FIRST UNION SECURITIES Covers QCOM
By: FIRST UNION SECURITIES
11/3/00 7:58:25 AM
Morning Notes:
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QCOM: F4Q’00 EPS OF $0.25 – BETTER THAN EXPECTED – REITERATE STRONG BUY
QUALCOMM, Inc. (QCOM-OTC)
PRICE: $62 13/16
52-WEEK RANGE: $200-$22
KEY POINTS
-- Yesterday QUALCOMM reported F4Q’00 earnings of $0.25 per
share (pro-forma), up 4% and $0.01 above consensus and $0.02
above our estimate. Revenues were $635.4 million, down 11.3%, and
slightly below our estimate of $640.6 million. The decrease in
revenues was attributed to the on-going handset subsidy ban in the
Korea domestic market.
-- It was a somewhat sloppy quarter. Don’t be surprised if both QCOM
“lovers” and “haters” find evidence in the quarter to support their case.
-- Management said F1Q’01 orders for the domestic Korean market
are recovering. They expect phone sales in Korea are expected to
reach 2.7 million units in the F1Q’01 and F’01 sales to reach 10
million units – about the run rate of the 1H’00. Better, but not as much
as we had hoped for.
-- There is no Globalstar exposure in our estimates. There is potential
balance sheet exposure – a one-time charge of about $0.47 per share if Globalstar goes “completely
bust.”
-- We are reducing our F1Q’01 EPS estimate to $0.28 from $0.30 and our F’01 EPS estimate to
$1.30 from $1.38. Our new estimates bring us more in line with management guidance but we think
management is likely being typically conservative. We suspect our original estimates will likely be
closer to reality.
-- We reiterate our Strong Buy rating on the shares. We think investors can justify a $70 share value
based on our CAPM that assumes a very conservative set of assumptions. Our $90 price target
makes several assumptions outlined below which we don’t assume in our base case model.
KEY ISSUES
Yesterday, QUALCOMM reported earnings of $0.25, a penny above expectations and 2 cents ahead
or our conservative estimate. Revenues were below expectations but that negative variance was offset
by a mix shift toward royalties. As we expected, the quarter was a little bit sloppy. We believe that
the better-than-expected earnings were driven in large part by up-front license fees paid by an
unexpectedly large number of new licensees who signed on to pay royalties to QCOM for 3G CDMA.
This point will no doubt be camped on by investors who have traditionally been negative on QCOM
shares. On the other hand, the company gave an upbeat view of F’01.
In their outlook, management said they are seeing order flow indicating that demand in the domestic
Korea market has returned to early 2000 levels.
There is no exposure to Globalstar in our estimates or in management’s guidance. Management
confirmed that balance sheet exposure to Globalstar is about $618 million, or less than $0.50 per
share. If Globalstar were to default, what we think QUALCOMM is likely to do is take a one-time
write-off, which we think most investors have already factored into their expectations.
We reiterate our Strong Buy on the shares for five reasons:
1) We think the risk profile of the shares is falling. QCOM shares may be incresingly viewed as the
proxy for the overall growth of the wireless industry because of their patent and royalty position. The
company is positioned to collect royalties on much of the next generation of equipment because
most of it will be based on some form of CDMA.
2) There is virtually no revenue from China built into our model. QCOM management’s guidance
apparently includes 1-2 million subscribers in China in the second half of fiscal ’01. Our previous
model assumed 5 million. We believe there is strong evidence that China, through China Unicom, is
preparing for an aggressive nationwide build-out. China is potentially the world’s largest wireless
communications market, and we believe we have been very conservative in modeling growth of CDMA
in China.
3) We have assumed, just to be conservative, in our models that QCOM gets no marketshare of the
demand for W-CDMA marketshare. QCOM management said their target is 50% marketshare of
W-CDMA chips.
4) We have confirmed that several TDMA and iDEN carriers are looking at implementing CDMA2000
1x instead of previously announced migrations to EDGE or W-CDMA. This is not contemplated in our
estimates or valuation models.
5) We think the demand for new 3G services and technology could be stronger than expected. The
experts have consistently underestimated the demand for wireless communications and we think that
the experts could be surprised at how popular new multimedia 3G services will be with consumers.
Consequently, we suspect we are underestimating the demand for 3G CDMA technology.
