Thornley at SSB - Part 2
Of course, Reliance is not the only operator in India who’s launching CDMA. BSML, the Government operator, is also expanding CDMA service. Tarta is launching in a number of circles and in fact we saw the announcement by [inaudible] Telecom of the first 1x third-generation network just recently being launched in India.
We expect to see both China and India being very significant drivers of growth going into ‘03.
Latin America has been troubled by the economy in most of the markets but the subscriber growth has continued in CDMA. There are approximately 14 million subscribers in that market currently. There is activity going on again to upgrade the networks to 1x for voice capacity and also at the high end. But most importantly the growth is going to come from the lower end and low cost devices are an extremely important element of growth for CDMA. CDMA has succeeded in the developed world today. In the developing world, the cost of CDMA phone has been higher than GSM – and really that has been the only thing that has been a competitive advantage left for GSM – the device has been lower priced. But, looking forward, with the introduction of our new chipset – the 6000-based chipset, we expect to see CDMA devices in the market below $70 next year – so really very competitive at the low end as well as the high end.
In Europe, with WCDMA being delayed – not having matured as we have been saying for some considerable time, the CDMA market in Europe is developing slowly. However, the good news is that our chipset is clearly taking the lead in terms of its capabilities and operators in Europe are recognizing the value of Qualcomm technology in deploying their networks. I think what’s going to happen is that WCDMA is going to be rolled out from a network point of view in ’03 and then in ‘04 and ‘05 we’re going to start seeing subscriber growth – and I would say 10 to 15 million is kind of where we’ve been looking at significant volume for 2004. I hope that we would begin to see that kind of level of investment in WCDMA. We are working very hard at the standards level and, of course, the operators and manufacturers, to make sure all of the interoperability issues are resolved as quickly as possible. There’s nothing fundamentally wrong with WCDMA but just simply that it does take a given amount of time to stabilize any kind of technology.
We have been trying to get cdma2000 also into Europe through out investment in Inquam and there is a network launch in Romania, with plans to launch in other markets in Western Europe but I think that will be relatively small in comparison to the WCDMA market for us in the long term in Europe.
TDMA operators are converting to CDMA2000, most notably recently BellSouth announced conversion of their TDMA networks in Ecuador and Panama and we expect to see more of their markets converted over the coming months.
This is a list of our strategic investments that we have made in order to ensure the growth of CDMA. Given the amount of time, I won’t go into these but you may have questions.
Our chips business is doing extremely well. Its market share is gaining; we have gotten Motorola as a customer for 1x which we really didn’t have for 95A. We have not seen effective competition, with the exception perhaps of Nokia in this market but their share has been relatively small.
We’re introducing a wide array of new chips this year – with multimode capability, high end, low end, medium - lots of integrated services. The chipsets have all of this integrated capability which is designed for wireless devices. No other supplier has anything close to this level of capability; and this is extremely important in terms of costs of devices and power requirements. This puts us in a very strong position, not only in CDMA2000 market, but also in WCDMA market because everybody else is playing catch-up.
gpsOne is an investment we made in a company, SnapTrack, in 2000 which has paid off very well… gpsOne is being rolled out in Korea, Japan, U.S. gpsOne is technology that will be adopted, I think, by GSM operations in Europe and elsewhere. Position location, we think, is a big driver of third-generation services.
In terms of BREW, this map shows the agreements that we have signed. Most recently, we signed a definitive agreement with China Unicom, which is very significant, as part of Unicom’s plan to grow its subscriber base in CDMA with new services differentiated from its competition. Wherever BREW has been launched, the operator has prospered. This is shown by KTFreetel who was the first to launch BREW in March of this year. Since that time, you can see that the ARPU resulting from the services on BREW has driven their ARPU up to significantly higher levels than they had in their second-generation systems which were purely voice. You can also say that the introduction of color screens has been very important in enabling these services. So it’s really the confluence of the third-generation systems and the device capabilities and the BREW download capabilities which is providing for a large market of applications which is making all this come together and driving success for operators.
Clearly, we have a very strong balance sheet – which is something that we value very highly. Our cash position at $2.6 billion is something that we think is extremely important – to have a liquid position, especially at this time in the market. We’re generating over $1 billion a year of operating cash flow. We are investing this year a little less than that in strategic investments. As you may have noticed on the chart, we had $800 million in commitment going forward; we will be funding those commitments over the next year or so. Looking to the future though, we expect to be very strongly free cash flow positive and so we are looking at the options in terms of the future as to what we do with that cash but right now we think that having the strong cash position is the right place to be.
Q&A
(Questions not completely audible, especially to this hearing-impaired, earphones ready listener; the bolded questions below are cryptic headings based upon Thornley’s repeat of the question)
Update on 6200 chip (GSM/WCDMA) and 6300 chip (GSM/1x)?
We brought forward the introduction of the 6200 by the quarter. That is the chip that we built into prototype phones that are being used in testing WCDMA networks currently by most of the operators, most of the manufacturers in Europe. In fact, we have been producing a significant number of those phones as test equipment - and we are actually selling those phones for the test equipment so we’re actually generating some revenue from that. But more importantly, we are using them to accelerate the introduction of WCDMA in terms of interoperability. It is positioning us very well in Europe and the European operators are beginning to prescribe to their manufacturers that they should be using our chip which, of course, is very good for our long term share.
GSM1x?
We have not yet seen anybody actually place orders for GSM1x systems, that is, cdma2000 air interface but with a GSM core network. We did demonstrate this year, starting at the GSM show in Cannes in February, the capability to do that without changing any of the GSM network elements. So it really is a real alternative to WCDMA. However, Europe – you mentioned KPN considering this - Europe generally has been keen on having just one implementation - because of the roaming issue. However, our new chip with the new multimode capability will allow for operators to, in fact, implement different technology – different versions of CDMA – and be able to provide their customers devices that are capable of roaming across all technologies so it becomes much less of an issue.
