Thomson Investors News, August 9, 2000....http://www.thomsoninvest.net/private/cgi-bin/news_story?story=222u8136
New York, Aug 09, 2000 (123Jump via COMTEX) --
Qualcomm (NASDAQ:QCOM), once a darling of hi-tech investors, is on the upswing once again. Not only has it posted solid 3Q earnings, its CDMA patents have been upheld across the world and and it has formed a joint venture with Ford to enter the telematics market.It has also initiated divestiture of its chip manufacturing division that could add billions in market value to Qualcomm. Though the days of Qualcomm stock flitting about the $200 level are over, it is still an excellent company for any wireless investor.
About Qualcomm
Qualcomm develops, manufactures and licenses digital wireless communication products based on its Code Division Multiple Access (CDMA) technology. The CDMA technology has been licensed to over 80 leading communications manufacturers worldwide. Over 41 million people use phones based on the CDMA technology, and due to its superior quality and flexibility, W-CDMA - a version of CDMA, is emerging as the recognized global standard for third-generation digital wireless communications. The company's portfolio also includes the OmniTRACS truck tracking system, High Data Rate (HDR) technology and Eudora Email. Qualcomm has partnered with Globalstar L.P. (NASDAQ:GSTRF) to make Globalstar Satellite Phones. However, on July 25, Qualcomm announced that it was spinning off its CDMA chip production into a separate entity, tentatively entitled Spinco. Qualcomm is headquartered in San Diego, California, and has 13 offices around the world.
Financials
Qualcomm reported revenues of $714 million for the third quarter of fiscal 2000, an increase of 11% compared to $645 million in 3Q 1999. Excluding $64 million in ongoing amortization of goodwill, $7 million in employer payroll taxes and the results of exited businesses, earnings per share were 27 cents for 3Q 2000, up 23% from 3Q 1999. Earnings before taxes were $352 million, up 47% from $239 million. Net income was $218 million, 40% higher than the $156 million in 1999.
For the first nine months of fiscal 2000, EPS was 80 cents and net income was $635 million. This represents an increase of 45% in EPS and a 72% increase in net income, compared to the first nine months of fiscal 1999.
CDMA
The potential revenues from CDMA and its next generation cousin W-CDMA, are huge. The Strategis Group predicts that the number of mobile subscribers will reach one billion by 2003, from 530 million today. Currently, approximately 8% of subscribers worldwide run on the CDMA standard.This percentage will rise since most wireless service providers are switching to Third Generation (3G) systems that use the W-CDMA standard. In addition, most phones are now CDMA capable, even ones sold in GSM dominated Europe, in order to facilitate roaming in CDMA jurisdictions such as the U.S. Though the company does not disclose royalty rates, Prudential Securities analyst Pete Peterson estimates that Qualcomm collects about 4% of the price of every CDMA capable cell phone sold. This royalty percentage will drop slightly with the switch to W-CDMA, since many different companies have contributed to the development of W-CDMA. CDMA royalty revenues in 3Q 2000 were $174 million, up 38% from the prior year's period.
CDMA is a digital technology pioneered by Qualcomm that provides crystal clear voice quality for digital and next-generation wireless communications systems. CDMA uses spread spectrum technology to break up data into small, digitized segments and encode them to identify each call. A large number of users can thus share the same band of spectrum and greatly increase system capacity. CDMA thus allows wireless service providers to squeeze more digital signals into a particular slice of the radio network, reducing service providers' costs.
However, CDMA is not the standard throughout the world - the Global System for Mobile communications (GSM), a digital communications technology developed in the early 1980's to allow for roaming throughout Europe - is much more prevalent than the CDMA standard in Europe and Asia.
Though GSM is more widely used, CDMA offers significant advantages over GSM. First and foremost, CDMA allows more subscribers to share the same radio frequency. The technology is so effective, that CDMA networks can provide 10 to 20 times the capacity of analog networks and more than three times the capacity of other digital platforms. Thus, CDMA requires fewer base stations to cover a particular area, thereby lowering costs for operators and consumers. Secondly, CDMA has superior outstanding voice and call quality. Thirdly, CDMA enabled phones have longer battery lives, improved security and privacy and lower background noise than other systems. Finally and most importantly, CDMA networks are based on standard IP packet data protocols. It therefore costs less to upgrade CDMA networks for wireless Internet than GSM, and it is easier to provide enhanced services such as short messaging, e-mail and Internet access.
2 = 1.5 + 1.5?
Though Qualcomm posted solid 3Q results and met analyst expectations, the big surprise was Qualcomm's announcement that it will be spinning off its chip manufacturing business into a company tentatively named Spinco. While under normal circumstances splitting a company should have no more effect on the value of a company's stock than cutting a cake in two, Qualcomm's spinoff could result in 2 = 1.5 + 1.5 and has boosted Qualcomm's languishing stock price.
The divestiture of Spinco enables Qualcomm to separate two business segments that possess very different business profiles. Qualcomm will focus on its own CDMA technology while the spinoff company will concentrate on wireless communication integrated circuits and systems software and products.
Qualcomm is set to benefit from this spinoff. The largest benefit is the separation of the royalty and chip segments. Qualcomm previously had to pay cross-licensing fees to manufacture chips for phones on the competing standard, GSM, which has drained licensing fees for CDMA. Moreover, licensees will not have to pay for royalties and purchase chips from the same company, which has created conflict in the past with Qualcomm's customers. Also, Spinco will more easily be able to cross-license technologies and enter the multi-mode business since it will not be directly competing with the GSM or other standards. Thus, Spinco will be able to tap the huge European and Asian mobile-phone chip markets where the GSM standard, not Qualcomm's CDMA standard, rules. Finally, both companies will gain greater strategic focus.
An additional benefit for Qualcomm is that it will be divesting itself of a slower growing, more commodity-like business. Qualcomm's technology segment, which mainly earns royalty payments from its CDMA patents, is growing very rapidly. In the latest quarter, the segment reported revenue growth of 38% year-over-year. Also, since royalty revenue incurs very few expenses, pretax margins were an impressive 87%. On the other hand, the company's chip-set business is involved in the commodity-like semiconductor industry. In the latest quarter, this segment's revenue only grew 6%, year-over-year, despite shipping a large volume of chips. More importantly, pretax margins fell to 32%,causing a decline in the division's profit of more than 15%.
In terms of sales, Qualcomm and Spinco will be approximately the same size. Spinco generated approximately 47% of Qualcomm's $713.5 million in revenue for 3Q 2000. However, since Spinco is a manufacturer and generates higher expenses than licensing, it only accounted for 31% of Qualcomm's $351 million 3Q earnings (before tax). In fiscal 1999, the Spinco unit accounted for $1.15 billion of Qualcomm's nearly $4 billion in revenue.
Qualcomm's spin off of Spinco has the potential to create value for Qualcomm's shareholders. Compared to Texas Instruments' (NYSE:TXN) and Broadcom's (NASDAQ:BRCM) market value and P/E ratios, Qualcomm's semiconductor business can have a value of $25 to 40 billion. If Spinco is compared to wireless chip designers such as RF Micro Devices, Spinco would have a value of between $10 and $20 billion. The remaining segments of Qualcomm would have a market value between $40 and $60 billion, since it would possess higher profit margins and lowering costs.
Thus, Qualcomm and Spinco, after the spin off, would be worth between $50 and $100 billion, whereas Qualcomm had a market capitalization of $46.5 billion before the merger announcement.
Best wishes,
REM55 |
