Cha2 (gdichaz) kindly reminded me a few weeks ago that this weekend is the third anniversary of when I completed my initial round of research on Qualcomm and reported to the thread about everything supporting my decision to buy the stock the following Monday morning. That report is at:
Message 8698546
You might remember that a few weeks earlier Ericsson had capitulated to Qualcomm by bringing an end to law suits and counter suits with the decision to license Qualcomm's product and buy its infrastructure division. The reason I brought the importance of that to the thread is because it was certainly the largest Gorilla Gaming event that any of us had observed in real time. (The book was published only about six months earlier if I remember correctly.) Three years later, it remains arguably the most significant event since the book was published.
In those three years, a lot has happened. First and foremost, those of us who invested in Qualcomm and held our shares to the present have enjoyed immense returns. Sadly, those of us who bought at significantly higher prices, following the advice in the manual that Gorillas are never undervalued and ignoring the advice in this thread that such a statement makes no sense, have endured significant loss of capital. Huey properly reminds me that I contended after the price fell precipitously that people who bought at or near its height have a good chance of enjoying healthy returns over the very long term. I still feel that way. Time will tell if I'm right. I look forward to Huey keeping me honest about that and I look forward to him giving long-term investors the time needed to make such a determination.
Three years ago we learned that the first CDMA tornado -- the voice tornado -- had actually been in progress before the Ericsson capitulation. It was impossible to measure it using revenue metrics as suggested in the manual so we used CDMA subscriber data as the best proxy we could find. At that time we could account for 23 million subscribers. Today there are nearly five times as many subscribers, rerepresenting roughly a 70% average annual increase.
Despite that huge growth, it's apparent that the first tornado has ended. Three years since we began diligently tracking the growth of Qualcomm's value chain, we are patiently (well, not so patiently :) waiting for the second tornado -- data transmission. CDMA2000 1X chips may indeed be going through a tornado as I write this. Or it might be prudent to more conservatively view the rapid growth that is typical of an attempt to cross the chasm. Measuring the adoption of data-based product will be much more difficult, if not impossible, than measuring adoption of pure voice-based CDMA networks.
Relating to the fact that my strong interest in Qualcomm began with the Ericsson capitulation (also true for many of us), Motorola caved about a year ago. Today we're still waiting for Alcatel and Siemens, significant holdouts, to promote the CDMA mantra. The betting pool that could have generated more wagering among us than the NCAA pool would have been based on the date Nokia would sign a new CDMA license. That finally happened. Considering the current stock price relative to past times and the frustration that it always takes much, much longer for product to be adopted than we investors think will happen, the fanfare accompanying the news of Nokia's new license can barely be remembered. In this day and age in which partners are also competitors, fans of the BREW concept were discouraged to learn that Nokia & Gang are promoting a competing, so-called open platform.
It was either one month before last year's anniversary report or the previous year's report that Irwin Jacobs made quite a stink by mentioning during the GSM Congress in an interview with a European publication that deployment of W-CDMA would occur a couple of years later than European carriers were predicting. Today there is no dispute that he was right about that. For more important perspective, he was also right when he mentioned about three years ago that his worst nightmare was that it would take too long for W-CDMA to be deployed.
Three years ago and many times since then, the real excitement about adoption of CDMA has had to do with China. I'm hesitant to use any variation of the word, "excite," as it appears to be Irwin Jacobs's favorite word. However, for those of us who are impatient about the long-term aspect of long-term investing, China has and continues to be the source of both excitement and frustration. For those of us with more patience, there is no question that Qualcomm has made immense inroads in China, with CDMA-based networks being built out as I write this. Other than the relatively small CDMA network owned by the military, three years ago the best we had to hang our hat on was that the build-out of a network for use by the public was authorized. Typical of the sort of news that long-term investors must endure, that decision was put on hold a couple of times.
