GS on QCOM preannounces upside on strong chipset
demand; details from our visit; RL
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REPRESENTATIVE.
Analyst Comment
7:18 AM - September 20, 2002
Recommended List
Large-Cap Growth
Price: US$25.72
United States
Nathaniel Cohn
nathaniel.cohn@gs.com
New York: 1-212-357-7512
Seogju Lee
seogju.lee@gs.com
New York: 1-212-902-6785
Goldman Sachs
Global Equity Research
Stock data Price performance 1M 3M 12M
52-week range US$62.47-23.75 Absolute -14% -9% -43%
Yield - Rel to S&P 500 -3% 9% -26%
Capitalization Forecasts/valuation 2002E 2003E
Market cap US$19.8bn EPS* US$0.96 US$1.10
Latest net debt/(cash) - GSCOPE EPS* - -
Free float - GSCOPE P/E - -
Shares outstanding 771mn * May differ from US GAAP
QCOM preannounced positively yesterday that its MSM chipset shipments would come in
around 20M units and exceed earlier guidance of 18-19M chipsets. Further, chipset
shipments are expected to be ’significantly’ higher in CYQ4 due to the large number of
new phones being launched in North America for the 1x push and accelerated
momentum in China and early orders from India. Raising FY02E (Sep) from $2.9B and
$0.94 to $2.9B and $0.96 but holding FY03E at $3.2B and $1.10 until we get better clarity
on 1x sell-through in CYQ4. Reiterate our view that at 23x 03 EPS and with solid
momentum in a tough market environment, QCOM is a key name to own in the group
and should trend into the $30s.
CHIPSETS TO EXCEED EXPECTATIONS AGAIN, STILL AWAITING SELL-THROUGH DATA
QCOM chipset shipments are again expected to exceed its earlier forecast and our
estimate of 18M chipsets and approach 20M, with roughly 15M chipsets expected to be
1x driven by the MSM5000, MSM5100 and MSM5105. The majority of the upside this
quarter, however, appears to be coming from stronger than expected demand for its
MSM3100 chipset for the China market as sub adds continue to accelerate with recent
data suggesting 35K adds per day and potential for China to ship more than 4M handsets,
up from our 3M estimate. Guidance into CYQ4 suggests even higher levels of chipset
shipments with 1x demand being the primary driver. The company attributes this to
share gain and better than expected handset sales although it is still unclear, in our view,
how much of the upside is being driven by the buildup of inventory to support the rollout
of new 1x phones, many of which are ramping in October/November. As a result of the
preannouncement, we are also raising our Dec qtr chipset estimates from 17.5M to a
conservative 20M (flat in CYQ4 despite new up guidance) since we assume shipments
taper off later in CYQ4 consistent with handset sell-in patterns. That said, for the
company to preannounce positively with a week and a half to go in the current quarter
and guide chipsets up ’significantly’ in CYQ4, we are clearly being very conservative since
QCOM’s confidence level in growth in CYQ4 appears to be very high, particularly if it is
willing to guide CYQ4 up without yet finishing CYQ3.
EXPECT STOCK TO CONTINUE TO OUTPERFORM, REITERATE RL Although the stock has
remained relatively flat over the last several months, in this tape we consider this
outperformance and expect the shares to continue to outperform its peers as business
conditions are not only better than expected in the current quarter but are also expected
to be solid again in CYQ4. While the carrier newsflow has remained relatively mixed with
strong results in Korea, China and Japan offset by concerns in the Americas, the company
continues to deliver better than expected results in such an environment and believe the
stock should trend higher. We are actually raising our FYQ4 estimate from $793M and
$0.27 to $829M and $0.29 and thus FY02 estimates from $0.94 to $0.96 but are keeping
FY03 estimates unchanged until we get better handset sell-through data. To offset a
stronger Dec qtr, we are now modeling for a steeper 10% sequential falloff in March.
Although we continue to look for a possible slowdown in orders, it appears the opposite
QUALCOMM, Inc. September 20, 2002
is occurring and we will need to closely monitor the Christmas selling season to better judge
whether our FY03 numbers are indeed as conservative as they currently appear. At 23x 03 EPSfor
a company that is a 15-20% grower, has a high margin structure, and is clearly delivering in a
challenging environment, we believe the stock should continue to outperform in the near-term
and begin to trend higher into the mid-30s.
Full details
DETAILS ON PREANNOUNCEMENT Qualcomm preannounced September quarter chipset
shipments of 20 million, up from previous guidance of 18 million to 19 million and our estimate of
18 million. 1x chipset shipments are expected to be inline with previous guidance of 15 million
and upside in the quarter is driven by cdmaOne chipset sales, primarily due to increased MSM3100
shipments to China.
