TMF (long) post: Taking Stock
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At the beginning of the year I posted an assessment of some of the key things that I thought were critical for Qualcomm this year (must do’s in 2002 boards.fool.com in order to keep/improve its share price in the current market. I have been using that list as a reference by which to evaluate the company’s performance, as well as related developments that affect its bottom line. While we’re only one quarter into the year, I thought it might be useful to review where we stand, and place certain recent events, especially the Unicom confusion, in context.
My starting point for my new year wish list was that while the long-term story remains strong as ever, I believe that this market has no patience for the longer-term stories. ..This market will reward companies that show real actual growth in earnings. We need strong growth, sustained growth, and an occasional positive surprise will not hurt. Hence, my basic premise was that 2002 will ride on selling chipsets, first and foremost., and that for 2002 and 2003, our market valuation will ride on how well CDMA operators are doing in their respective markets, and the realization of the much-touted advantages promised through 1X.
So, how well are we doing? We have been told when Qualcomm confirmed guidance for this quarter that QCT is ahead in chipsets for this quarter, particularly 1X chipsets where it was about 1 Million ahead of original projection. This extra million confirms a healthy growth trend for 1X, summarized below (from a recent presentation by Don Schrock, at qualcomm.com
Q3 ’01 1M
Q4 ’01 4M
Q1 ’02 6M
Q2 ’02(est) 8M
1. In the US, we need stronger dominance by Sprint and Verizon over the recent GSM converts, AT&T and Cingular (most likely tying the knot with Voicestream). This year and next are likely to be a time of maximal advantage for the CDMA carriers over the TDMA to GSM converts.
So far so good. The last quarter’s numbers showed Sprint way ahead of the pack, as was Leap& Wireless (not a national player though, but excellent growth record in regional local-wireless service), Verizon holding its own—but that did not yet reflect the 1X factor boards.fool.com. While Sprint has cut its growth numbers, they would still be ahead of the competition if these materialize. Cingular seems to be struggling more than ever, and AWE is arrogantly playing catch up. Cingular, AWE and Voicestream infrastructure sharing deals for GSM/GPRS build out is another sign of weakening fundamentals.
What has been the brightest surprise is that Verizon has been making all the right moves this quarter. They have introduced 1X in key markets ahead of schedule, and have created awareness, especially in the business market. They have received glowing reviews so far from most popular magazines’ technology reviewers about the quality of the service where deployed. We have not yet seen numbers for new adds, but I expect respectable numbers. Another positive development for Verizon have been their 1X EV/DO trials in two key markets, San Diego and the DC area. Sprint is still on track for June launch of 1X, and has been very effectively populating its system with 1X handsets since November.
So for the US players, I would say we’re on target, with some positive surprises from Verizon. But the industry as a whole has been perceived as weakening, and it is too early in the year to see anything for sure.
2. We need a glitch-free CDMA launch in China, and no serious delays. This may be a tall order, but a lot is riding on it. In congested China markets, CDMA has been positioned as a “premium brand” of sorts. It needs to deliver. Crystal-clear voice is not enough; decent coverage in the deployed markets needs to be there.
Hmmmm… I will admit that what I was concerned about when I wrote this at the beginning of the year was the technology. I was dead worried that Motorola would screw CDMA yet again. But then Unicom’s and Motorola’s engineers, probably with help from the Koreans and Qualcomm, tested, retested and fine-tuned the system. So the launch was essentially glitch-free technologically.
Little did I think that China is a developing country after all, and that they would screw up the supply chain logistics and the marketing/positioning of the service. What a dismal job! I don’t know what how MBA’s from Beijing University are trained, but while the engineers came through with flying colors, the business folks blew it—that’s all. This is where you really see the difference with the way Sprint seems to be handling, with 1X handsets in the stores six months before service launch (in all fairness, upgrade to an existing system is entirely different from launch from scratch).
On the other hand, as several had noted, Qualcomm has been extremely conservative in recognizing much revenue from China in the first half of this year, so there is still hope. My own numerical expectations in my new year post are still attainable:
I would like to see at least 1 to 2 Million and accelerating take up by the middle of the year, with upwards of 5 Million by year-end.
There is still time to make at least the 1Million mark, especially with the new plans and concerted effort at marketing and ensuring handset availability.