Upfront fees for new licenses and license renewals could contribute to earnings over the next several
quarters. QCOM signed up 28 new licensees in F’00 and has already signed up 8 in the first month of
F’01. Most of these licensees pay multimillion dollar upfront license fees.
OUTLOOK
Management guidance for F1Q’01 – they expect QCT to ship 14 million MSM chips and suggested
flat year-over-year revenue. Management indicated its comfort with the current EPS consensus of
$0.28.
Management attributed the expected sequential increase in MSM shipments to higher expectations
for the Korean domestic market. The company expects Korean handset sales to reach 2.7 million
units in F1Q’01 and 10 million units in calendar 2001. This represents a significant change from
previous expectations. The company forecast the CDMA handset market at 90 million units for
calendar 2001, up 50% from the company’s calendar 2000 estimate.
Management said it is not aware of any other company in the market offering samples of CDMA2000
1X chipsets for either handsets or infrastructure. Management also indicated that it is expecting to
maintain its chip market share in 2001 for CDMA technologies, which suggests to us that
QUALCOMM is perceiving Nokia’s CDMA handset efforts as underperforming. (Nokia is currently one
of the only companies that does not purchase CDMA chips from QUALCOMM.)
We believe ASPs in the chipset business could be flat as the company begins commercial sampling
and ramp of its 1X chipset. Management indicated ASP erosion at the end of September was about
10% on annualized basis. Historically, ASPs were expected to erode 15-20% annually. Lower ASP
erosion would be positive for QCOM.
Management said that at the end of the quarter the company’s exposure to Globalstar (GSTRF) was
about $618 million (<$0.50 per share). This exposure continues to decline as Globalstar continues to
make payments to QUALCOMM. The exposure is reflected in the balance sheet only (i.e. no impact
on the income statement). The company has taken no reserves to date as it does not expect
Globalstar to fail. Our estimates assume Globalstar does in fact fail and we expect that the company
will take a write-off and move on. We are being conservative.
We reiterate our Strong Buy rating on the shares. We think the shares are attractive because there
are so many potential positive announcements that could lift earnings expectations over the next
several quarters.
REVIEW
Yesterday QUALCOMM reported F4Q’00 earnings of $0.25 per share (pro-forma), up 4% and $0.01
above consensus and $0.02 above our estimate. Revenues were $635.4 million, down 11.3%, and
slightly below our estimate of $640.6 million. The decrease in revenues was attributed to the on-going
handset subsidy ban in the Korea domestic market.
QCT. FQ4’00 ASIC shipments decreased sequentially, as expected, to nearly 11.3 million units.
Revenue for the QCT segment was higher than expected at $269 million versus our estimate of
$253.3 million. The segment shipped more than 11 million MSM chips during the quarter, versus 14
million in the year-ago quarter. The decline in MSM shipments reflected the on-going handset
subsidy ban in the Korea domestic market and was in line with management’s guidance at the end of
F3Q’00.
The company shipped 1X MSM and CSM chips for SK Telecom’s launch of the world’s first
cdma2000 1X network. This SK Telecom network has demonstrated a near doubling of voice capacity
and data rates exceeding 140 Kbps.
QTL. The QTL segment (licensing and royalties) reported revenue of $186.1 million, above our
estimate of $170.6 million. The upside to revenues was due to additional licensing agreements for
3G. During the quarter the company entered into eight new licensing agreements, bringing the
cumulative total to greater than 90. The company also signed 13 R&D agreements with Chinese
manufacturers in the quarter. Approximately 20 companies have extended, or entered into, 3G
licensing agreements with QUALCOMM.
QWS. Segment revenue was $150.5 million, below our estimate of $184.6 million. The company
shipped approximately 12,000 of OmniTRACS units and related products, down 20% from FQ4’99.
The segment also shipped about 28,000 Globalstar (GSTRF) handsets. The variance from our
segment revenue estimate was attributed to the unwinding of the company’s development contract for
the Globalstar system.
Margins. Pro forma gross margin and operating margin for the quarter were 63.3% and 38.3%; we
had estimated 61.5% and 37.1%, respectively. Gross margin variance was mostly due to a higher
mix of royalties (which are very high margin). Operating expenses were generally in line with our
expectations.
Additional information is available upon request.
First Union Securities, Inc., maintains a net trading market in QCOM. An author of this note owns
stock in QCOM. QUALCOMM is on the Analyst Action List. |