India was a subject that was discussed very little, if at all, three years ago. Today the government-approved fixed wireless solutions offer a tremendous opportunity for Qualcomm.
Three years ago South America was the source of quite a bit of excitement. (There I go, using Irwin's favorite word again.) Since then we've had a number of disappointments because adoption there hasn't been as strong as we had hoped. (Don't ask me to go into the details because I'm not as familiar with them as I should be to make that sort of statement. Ask Eric. :)
Regarding adoption of CDMA close to home for the many of us who live in the U. S., in the past three years we've had issues of a positive nature to enjoy and of a negative nature to endure. We were surprised to learn that Nextel had made the decision to build a CDMA data network. Sadly, that appears to be very much up in the air, to the extent that I don't believe we have any strong convictions about when it will happen. Public information about European Vodafone's relationship with its American partner has been the source of a few ulcers, always reminding us that nothing ever goes as smoothly as we would like.
Virtually all over the world, carriers are suffering in the short term for decisions they have made fairly recently. (DoCoMo appears to be on the verge of reporting one of its biggest losses in history.) Though some of us like to point out that some of those problems are directly related to the point that they chose to adopt a competing technology, the fact remains that every carrier is a potential customer. We will have to wait a long time before the general financial health of Qualcomm's direct customers improves. Ironically, it is the financial deteroriation of the carrier world that might cause the first significant defection from the dark side, a defection that in the best possible scenario could be the first of many dominos to fall.
For me, certainly the biggest suprise since writing last year's anniversary report is the announcement of Qualcomm's GSM1X. For the carpetologists among us, the best that we can take from that is that Qualcomm now has an offering for the GSM carriers to overlay Qualcomm's data trechnology on existing GSM networks.
The second biggest news in the last year is that Qualcomm also announced a technology allowing a CDMA user in China to push a button and instantly talk to a U. S. user. This is a technology that has been highly successful for Nextel in the U. S. market. I have no idea how important that concept will be in a world market and I haven't been able to come by an informed opinion about Qualcomm's decision to license it exclusively, but it was a surprise to me that seems to provide more opportunities for Qualcomm.
The biggest question in my mind since writing last year's piece is about the impact BREW is having. Is it a compelling source of revenue that is immensely adding to the size of the value chain and Qualcomm's control over it. The reason it remains a big question is because it's far too early to know. The only thing I know with a great deal of certainty is that it's a critically important issue to follow in the coming years.
Three years ago Qualcomm had $657 million in working capital. Today it has $2.5 billion. I haven't poured through the details of the 10Ks, but my rough calculations for the company's free cash flow net of income tax adjustments generated in FY98 was a negative $328 million; for every dollar of revenue, the company generated about ten cents in negative cash flow. In FY01, utilizing a business model shed of the necessity to manufacture and market hardware, the company generated $547 million in positive free cash flow, about $.20 for every dollar in revenue. Three years ago the company was almost debt-free, with only $3 million in long-term debt. Today there is none.
Having spent probably too much time mentioning the things that have changed in the last three years, there are some vitally important issues that haven't changed. The spectral efficiency of Qualcomm's technology remains superior to competing technologies. Some position CDMA as offering 10 times the capacity of analog capacity and 3 times the capacity of GSM technology. Qualcomm maintains that its CDMA2000 1X technology offers voice capacity that is six to eight times greater than GSM-based systems. As economic concerns become more and more important for carriers, those issues take on even more significance. Those operating inefficient systems will gradually find it more and more difficult over time to compete with offerings based on more efficient (less expensive) technology.
If three years seems like a long time to you, I'll end this missive with a quote from my write-up on in 1999 that Cha2, Frank and a few others like to celebrate: "It's truely hard to know how fast Qualcomm will grow in the next five years but most people seem to be thinking it will be at or in excess of 50% annually. My thinking is to look at the next five years as a blip in time and, instead, look at the next fifteen."
Twelve more years to go.
--Mike Buckley |