3. Korea has been a great driver, and the single biggest bright spot for 2001.
So what to wish of Korea? Remain the beacon of light that has kept hope alive in the dark days of 2000 and 2001.
What more can I say? If I knew the Korean national anthem, I would sing it! Korea has continued to give every indication of 1X take up, 1X EV/DO success, 3G service introduction and use, higher ARPU for data users. It is validating the business case for data services and 3G in ways that exceed all expectations.
4. KDDI must be a success—period, no excuses! Other than the US, Japan is the single most important market where the technologies compete.
If they do not flourish it will weaken the global case for 1x. If they succeed, it will generate chipset sales, and promote higher-end handset development for CDMA.
That is the next big one. Promoted for April 1 launch, we’ll see soon enough. KDDI seems to have convinced investors that it has something up its sleeve in the realm of data services, as its stock has been bid up recently. The marketing side seems to be strong—just have to keep our fingers crossed that Motorola does not mess things up again (after the delay from initial intended launch).
5. Korean telecom firms (infrastructure vendors and service providers) could be a great catalyst in relatively new and less-developed markets.
However, markets like Vietnam, North Korea, Cambodia—generally poorer countries with messy political pasts (and in some cases present) and underdeveloped infrastructure are part of the next frontier.
We have recently had an announcement about a likely deal for North Korean CDMA, delivered by a consortium of Korean telecom leaders. So on target with this one.
However, I am personally not too hopeful about India: it has the messiest obstructionist bureaucracy anywhere… so I'm leaving it out of my book for 2002.
This may be a positive surprise. Dr. J. certainly seems to think it’s the next big break after China. I’ll still leave it out for 2002.
6. In a best-case scenario, we would see successful launches and operation in the Eastern European markets where 1X is being introduced in the 450MHz frequency band. Romania, Bulgaria and Russia.
Moving right along with these.
7. Latin America will remain a battleground between CDMA and GSM in 2002. If the US is any indication, we may end up with a roughly 50-50 split, though the hope is that if item (1) on this wish list were to materialize, then the Latin operators will not make the same mistake as Cingular.
Recent good news on that front linked by Talksfree about Bell South and Verizon converting South American properties (http://boards.fool.com/Message.asp?mid=16955024).
8. In the wish-list category, though this is not directly critical to this year's bottom line, I would like to see a successful all-data CDMA-based service take hold someplace.
Is there a business case for a CDMA-based data service, most likely using EV-DO or even enhanced 1X?
Check out Monet Mobile. Monet is an all-data wide-area CDMA 1X network doing very well in Sioux Falls, South Dakota. Forbes recently did a feature on their service, and gave them a glowing review (http://www.forbes.com/best/2002/0325/002.html)-- but the business case is far from conclusively established though.
9. Under the other businesses, I noted, about BREW, that I continue to view BREW as an enabling service, rather than an end product or major direct profit generator. … Successful adoption by a couple of major carriers would help the general cause of 1X and wireless data services—
I may have underestimated BREW. With Verizon, KDDI, Korean operators, the confusing Q-Chat deal with Nextel, Qualcomm may have a surprise winner here.
Having just gone over my must-do’s, I will note TWO NEW MAJOR POSITIVE SURPRISES thus far:
A. GSM1X—this one blew my mind! Out of the blue goes Dr. J. to Cannes to announce GSM1X. It is significant on so many different levels. Not sure it will contribute anything to the bottom line this year, or may be never in its direct form. But it opens the door for many possibilities, and gives Qualcomm an entry door to a much wider market for 3G products and collaborations.
B. W-CDMA—Qualcomm’s Don Schrock has put forward an admirable strategy technologically and marketing-wise for the company to play a major role in W-CDMA chipsets. I posted several times on this topic in the past couple of months. This is happening sooner than I had expected, and is an extremely positive development for the company. With closer collaborations with Telefonica and Vodaphone, some interesting new revenue drivers may be in the offing.
Overall, Unicom has been the major blemish so far. Because the glitches were business screw-ups, rather than technological, there is still ample time to take corrective action and produce better numbers.
There is still a lot of excitement ahead for the rest of the year!
BRational (practicing assessment by objectives...) |
