OPINION
There are two news stories today that highlight the positive news momentum
for QUALCOMM. First, China Unicom announced that it had signed $1.5 billion
in 2G CDMA contracts with 10 vendors. Second, Nextel repeats its CDMA
technology choice.
UNICOM CONTRACT - FINALLY
The Unicom deal is an obvious positive for QUALCOMM as CDMA breaks into the
huge China market. Today's announcement is another positive step in the
right direction for CDMA getting deployed in China. We believe this
announcement by Unicom is a positive for QUALCOMM given the speculation that
began to arise about 2 weeks ago when Unicom suddenly postponed the signing
of its infrastructure contracts in front of a major Chinese holiday with no
explanation.
In three separate press releases today, Motorola, Ericsson and Nortel
announced the specifics of their contracts. We believe Lucent and Samsung
represent the other major infrastructure vendors as well as several local
Chinese vendors. Ericsson was awarded a $200 million contract for the supply
of an end-to-end network in 7 provinces. Motorola was awarded a $407 million
contract for the supply of infrastructure in 11 provinces (including
Beijing). Nortel's contract was valued at $275 million for the supply of
infrastructure in 6 provinces. Motorola, Ericsson and Nortel have all
indicated they expect deliveries to begin immediately with commercial service
to begin in 4Q01.
Although press indications suggest CDMA could be commercial before the end of
this year in China, we continue to remain a bit more conservative with
respect to the timing of Unicom's commercial launch of its CDMA network. We
continue to treat CDMA in China as upside to 2001 for QUALCOMM and we would
be pleased even with partial shipments and deployments this year and a
commercial launch in 2002.
The impact to QUALCOMM's numbers is a moving target. However, there are a
few things to keep in mind. The first is that a majority of the future
royalty impact from China will come from the sale of mobile phones. The
second is the royalty impact from the network buildout depends upon the
vendors that are awarded the contract. The royalty impact from the vendors
involved is: Ericsson (pays no royalties based on their "paid-up" license
which they signed in conjunction with the purchase of Qualcomm's
infrastructure unit); Nortel (pays roughly the industry average for CDMA
royalties); Motorola (pays a lower than average industry rate on the 2G
standard, however they pay roughly the industry rate on future generations of
CDMA); Lucent (pays a lower than industry average royalty rate); Samsung
(pays roughly the industry average rate on CDMA); and, the local Chinese
vendors (pay lower than industry average rate for anything manufactured and
shipped within China and they pay roughly the industry average rate for all
CDMA equipment that is exported). We believe the royalty impact solely from
this contract (depending on the remaining pieces and does not include any
handset impact) could be worth $0.01-$0.02 per share for Qualcomm, which is
upside to our model in CY01.
NEXTEL CDMA RUMBLINGS HEARD AGAIN
Nextel seems to have indicated yet again its preference for migrating to CDMA
from its current iDEN technology. The Nextel commitment to a CDMA overlay to
its current iDEN network represents a new customer for the CDMA technology,
further expanding CDMA's reach in the U.S., which now represents the largest
CDMA market in the world. Also, Motorola, which is the sole supplier to
Nextel for iDEN, is well positioned to win infrastructure and handset
business.
CATALYSTS REMAIN IN PLACE
We reiterate our 1H on QCOM as we feel the company has both near-term
catalysts (i.e. 1XRTT rollouts, 1X market share gains in chipsets and CDMA in
China) as well as long-term catalysts (i.e. all 3G networks are based on its
CDMA technology).
from SSB |
