All kinds of interesting trends outlined in this research piece...thanks to janust2000 over on the Yahoo thread.
Salomon Smith Barney ~ August 10, 2001
As of 08/11/2001
QCOM: 1XRTT Updates from S. Korea: Early Signs are Positive
TELECOMMUNICATIONS EQUIPMENT
T.C. Robillard Jr. and Karen O. Nielsen
SUMMARY
* XRTT is one of the key drivers for QCOM over the next 12-18 months and we wanted to provide an update with some early datapoints from S. Korea.
* Total 1X subs at the end of July were approx 685K, with SK Telecom owning the lion's share with 610K. Based on July's net add run rate we believe 1X subs could represent roughly 10% of S. Korea's base by mid 2002.
* 1X tariffs are roughly W6.5 (US$0.005) per packet (512 bytes) and W2.5 (US$0.002) per multimedia (e.g. video). SKT reported a data ARPU premium of W3,500-W4,000 (US$2.75-3.00) per month since May 2001.
* Samsung is offering 2 1X handsets with color displays. Its 210 model (currently available in most stores) is retailing for W500K (US$390). Its 200 model, which is expected to be available in Aug, is est at W650K-700K ($US$500-540). New handset prices typically decline 20% w/in first 6 mos.
* We reiterate our 1H (Buy) rating.
1XRTT A KEY CATALYST - EARLY DATAPOINTS ARE POSITIVE
One of the key catalysts to QUALCOMM's story over the next 18 months is the success and take up of 1XRTT around the world (the other key catalysts include CDMA service launch and subscriber take-up in China and the need for Nokia to use QUALCOMM's CDMA ASICs). 1XRTT services, which are currently available in South Korea, are also expected to be in commercial deployments over the next 6-12 months in the U.S., Japan, Brazil, Mexico and New Zealand. We wanted to provide an update and several data points on South Korea's 1XRTT rollout to date.
SUBSCRIBER TAKE-UP AND SERVICE PROVIDER ESTIMATES FOR 2001
There are 3 service providers in South Korea (SK Telecom, KT Freetel and LG Communications), all of which are currently providing 1XRTT services. SK Telecom launched its service in December 2000, while KT Freetel and LG Communications launched in May 2001.
At the end of July there were approximately 685K 1XRTT subscribers in South Korea. SK Telecom holds the lion's share of these subscribers (610K), while KTF has roughly 50K and LG has roughly 25K. SK Telecom recently maintained its YE01 estimate of 1.8-2.0 million 1X subscribers, which based on July's net add run rate of 240K, we believe the company should be able to achieve its goal. KTF is targeting 760K 1X subs by year-end, which we believe based on its current base of 50K is likely to be overly optimistic.
Based on the current net addition run rate we believe 1XRTT could represent at least 10% of South Korea's subscriber base by mid 2002, a very solid ramp within the first 15-18 months of service.
SERVICE OFFERINGS - COSTS, ARPU'S, APPLICATIONS AND TRANSMISSION SPEEDS
One of the biggest concerns for 1XRTT (as well as GPRS) is not only the availability of handsets and the take-up of the service but also the application offerings. The consistent question asked is "what are the applications going to be that will drive wireless data service adoption?" It is still too early to in the lifecycle of mobile data services to get a clear answer, however we highlight the various applications being offered in South Korea today on 1X networks.
The most popular 2G data services to date (which we expect similar offerings on 1X) are (in order):
(1) cartoon or character download;
(2) games;
(3) ringtone downloads;
(4) MSN (Miscrosoft portal);
(5) Daum (Korean portal); and
(6) mobile chat.
The introduction of color screen handsets (discussed in greater detail below) should continue to drive many of these data services in 1X.
As far as the tariffing is concerned, all three operators have roughly the same pricing. 1X tariffs are being billed based on packets rather than the traditional voice tariff of billing for airtime. As of April 2001, the 1X tariffs were roughly W6.5 (US$0.005) per packet (512 bytes) and W2.5 (US$0.002) per multimedia (e.g. video). ARPU's in South Korea have increased 10% YTD, which we believe is largely due to the launch of 1X and other data services. SK Telecom reported a data ARPU premium of W3,500-W4,000 (US$2.75-3.00) per month since May 2001 and has indicated that data revenues accounted for 1.6% of total revenues in 1H01.
KTF has seen similar success, despite a much lower 1X subscriber base, with data revenues representing 1.9% of total revenues in 1H01.
The network transmission speeds (as reported by the operators) are estimated at roughly 50-80 kbps. Although this is roughly half of the peak burst rates of 144 kbps we believe this figure represents average throughputs speeds and is still 3-6x faster than IS-95A data rates and 2.5x-4.0x faster than average throughputs of GPRS.
HANDSETS - COLOR DISPLAYS COULD BE THE NEXT FRONTIER
There are currently several 1X handsets available in South Korea from Samsung, Sanyo and Motorola (which began initial shipments earlier this quarter). LG had planned to launch a handset in July, however we have not received confirmation yet whether its handset is available in stores. Samsung is offering 2 1X handsets with color displays. Its 210 model (currently available in most stores) is retailing for approximately W500K (US$390). Its 200 model, which is expected to be available in August and has Video On Demand capabilities, is expected to retail for approximately W650K-700K ($US$500-540). In the past, new handset models in South Korea typically decline by 20% within the first 6 months, therefore we expect Samsung's 210 model to be retailing for roughly W400K (US$315).
1XRTT CAP EX PLANS
Sk Telecom appears to be the most aggressive of the operators with respect to building out its 1XRTT network. SKT estimates it will spend W1.7 trillion (US$1.3 billion) in 2001 and 2002 on 1X to cover 79 cities, which will account for 80% of the total population. SKT also plans to spend W300 billion (US$230 million) on 1XEV-DO by May 2002. KTF estimates it will spend W410 billion (US$315 million) in 2001 and 2002 to cover 23 cities, which will account for 70% of the total population. LG is planning on spending roughly W200 billion (US$150-160 million) on its 1X rollout.
WCDMA IS DELAYED
SK Telecom and KT Freetel, holders of UMTS spectrum, have both indicated that WCDMA rollouts in 2002 are unlikely and 2003 is also uncertain.
We believe this bodes well for 1XRTT as the operators will continue to focus their efforts, and more importantly their capital, on deploying the service.
VALUATION
We continue to believe QUALCOMM is the best positioned company to benefit from the migration to next-generation wireless technologies, which are all based on its CDMA technology. We continue to feel the momentum and newsflow are currently moving for QUALCOMM, not against it, given:
1) the continued progress for CDMA deployment in China;
2) 1XRTT deployments, subscriber take-up and handset sales in South Korea, Japan, U.S., Mexico, Brazil and New Zealand over the next 6-12 months; and,
3) 1XRTT chipset market share gains at Motorola (who plans to use QUALCOMM;s chips in 100% of its 1XRTT handsets) and possibly Nokia.
We have looked at QUALCOMM's valuation using 3 different metrics, including trailing P/E multiple, relative forward P/E multiple and a sum of the parts. Over its history QUALCOMM has traded at and average trailing P/E of roughly 85x and a forward P/E relative to the S&P500 of roughly 3.1x. Based on these 2 metrics we believe QUALCOMM's stock can trade between $75-$89. Using the sum of the parts we have arrived at a valuation of its royalty business of $63 per share (using a 10 year DCF with a 12% discount rate and a 20x terminal multiple) and a valuation for its ASICs division of roughly $12-15 per share. Based on this metric we believe the company's shares can trade between $75-78.
Our $75 price target conservatively assumes the low-end of the range of these valuation metrics. |