China Unicom has shown good momentum since May with monthly net adds improving from
83,000 in May to 151,000 in June, 322,000 in July, and 432,000 in August. Qualcomm believes
that much of this improvement is related to improved handset availability and pricing. In our visits
to China Unicom stores, we noted a total of 10 different CDMA handset models being sold
including devices from Haier, HiSense, Kyocera, LG, Motorola, Samsung, Sanyo, and Soutec. The
best selling device was reported to be the Samsung A399, which was selling for 4180RMB, the
most expensive; device prices started at 800RMB for the Motorola V8060.
Qualcomm also indicated that it expects December quarter chipset shipments to be up significantly
sequentially including a continued increase of 1x chipsets. While the company had not previously
provided detailed December quarter chipset guidance, it had indicated that it expected units would
be up sequentially, but we would still view yesterday’s announcement as incrementally more
positive given the higher base now expected for the September quarter. Additionally, the company
indicated improved visibility with lead times extending from 10 weeks to 13 weeks.
CHANGES TO OUR MODEL:
We have raised our chipset numbers from 18 million to 20 million for September and from 17.5
million to 20 million for December; we are maintaining September quarter 1x chipset expectation
at 15 million, but increasing our December quarter 1x chipset shipment expectation from 16.5
million to 17 million. We are remaining relatively conservative until we get more color from the
carriers. Although it also looks as if our 80M handset assumption is conservative, we are holding it
steady at this point until we see further evidence of solid sell-through from the carrier reports.
While the company did not provide an update to revenue or EPS guidance, improvement in both is
implied given the higher volume of chipsets and handsets as well as gross margin and operating
benefits. Given our increased chipset expectations we are raising FY02 estimates by $30 million
and $0.02 to $2.9 billion and $0.96.
DETAILS FROM MEEETING WE HAD YESTERDAY WITH QUALCOMM:
Representatives from the company included:
* Tony Thornley: President and Chief Operating Officer * Don Schrock: President, Qualcomm
CDMA Technologies Group * Dr. Paul Jacobs: President, Qualcomm Wireless and Internet Group
* Julie Cunningham: Senior Vice President, Investor Relations
Highlights from Tony Thornley’s Presentation:
* The company is seeing continued strong business momentum, which is across the board, with
particular notable areas being 1x, China, and initial orders related to India; we would also note
that Korean wireless manufacturers and Kyocera have discussed initial orders related to India.
Overall lead times have increased to 13 weeks from the 10 weeks level. The company noted that it
does not believe there is any inventory buildup in the channel, though it did admit that it didn’t
have great visibility into handset inventories currently.
* Chipset upside in the quarter was driven by cdmaOne-based chipsets due to the ramp in China,
which is pulling the MSM3100. The company noted that the MSM3100 has a good gross margin
structure given its cost reduction; it maintains higher gross margin that the MSM5100 given the
MSM5100’s larger die size, which has yet to be cost reduced. While cdmaOne chipset shipments
Goldman Sachs Global Equity Research 2
QUALCOMM, Inc. September 20, 2002
were stronger than expected in the September quarter, the company continues to expect cdmaOne
shipments will likely diminish to a very low level by the March quarter as China will soon be
converting over to 1x.
* The company believes the acceleration of subscriber additions in China is related to improved
availability and pricing plans of handsets and continued network improvements. Additionally,
China Unicom is expected to upgrade its network to 1x quickly and 1x phones are expected in the
Chinese marketplace shortly.
* 1xEV-DO uptake has been a little slower than expected due to some initial product issues,
however, Qualcomm has been working with SK Telecom and Samsung to get these issues resolved
and believes these are behind them at this point. The MSM5500 chipset, which supports
1xEV-DO, is said to have ASP in the $30s, while the company’s 1x voice-only MSM5010 is said
to be less than $20.
* Qualcomm noted that it believes CDMA handset shipments should exceed previous expectation
of 80 million in calendar 2002. Additionally, the company continues to feel comfortable with the
north of 40 million expectation for North America.
* Qualcomm remains optimistic regarding India and noted that Reliance remains aggressive and
has started its network buildout. Reliance also plans a soft launch by year-end, to cover 500
towns by the end of March 2003, and to have approximately 35 million subscribers within three
years.
While Qualcomm is no longer contractually obligated for a $200 million investment in Reliance
since Reliance did not meet requirements related to infrastructure equipment deployment,
Qualcomm expects it will likely make an investment in the Indian operator in the future.
* Qualcomm views CDMA on the 450MHz band positively, though timing has yet to be set. The
company noted small trial systems have been deployed in China, while Russia continues to
determine deployment plans. In addition, Inquam continues to show progress in Romania.
Highlights from Don Schrock’s Presentation:
* Qualcomm has shipped over 200 million MSM chipsets to date and over 600 million chips to
date.
* Strength in the current quarter was said to be across the board with Qualcomm noting solid
momentum with MSM5100 (1x with integrated GPS), MSM3100 (cdmaOne), MSM5000
(Qualcomm’s initial 1x chipset, which continues to see good demand in Korea), and MSM5105
(voice-only 1x chipset).
