QCOM: ASIC Spin-off is Good News
Qualcomm Inc(QCOM)*
Rating: 1H
As of 07/26/2000
Last Changed 03/31/2000
Salomon Smith Barney ~ July 26, 2000
QUALCOMM, Inc. (QCOM)
QCOM: ASIC Spin-off is Good News 1H (Buy, High Risk)
Mkt Cap: $50,993.1 mil.
July 25, 2000 SUMMARY
* Tues AM, QCOM announced plans to spin off its chip
TELECOMMUNICATIONS business in an IPO creating 2 cos: a chip company
EQUIPMENT ("Spinco") & a royalty company (Qualcomm).
Alex M. Cena * We believe this separation of businesses is positive
for the company and for shareholders for several
reasons: 1) it reduces the need for cross licensing by
Karen O. Nielsen the royalty/licensing part of the company and improves
the access to third party technology for the new chip
business; 2) it eliminates licensee/ASIC customer
Thomas Robillard conflicts who now deal with one company for chips and
JR another for royalties; and 3) creates greater strategic
focus for both new companies.
* Revs for the new chip biz were about $1.1 bn in F99 &
$1.3 bn for the royalty company. EBT in F99 was 38.5%
for chips and 57% for royalty company.
* The new structure does not affect exisiting royalties in
any way.
* We continue to rate the stock a 1-H and believe the
market will continue to respond positively as the
details of the spin are digested.
FUNDAMENTALS
P/E (9/00E) 60.6x
P/E (9/01E) 47.1x
TEV/EBITDA (9/00E) NA
TEV/EBITDA (9/01E) NA
Book Value/Share (9/00E) NA
Price/Book Value NA
Dividend/Yield (9/00E) NA/NA
Revenue (9/00E) $2,986.3 mil.
Proj. Long-Term EPS Growth 0%
ROE (9/00E) 113.8%
Long-Term Debt to Capital(a) NA
QCOM is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (7/24/00) $63.63 Current Rating 1H
52-Week Range $179.31-$35.00 Prior Rating 1H
Shares Outstanding(a) 801.4 mil. Current Target Price $200.00
Convertible No Previous Target Price $200.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
9/99A Actual $0.08A $0.10A $0.19A $0.23A $0.62A
9/00E Current $0.26A $0.26A $0.27E $0.26E $1.05E
Previous $0.26A $0.26A $0.27E $0.26E $1.05E
9/01E Current NA NA NA NA $1.35E
Previous NA NA NA NA $1.35E
9/02E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 9/00E $1.03; 9/01E $1.30; 9/02E NA
Calendar Year EPS: 12/99A $1.70; 12/00E NA; 12/01E NA; 12/02E NA
QUALCOMM PLANS TO SPIN OFF ITS ASIC BUSINESS IN AN IPO
The company's current plan is to transfer its ASIC business to newly formed
SpinCo. The shares of Spinco would be distributed to QCOM stockholders in
the form of a tax-free dividend. The tentative time frame is as follows: the
S-1 has already been filed. An IPO of 10% of the company would take place in
the fall. The remaining distribution to shareholders would take place in the
spring/summer time frame of 2001. The spin off is expected to be completed
by August 2001 at the latest.
WE BELIEVE THIS BUSINESS SEPARATION IS POSITIVE FOR THE
COMPANY AND FOR
SHAREHOLDERS
We continue to believe that the separation of the businesses makes sense for
the company and shareholders for several reasons. Foremost, the separation
of the two businesses creates separate ASIC and royalty companies. Thus,
licensees won't have to pay the same company for royalties as well as for
chip purchases, which has created conflict in the past among licensees. This
independence should further enhance the chip business, which is already the
largest chip supplier of CDMA ASICs having shipped more than 100 million CDMA
chipsets. Second, Spinco will have more effective access, through its
ability to cross-license, to third party technology such as GSM to enter the
multimode chip business. Third, both companies get greater strategic focus.
SPINCO BECOMES THE NEW CHIP COMPANY
Spinco will inherit Qualcomm Technologies (the chip business), HDR products,
Positioning Location products (SnapTrack) and 1000 engineers. In lieu of
paying a royalty fee to Qualcomm, Spinco will receive credits in exchange for
which they will provide Qualcomm with additional patents that Qualcomm can
then license. Spinco will be assigned a portion of QCOM's patents that are
essential and/or necessary to implement CDMA standards so that it can gain
reasonable access to third party intellectual property and to negotiate
cross-licenses.
EBT margin for first 9 months 2000 is estimated at 37% on 9 month revenues of
$965 million. Revenues for the end of fiscal 1999 were $1.1 billion with an
EBT margin of 37.8%.
With independence, Spinco becomes a pureplay wireless ASIC and software
company with unparalleled CDMA knowledge and expertise. According to
Dataquest, Spinco is the largest fabless semiconductor company in the world.
The new company's goals are to be an end to end CDMA systems supplier (in
addition to the chips, providing RF designs, software, applications support,
design help, etc.); expand their capabilities; enter the multi-mode chip
business (CDMA2000, WCDMA, GSM, and TDMA); and continue its technology
leadership. Spinco's focus will include developing innovative ASICs and
software solutions for handset and infrastructure providers.
QUALCOMM BECOMES THE NEW ROYALTY COMPANY
Qualcomm will inherit the licensing business, OmniTRACs, Globalstar, and
Eudora as well as Position Location IPR (SnapTrack) and 800 engineers.
Qualcomm's focus is on developing and supporting the growth of CDMA
technology and the integration of data/Internet with the goal of increasing
royalties.
EBT margin for first 9 months 2000 is estimated at 57% on 9 month revenues of
$1.2 billion.
Qualcomm's goals are to drive CDMA market growth; increase the number,
breadth and variety of licenses; and reinvest revenues in technological
development. With independence, Qualcomm reduces its need for cross-
licensing; eliminates conflicts with its customers; gains greater strategic
industry impact and greater management focus. Qualcomm's patents cover all
3G technologies including CDMAOne, HDR, TD-SCDMA (China), WCDMA, and
CDMA2000. The royalty fees are the same independent of technology. After
the spin off of the chip business, Qualcomm will retain more than 1000
patents and patent applications, substantially all of which are essential to
or useful in CDMA applications. Moreover, QCOM will have the right each year
to select and receive ownerhsip of a portion of Spinco's patent applications,
which should enable QCOM to extend the terms of its licenses and create new
licensing opportunities.
THE SPIN OFF CREATES NUMEROUS BENEFITS FOR BOTH NEW
COMPANIES
There are several benefits of the spin. These include:
(1) Reduces need for cross-licensing. Since QCOM will no longer be producing
ASICs, there won't be much need for third party cross-licenses to develop
multi-mode ASICs. Any potential cross licensing net payment reduction risks
are thus minimized. Likewise, Spinco gains more effective access to third
party technology.
(2) Eliminates Customer/Licensee Conflicts. As both a licensor and ASIC
supplier, QCOM's two businesses are also in conflict. As more independent
entities, this potential conflict is reduced. Customers can go to Spinco for
chips and to Qualcomm for royalties.
(3) Greater Strategic Focus and Impact. The two separated companies will
gain greater strategic focus. SpinCo can focus on ASIC development and
innovation while QCOM can focus on the expansion of CDMA technology
worldwide. |
