re: Lehman Brothers on Qualcomm FQ3 Selected Excerpts ...
Courtesy of one of my brokers (Fidelity):
When: July 26, 2002 - After FQ3 (CO2 Earnings)
Rating: 1 - Strong Buy
Earnings Review: Solid 3Q02, Guidance Raised
Rating Target: Old: 1 - Strong Buy Old: 45.00
New: 1 - Strong Buy New: 35.00
Investment Conclusion:
QCOM, as previewed, delivered solid FY3Q02 results & guided up for both Sept and Dec quarters actually raising the range for Sept Q as 1X rollouts gain traction. In a clearly challenging wireless sector QCOM remains preferred pick & we maintain our 1 buy rating.
Summary:
June Revs $721M beat our $685M est with pro forma EPS (ex QSI & Leap charges) $0.24 ahead of consensus $0.23 on 16M CDMA chips & solid royalty revs. Margins & Bal Sheet show solid trends.
Mgmt raises guidance for Sept Q to $0.26-$0.27 on 18-19M chips Vs our prior est $0.24 on 17M & for Dec as previewed mgmt looks for QoQ uptick. We model $0.28 on 20M chips.
QCOM cites 1X momentum in Korea & Japan with VZ & PCS preparing channels & MOT switching to QCOM chips. Mgmt endorses 80-85M CY02 CDMA phone market.
While some concerns may linger on end demand/inventory in channel, we estimate inventory at 13 weeks in line with expectations & retain modest ests for March 03 Q. FY02 & CY02 ests raised.
Post close yesterday, wireless innovator QUALCOMM delivered solid FY3Q02 results and guided upwards for both its September and December quarters. While we had previewed that having pre-announced a robust June quarter.
QUALCOMM would look for sequential improvements for the balance of 2H02, we were encouraged that QCOM is now actually raising its guidance range for September Q as 1X rollouts gain traction. While we recognize that some investor concerns may linger around the pace of end demand and potentially over inventory levels in the channel, we maintain that in a clearly challenging wireless sector QCOM continues to execute well and remains a preferred pick. We retain our 1 buy rating.
QCOM’s June Revs $721M beat our $685M estimate with pro forma EPS (ex QSI & Leap charges) of $0.24 ahead of the consensus estimate of $0.23. CDMA handset chip shipments of 16M+ were in line with our estimates and were matched by solid royalty revenues. Qualcomm’s gross margins improved helped by a favorable product mix shift to 1X CDMA platforms and operating expenses moved lower as a percentage of revenues. Balance sheet metrics appeared to remain solid with total cash slightly higher, $238 million in cash from operations and solid receivable and inventory levels.
We believe investors are likely to be encouraged that management raised guidance for the September quarter to $0.26- $0.27 on 18-19M chips Vs our prior estimate of $0.24 on 17M chips & for December as previewed management looks for a QoQ uptick. We have now modeled around $0.28 on 20M chips for December. QCOM is currently 95% booked in its chipset business for September.
QCOM cites 1X momentum in Korea & Japan with VZ & PCS preparing channels & MOT switching to QCOM chips. China currently tracking broadly in line modest estimates, India also remains on track.
We note that management endorsed CY02 CDMA handset market of 80-85 million phones. While some concerns may linger on end demand/inventory in channel, we estimate inventory at 13 weeks in line with expectations. We believe that with around 31 million 1X chips shipped there are around 13 million announced 1X subscribers and potentially another 4 to 5 million unannounced users at Verizon, Bell Mobility in Canada and other operators in North America and in Latin America and Brazil.
We are also retaining a conservative approach to our estimates for the March 2003 quarter where we look for a seasonal decline to around 15 to 16 million chips. Our estimates for FYO2 now move higher from $0.89 to $0.93 and CY02 increases from $0.91 to $0.98. Our estimates for FY and CY03 are left broadly unchanged at $1.03 and $1.06 respectively to reflect our conservative assumptions for end demand in 1H03.
We continue to view QCOM as a preferred play in a challenging wireless equipment sector and we are using a target price of $35 to $40 or around 30 to 35X our CY03 earnings estimates.
Management Guidance
* September quarter pro forma EPS of $0.26-$0.27
* September quarter MSM shipments of 18-19 million units, including ~15 million 1x units.
* Fiscal 2002 guidance for sales growth of 7%-8% and EPS of $0.93-$0.94.
* Management suggested on the call that December chipset shipments and EPS would likely be sequentially higher.
<snip>
QCOM Maintains CY02 CDMA Market Forecast 80-85 Million; Anticipates 2H02 Demand 42M
Qualcomm maintained CY02 CDMA handset market expectations of 80-85 million, and broadly maintained regional expectations given during its May analyst day. Management suggested that both North America (42 million units) and Asia (30 million units) were both somewhat ahead of plan, although Latin America (10 million units) was a bit slower. QCOM maintained expectations in China of 3-4 million phones, and India (Reliance) 1 million. With respect to limited mobility in India, QCOM suggested that Reliance could likely begin build-out of its network this summer with a soft launch in early fall.
QCOM CDMA Market Assumptions
QCOM
Market Shipment
1Q02 18M 14M
2Q02 ~20M 16M+
3Q02 22M+ 18-19M
4Q02 20-25M ~20M
--------- ---------
2002 80–85M 68-70M (~80-85% share)
QCOM Endorsement of Sequentially Higher September & December Chip Outlook While Positive Likely To Be Overshadowed By Lingering Excess Inventory Concerns
While we are encouraged by management’s upbeat outlook, we believe expectations around a sequential chip uptick in September and December periods could be viewed by some investors with some skepticism, given lingering concerns around excess inventories. Investors are likely to point to the 13 million 1x subs at the end of June, with over 30 million 1x chips shipped to date.
We note lead times in chips continue to average at least one quarter (12-13 weeks), half of which is in channels, and half in manufacturing/production at any point in time. Additionally, it appears that the 13 million 1x subscriber figure at the end of June does not fully include recent 2Q 1x additions from all CDMA carriers. The 13 million number at present includes SKT, KTF, KDDI, LG and Sprint, but does not include Verizon, Bell Mobility, and some smaller N.A. carriers and Brazilian carriers, etc. Generally, it seems more limited visibility around 1x subscriber levels in the near-term is likely to remain until carriers more aggressively begin to highlight 1x subs apart from their total installed base. But if we assume around 15 million users in total, we believe inventories should trend at approximately 1 quarter.
Management also continues to point out, however, that chip demand remains difficult to track in focusing purely on net adds (a phenomenon which has historically plagued QCOM in Korea with monthly net add figures released) as it ignores strong replacement phone demand. On the call, management clarified that it anticipates replacement demand this year to represent 70% of CY02 CDMA phone demand, with only 30% driven by new subscriber growth.
New Products Remain On Track; Solid Progress with W-CDMA/GSM/GPRS Platform Development
QCOM continues to make solid progress in the development and shipment timelines of its 3G W-CDMA and cdma2000 1x multi-mode chipsets. Recently, QCOM announced that it would likely begin sample shipments of its MSM6200 GSM/GPRS/W-CDMA chipset in the June period, up from prior September period targets. QCOM confirmed that sample shipments of its MSM6100 (mid-tier, 1x, 307 kbps, GPS) and MSM63000 (1x/GSM/GPRS) chips continue to remain on track for sample shipments in the September period. We note that QUALCOMM first debuted with its MSM6000 family in the March quarter with sample shipments of its MSM6000 (entry-level 1x chip, 14.4 kbps) and MSM6050 (Low-end 1x chip, 153 kbps) chip.
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- Eric - |