So we do expect that GSM1x will be very important from a roaming point of view; from a device point of view and going forward we expect to see systems launched with GSM1x, probably initially in Asia and then later maybe in Europe.
What held up our investment in Reliance and what is the relationship today?
The investment commitment that we made was contingent upon them actually placing orders for equipment at a given point in time. For a number of reasons, particularly the unfortunate death of founder of Reliance amongst other things, that was delayed. So that is what has caused us to be remove the commitment as a firm commitment from our list of financial commitments. However, our relationship today with Reliance today is good. We’re still supporting them. We’re actually providing a lot of technical support to them and helping them launch their network as quickly as possible. We do expect that we will make that investment here in the not to distant future as they launch their network.
December quarter?
Normally, December is slightly down because of seasonality. What do we expect to see this year? Well, in fact, from a chip point of view, that’s generally the case because of the Christmas selling season. So deliveries tend to peak in September time-frame so that manufacturers have the phones to the operators for the Christmas selling season. In terms of this year, I think that some of the forces that you see in the other markets that are not particularly Christmas driven and those are the ones that are beginning to grow, such as China and India, it may well be that we will not see that seasonality this year.
Top 5 manufacturers?
The top manufactures today in terms of volume of CDMA handsets are Samsung, Motorola, LG, Toshiba, Sony – probably those 5. Nokia is kind of just on the edge of that list.
Size of 450 MHz Market?
The 450 market we haven’t exactly sized per se. But I think in China – they use a different standard band which 4.5 MHz each way, it’s a relatively small piece of spectrum relative to what’s available at 800 or 1900 or 2.1GHz, but it certainly does have very good propagation characteristics for rural markets. So you expect to see it deployed to satisfy the rural markets first and foremost. In that sense perhaps it’s not going to be quite as big as the other bands. However, we do see the potential for it to be launched on a global basis so it could be quite a significant piece in the long run - hard to say just exactly what the numbers are will be though.
Driver of revenues?
The first driver of revenues for us is technology licensing. So the gpsOne technology from SnapTrack is licensed to various companies - that’s not a major source of revenue for us. It is a source but it’s not going to be big. The more significant source of revenue is going to come from BREW services that are built on gpsOne technology and that will be the economics of BREW, which is largely a revenue sharing with the application developer and I expect to see that grow substantially over the coming year.
Is BREW an alternative to JAVA or is JAVA a complement to BREW?
BREW is definitely a complement to JAVA. BREW is a capability to download applications and those applications can be written in C/C++ or they can be written in JAVA. JAVA works just as well on top of BREW as it does in native mode. [Previously, they have said that you might want a non-BREW JAVA for more complicated graphics applications??]. We see BREW opening up the market for developers in all languages. In fact, we see, though, that C/C++ has a lot of advantages in terms of the speed of processing and that, in terms of small devices with relatively limited processing power and memory, there’s a significant advantage in C/C++ today.
Q-Chat?
Q-Chat is a service that we actually developed initially for the Government under contract. We have sold that on a somewhat exclusive basis to Nextel. Actually, the arrangement with Nextel is that we will co-market Q-Chat on CDMA around the world. We have done a lot of business development on that. We expect commercial services to be launched in ’03 with Q-Chat. We think that is a very important element in the growth of voices services, particularly in enterprise market around the world.
Q-Chat and Sprint and Verizon?
Because of our arrangement with Nextel, Q-Chat itself will not be available to Verizon and Sprint. There are alternatives that Verizon and Sprint are looking at; we don’t think those are as good as Q-Chat, however.
QSI going forward?
We have the $800 million or so of commitments and we are going to fund those over the next year or so. Why’s isn’t that a recurring thing? What we have been doing over the last number of years is, in fact, fighting a battle to establish CDMA as the technology of choice against GSM in many markets and we found it necessary to invest in operators to enable that in some markets.
In fact, some of the investments – if you look at Pegaso and you look at Vesper - those investments go all the way back to when we were in the infrastructure business. We invested initially, as vendor financing, to get the infrastructure business going. Once we sold that business to Ericsson, then the shift was looking at protecting CDMA.
But we do not expect, as we look forward, that that’s going to be necessary in the future. We see the need to invest in operators declining as we look forward. We still have that $800 million commitment. We probably will make some new commitments but we expect those to be declining over time and so 2004 and 2005 should be substantially lower investment in those carriers. The Reliance commitment was $200 million.
I should also add that we expect to see cash coming in from those investments as we exit. Pegaso in Mexico is the first major one that we are looking to exit. The deal with Telefonica has been approved by the regulators so we expect to see that closing here very soon. We should be getting somewhere in the range of $4-500 million back from that investment.
[Thornley did not answer the question which I gather was why QSI should not be included in pro forma calculations since it is a core part of Qualcomm’s promotion of CDMA.]
What’s the status of EV-DV and explain Qualcomm’s apparent reluctance to be a leader in that space?
DV is in a sense an evolution of 1x as it’s currently in the market but with higher speed data, supposedly in the order of data optimized or EV-DO - so it’s combining 1x today with EV-DO. And that’s really the reason that Qualcomm has not been a particularly strong advocate because we see it as being the existing capabilities and yet a completely new development for the industry, which is a very big investment for the industry which we don’t necessary see a big payoff from. So that’s why we have not been particularly strong on it although we do expect, as we currently see it, that DV will be developed starting with, starting development on the chipset, and we expect to see it roll out, maybe in 2005. But we’ll see how that develops. |