Additionally, we believe Qualcomm has begun to ship some newer platforms in volume during the
quarter, including the MSM5010, a follow on voice-only 1x chipset that features 2-way SMS
and allows use of a smaller memory footprint, hence reducing overall handset BOM.
* In regards to 1x, 16 carriers have launched networks, over 120 handset models have been
developed, and Qualcomm is shipping 1x chips to over 50 customers. In addition, the company
remains optimistic regarding continued traction of 1x with China expected to start rolling out the
technology shortly and India launching with 1x.
* Qualcomm noted the high barriers for competing in the 1x chipset market.
Qualcomm highlighted its broad product offering and technology leadership including integrated
GPS (which is seeing strong uptake due to E911 mandates), Internet Launchpad features (including
CMX, which is reportedly being required by SprintPCS), BREW support (which is being required
by Verizon, KTFreetel, and other BREW supporting carriers), and direct- conversion radio as the
leading factors. Qualcomm noted that competitors might be able to offer point solutions, but not
complete roadmaps, which customers require. In addition, given the quick product cycles of
wireless handsets, but long product development cycles, alternative solutions are always
significantly lagging Qualcomm’s solutions, which compromises the potential success in the market
of alternative solutions. We would note that competition in the CDMA chipset market is not a
new thing as a number of companies including LSI Logic, DSPC, Texas Instruments, Motorola,
LG, Nokia, amongst others have tried, but have not necessarily seen any great success with a
number opting to withdraw from the market.
Goldman Sachs Global Equity Research 3
QUALCOMM, Inc. September 20, 2002
* Qualcomm noted that Samsung has had CDMA chip development for 5 years and a couple years
back brought to market a cdmaOne solution. However, Samsung’s cdmaOne chipset was used in a
very small number of phones (approximately 300,000 handsets that were shipped into the
domestic Korean market) and Samsung clearly remains an extremely good customer of
Qualcomm’s; Qualcomm noted that Samsung continues to buy and order inline quantities and
continues to develop new platforms based on upcoming Qualcomm chipsets including MSM6050,
MSM6100, and MSM6200. Clearly Samsung continues to use the threat of deploying an
internally developed solution in order to try to maintain purchasing power, though Qualcomm also
noted its own leverage given Samsung’s dependence on Qualcomm’s chipsets, which they could
easily swing to favor other CDMA handset makers. Still Qualcomm realizes competitive threats
exist and continues to push the technology envelope forward as demonstrated by their strong
execution and diverse product roadmap, which includes WCDMA, multi-mode, and both
higher- performance and lower cost 1x solutions. Additionally, Qualcomm continues to closely
monitor Samsung’s and other possible alternative manufacturers’ development of CDMA chipset
solutions. We would also note that Qualcomm would continue to receive its standard royalty rate
on handsets that use non-Qualcomm chipsets.
* In regards to Qualcomm’s manufacturing partnerships, Qualcomm noted that IBM will be
responsible for the largest percentage of production this year, though it continues to source a lot of
production from TSMC; TSMC was Qualcomm’s first foundry partner qualified for 300mm
production (the MSM6050, which is being designed in by at least 15 handset vendors, is being
done at 0.18-micron) and 0.13-micron process (the MSM6100 will be Qualcomm’s first chipset
to be manufactured on a 0.13-micron process).
Additionally, Qualcomm maintains manufacturing relationships with Texas Instruments and
Motorola.
* While Qualcomm recognizes that its chipset pricing is likely not the lowest in the industry, it
believes it is helping handset manufacturers drive down handset BOM by introducing numerous
features including DCR and support for NAND flash, which is reportedly 30% of the cost of
traditional NOR flash used in cell phones.
Highlights from Paul Jacobs’ Presentation:
* Qualcomm indicated that Verizon will move to more actively launch BREW services shortly.
This launch will include increased advertising (primarily focused on the youth market) and will also
feature the introduction of the Motorola T720 and a new Audiovox/Toshiba color 1x phone;
Verizon’s BREW services will also continue to be supported by the Kyocera 3035e (cdmaOne) and
Sharp Z800.
* There are approximately 2 million BREW subscribers currently with approximately 1.6 million
on KT Freetel. This is expected to increase significantly with upcoming Verizon launch as well as
continued progress with other operators: China Unicom recently signed a definitive agreement,
Telesp has signed an RFP, and Alltel is reportedly trialing in a few cities currently and is expected
to launch before Christmas.
* Omnitracs is reported to be doing reasonably well with Qualcomm noting that a number of
inactive units have recently come back on-air suggesting some economic improvement. In
addition, Qualcomm continues to make headway in Europe as well as into different industries
including private fleet, equipment rental, and medical.
In summary, Qualcomm is executing extremely well in a difficult market environment. It has
raised numbers several quarters in a row and arguably has better visibility today than it has had all
year given that it is confident enough to raise the bar for next quarter without yet having finished
CYQ3. Although skepticism is unlikely to go away completely, the solid visibility and momentum
for the current and next quarter is likely to keep the shares outperforming and thus reiterate our
RL rating. |
