EPS CAGR 35.0 %
Dividend Yield - - Return On Equity (2000) 23.9
Convertible No Current Book Value 4.8
Float - - Debt To Capital 18.2 %
Disclosure(s) C, A
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INVESTMENT HIGHLIGHTS :
* Yesterday, QCOM announced plans to spin-off its wireless semiconductor
business enabling the new spin-off to expand its positioning in
technologies
such as GSM, while enabling QCOM parent to maintain its royalty &
licensing
revenue streams.
* The new spin-off, temporarily called Spinco., will include QCOM`s CDMA
chipsets & software bus., HDR development & SnapTracs (location based
technology). The new QCOM will consist of the licensing & royalty bus.,
OmniTRACS, Globalstar and the company`s digital media business.
* Below we highlight some of the details and terms of the transaction as
announced by QCOM. We also provide some metrics for comparable companies
in
the areas of ASICs and intellectual property.
* We reit. our 1 Buy rating and price target of $120.
Qualcomm Announces Spin-Off of Its Semiconductor Business
This morning, QCOM announced it would be spinning-off its wireless
semiconductor solution business. The spinoff is expected to enable the new
spin-off company, temporarily called Spinco., to expand its positioning in
other technologies such as GSM while enabling QCOM parent to maintain its
royalty & licensing revenue streams.
Spinco. Expected To Be One of the World`s Largest Semiconductor Companies &
Industry Leader In CDMA Technologies
The new spin-off will include QCOM`s CDMA chipsets & system software
businesses, as well as HDR (1XEV) development and SnapTracs, which focuses
on
the development of wireless position location technology. Spinco. will
receive a portion of QCOM parent`s IPR portfolio of CDMA patents which will
enable Spinco. to trade these patents with other vendors in other wireless
technologies, such as GSM, so that the new chipset company may create
multi-mode, multi-band, multi-network chips. Spinco. and QCOM parent, will
have an agreement whereby Spinco. will use a portion of QCOM parent`s
patented
technology license free and in exchange, QCOM parent will be able to select
and obtain ownership of some of the new CDMA patented technologies developed
by Spinco. going forward. Spinco. will not gain royalty or licensing
revenues
from its intellectual property but will use its IPR portfolio as leverage in
the cross-licensing of additional technologies only. On the call,
management
stated that in light of the recent announcement it continues to expect to
make an announcement regarding a GSM licensing agreement by year end, in
line
with previous expectations.
The engineering team at Spinco. will include the current engineering team
from Qualcomm`s CDMA Technology Segment (QCT) which manufactures the CDMA
chipsets, as well as a team of engineers from the corporate development team
focused on HDR (1XEV) development. Additionally, the engineering team
focused
on location based technology from the SnapTracs acquisition as well as three
R&D centers in Israel, the UK and Boulder, Co. will also be assigned to the
new company.
Management of the new company will include Dr. Irwin M. Jacobs as Chairman,
Richard Sulpizio as CEO and Don Schrock (current head of the chip business)
as President and COO. Tony Thornley will serve as interim CFO.
QCOM Parent Expected To Maintain Current Royalty & Licensing Rates Following
Spin-Off Of Semi Business
Following the spin-off of the semiconductor business, the remaining Qualcomm
will consist of the licensing & royalty business, the OmniTRACS Systems
business which provides satellite-based two-way data messaging to the
trucking industry, Globalstar, and the company`s digital media business
which
is working with the motion picture industry to deliver movies via satellite.
The new QCOM will continue to develop and enhance its CDMA patent portfolio
and expects to continue to generate the same royalty and licensing rates
going
forward.
Management of the new QCOM will include Dr. Irwin M. Jacobs as Chairman and
CEO, Dr. Paul Jacobs as President, Tony Thornley as COO & CFO and Steve
Altman
as Executive VP.
Details/Timeline For the Transaction
Qualcomm plans to transfer shares of the new company to current QCOM
shareholders in the form of a tax-free dividend, with a portion of the new
company being sold to the public in an IPO. QCOM has filed an S-1 for the
IPO of Spinco. and is targeting the early fall for the IPO. QCOM expects
the
spin-off to be fully completed by August 2001.
Existing QCOM Revenue & Operating Estimates By Segment
We remind investors of our current revenue and operating performance for the
existing QCOM listed below:
Revenues (mil.) EBT (mil.) EBT
Margin
%
CY00 CY01 CY00 CY01 CY00
CY01
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CDMA Technologies (QCT) $1,200 $2,000 $385 $636 32%
32%
(CDMA Chipsets)
Tech Licensing (QTL) $725 $943 $637 $843 88%
89%
(CDMA Royalties & Licensing)
Wireless Systems (QWS) $727 $962 $237 $239 33%
25%
(OmniTRACS, Globalstar)
Adjustment $113 $175 ($ 65) ($100)
Total $2,800 $4,100 $1,194 $1,618
Comparables:
Below we highlight some of the relevant comparables in Qualcomm`s new
business structure in silicon chipsets (Spinco.) and intellectual property
(parent QCOM).
Price Rev.(mil.) P/S EPS EPS P/E
P/E
Comparables In Wireless Semis TKR 7/24 CY00E CY01E `01 CY00 CY01 `00
`01
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RF Micro Devices RFMD $76 $400 $600 10x $0.78 N/A 97x
N/A
Triquint TQNT $49 $270 $360 12x $0.65 $0.86 75x
55x
Other Comparables In Price Rev.(mil.) P/S EPS EPS
P/E
P/E
Communication Semis TKR 7/24 CY00E CY01E `01 CY00 CY01
`00
`01
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Broadcom BRCM $224 $930 $1,450 35x $0.90 $1.27
250x 175x
PMC Sierra PMCS $197 $500 $730 40x $0.95 $1.42
200x
140x
Vitesse VTSS $63 $475 $690 16x $0.73 N/A
86x
N/A
Price Rev.(mil.) P/S EPS EPS
P/E P/E
IPR Comparables TKR 7/24 CY00E CY01E `01 CY00 CY01
`00 `01
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Gemstar GMST $63 $320 $410 30x $0.52 N/A
121x N/A
Rambus RMBS $86 $80 $149 55x $0.21 N/A
400x N/A
Arm Holdings ARMHY $38 $150 $210 55x $0.11 $0.14
345x
270x
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Note: Consensus Estimates
Stock Opinion: Valuation Attractive At Current Levels, Reiterate 1 Buy
We continue to view QCOM as a core holding in wireless equipment with its
leverage to CDMA growth and the development of new data enabled wireless
networks. We believe current valuation levels remain extremely attractive
relative to other leading communications IC companies. In fact, we believe
that since QCOMs leadership position in the fast expanding wireless merchant
chip market is coupled with a rapidly expanding royalty stream, the shares
should trade at a premium to those of leading communications IC plays. We
are
reiterating our 1 Buy rating and our price target of $100-120 or
approximately
70x our CY01 Estimate of $1.30 to $135. |
