My Draft Notes; Webcast still delayed
Qualcomm 2003 Shareholders Meeting
San Diego February 11, 2003
The webcast is still not available. IR advised me at about 11:30 PST February 13th that they were still working on the problems with the webcast; the fellow will call me when it is available.
The following is a very rough draft of my notes which will be revised and extended after I listen to the webcast. In light of the problems with the webcast, I have made some notes from the slides, which are available. qualcomm.com
Thus, the first part of each section is my summary of the slides. I then use “Dr. Jacobs said” etc. to indicate material taken from my nearly unreadable notes. My notes became particularly sketchy on some of the questions since I was so sure I would have the webcast available before I started typing. I have run spell-check but will not read through to edit until the webcast is available since so much will change. More to come…
Dr. Irwin Mark Jacobs - CEO
Dr. Jacobs handled the formal part of the meeting, introduced the directors and thanked retiring director Jerome Katzin.
Citing the cash flow and strong balance sheet, Dr. Jacobs said that the company would pay its first quarterly dividend of 5 cents a share [payable March 31st to shareholders of record March 14, 2003] and had authorized the repurchase of up to $1 billion of stock over 24 months.
In briefly summarizing the segments of Qualcomm’s business, Dr. Jacobs noted that the chipsets were now integrating more significant software.
Slide 5
As of December 2002, EMC says there were 143 million CDMA subscribers and 792 million GSM subscribers worldwide. CDMA has a 13% penetration of worldwide wireless [which would include TDMA and other technologies too]. The slide lists the top 10 CDMA Carriers, led by Verizon, SKTelecom, Sprint, KDDI, KTFreetel, China Unicom.
Slide 6 – CDMA versus Non-CDMA Handset Growth
Based upon an average of 4 industry pundits, this slide shows that CDMA is projected to grow 33% compounded per annum from 2001 through 2005. [Based upon the first three year estimates, the pundits seem to be a bit on the low site.] All of wireless growth is coming from CDMA as the same slide shows that non-CDMA handset sales are basically flat in the 324-329 million range except for slight blips to 359 million in 2003 and 351 million in 2004 before falling to 329 million in 2005.
Slide 7
1x chipsets were 72% of 2002 CDMA handset chipsets but should be over 85% in 2003.
Slide 9 – Cumulative U.S. Patents
Qualcomm now has 936 issued patents in the U.S. and 2,655 Total [including patent applications I assume]. It has been averaging over 200 new applications per quarter.
Slide 10 – 55 UMTS/WCDMA License Agreements
This lists some of the leading licensees. The subheading of the slide is “Same Royalty Rate by Manufacturer Regardless of Standard.”
Dr. Jacobs said that WCDMA had been late to the market in terms of what a number of companies had planned but the 2004-2005 timeframe is about the schedule that we anticipated. It is a very effective chip.
Dr. Jacobs said there will never be a single structure for all wireless since there will always be phones that are being phased out. There are 1 billion 2G handsets now and there will be a transition away from them.
Slide 11 – 3G CDMA Evolution
This slide shows 1x Antenna Diversity – Another doubling of voice – coming in 2004 and 1xEV-DV coming in 2005. It lists examples of what is coming next for 1xEV-DO, including broadcast, push to media and forward/reverse link enhancements (capacity increases).
Dr. Jacobs spoke of the “world phone” beginning in the fall and said the MSM6250 would be out later this year (assisted GPS) and would be followed by the MSM65000 which offers 1x/1xEV-DO/GSM/GPRS and gpsOne and will support two antennas.
Dr. Jacobs said that RadioOne will offer lower current consumption and lower costs for multi-mode, multi-band and diversity receivers.
Slides 24-26 – Return on Investment for Enterprise
This BREW slide is showing business applications for data and noted medical/insurance/ pharmaceutical applications. It also said that a business in Boise had doubled the number of inspections without adding people. The User Interface on the handset can be customized over the air with BREW applications – Generation Y vs. Business vs. Basics. The carrier (not the handset manufacturer) is in control of the branding with BREW.
Dr. Jacobs noted that BREW allows shorter time to market. Verizon will be offering games for $1.99 per month. One of the fastest growth areas will be the Enterprise market.
A slide of concentric circles dealt with frequency propagation. Dr. Jacobs said that there are added costs as you go up the frequency band.
Slide 28 – GSM1x with WCDMA
This is a new slide which shows how GSM1x could work with WCDMA. WCDMA would be used in the major cities, using the 3G spectrum. In the less populated areas, GSM voice would run on 2G spectrum. In the areas in between, GSM1x would offer 1x/1xEV-DO in 2G spectrum. Dr. Jacobs explained that this structure would allow the entire country to be covered much earlier than could be justified economically otherwise. As I recall, no specific country was identified as the target for this approach. I suppose it would work in Latin America and for China Mobile as well as Europe if they would ever allow 1x in the 2G spectrum.
Dr. Jacobs briefly discussed a slide regarding the new charters for each committee of the board of directors; the charters are available on the website. qualcomm.com
Tony Thornley – President and COO
Thornley said that 13% of wireless subscribers at the end of 2002 were CDMA. Qualcomm wants to direct replacement cycles with new products and to add revenue streams from BREW, QChat, gpsOne, enterprise applications and new areas.
Slide 3 – Large CDMA Market Potential
This slide shows the large markets most of which have not been well penetrated by CDMA:
China 1.3 billion
India 1.1 billion
Latin America 494 million
W. Europe 425 million
No America 237 million
Japan 127 million
So Korea 48 million
Slide 4 – 2003 CDMA Handsets mature and Emerging CDMA Markets
This slide shows the percentages in each major market that are expected to be replacement handset sales in 2003 and the percentages (the rest) that are expected for new CDMA subscribers. The mature or maturing markets are mostly replacement markets: South Korea – 90%; Japan – 84%; U.S. and Canada - 73%. There are some markets where handset sales will largely be for new subscribers this year: China – 99%; India – 90%; Latin America - 60%; and Rest of the World - 73%.
Thornley said that China Unicom expects to launch 1x in 30 cities by the end of February. Unicom was to have 20 million subscribers by the end of 2003. It enjoyed huge growth in the third and fourth quarters of 2002. The Chinese manufacturers have been building handsets based upon the MSM3100 and MSM5105; the MSM51000 with gpsOne will be more important in 2003.
Thornley said that India is behind China but has the same potential. There were 300,000 who signed up with Reliance on the first day and 1 million had signed up as of February 7, 2003. Reliance has a 10 million subscriber initial network capacity and plans to have 673 cities launched by the end of 2003. At the same time, Reliance is launched a wireline backbone.
Slide 9 – Growth in South Korea
Over 4 million 1xEV-DO subscribers are estimated to be added in 2003. The Wireless Data ARPU Percentage [of total subscriber revenue?] grew from 7% in 2001 to >12% in 2002 and is estimated to grow to 15-18% in 2003.
Slide 10 – Japan’s 3G CDMA Leadership
KDDI is expected to launch 1xEV-DO in October 2003. There is a nice bar chart showing KDDI’s impressive growth in the past year, especially its huge growth in 1x in the past 3 quarters. It had 5.3 million 1x subscribers through January.
Thornley said that Japan is similar to South Korea in terms of the consumer willingness to adopt new technologies very willingly. There are 4.1 million gpsOne capable handsets. KDDI will only be offering camera phones [they have been so popular]. Increasing resolution for camera phones will demand more network capacity where CDMA does well.
Slides 12-13 – North America Replacements
Verizon expects to sell 100% 3G 1x handsets throughout its markets by mid-2003. 90% of the handsets sold by Sprint in the December quarter were 1x and Sprint expects to have 50% 1x penetration by March 2003. North America ended 122002 with over 65 million CDMA subscribers – 46% of the market.
Thornley said that Verizon’s differentiation will soon be more evident. Verizon already has the lead with a 21% market share.
Thornley said that Inquam in the 450 MHz frequency in Romania is doing very well, with ____ subscribers. Inquam’s customers are huge data users. France has refused to allow Inquam to use the 450 MHz spectrum for CDMA. Inquam is challenging the decision; the 2.1 GHz operators are worried about competition.
Slide 19 – Vesper
Anatel, the Brazilian regulator, has denied use of Vesper’s existing licenses for mobility. The slide says mobility is critical for Vesper’s financial viability and that Vesper and others are challenging the decision.
Thornley said that Vesper covers 64 million pops but it needs mobility to be economically feasible.
In summing up, Thornley said that the opportunity is very much ahead of us. We will have our ups and downs but we have the chance to take ___ % market share and are in an excellent position for the long term.
Bill Keitel – CFO
Keitel said that Qualcomm was the 6th company to file the newly required certification with the SEC in July. Qualcomm now simultaneously files its Form 10-Q with the SEC at the same time as it issues its earnings release. Prior to this recent change, there had usually been one or two days that intervened. There are very few companies that do this simultaneously or even within a few days. Qualcomm makes full disclosure of its outstanding commitments, which are published on its website. [http://www.qualcomm.com/IR/annualreport/segment/qsi_invest_0103.html]
Keitel explained Qualcomm’s segment reporting. Its core businesses (QCT, QTL and QWI) should be valued based upon earnings and cash flow. QWI has long term earnings potential but the current valuation should be based on the sum of the total asset values. Over 90% of the combined QCT/QTL revenues and 98% of earnings result from the sale of new CDMA handsets.
Slide 12
This interesting slide was designed to show key cash and dividend information. The bar chart is based upon Morgan Stanley analysis of the most recent filings by the companies and shows the ratio of cash and equivalents to the sum of the OpEx and CapEx for the last quarter. Qualcomm had the second best ratio among the companies listed:
Microsoft 16.3
Qualcomm 10.1
Nokia 5.1
Dell 4.7
Cisco 4.5
Intel 3.4
TI 3.0
IBM 1.0
I think I am going to like Keitel. He concluded his remarks by saying that CDMA had a 13% market share today and we want to grow that to 100%!!
Q&A
[With a lot of anti-French background,] please comment on the 450 MHz decision by the French.
TT: The 450 MHz CDMA is not a direct threat to the existing operators – it would be a service to small businesses – but it is perceived that way. Qualcomm was surprised that the decision said that CDMA was not a mature technology – an obvious mistake. But there is not a great hope for reversing the decision.
Why not a bigger dividend? [already complaining about a dividend when this is the first one – after many years of dividends, Intel still only pays 8 cents a year and Qualcomm will be paying 20 cents]
IJ: We don’t want the dividend to go down – we want it to grow and thought this was the proper initial dividend amount. Going forward, there may be a variety of opportunities that come along and we want to be able to take advantage. In terms of the amount of dividends versus the amount of stock repurchase, this is a decision that will be reviewed going forward.
Jim Mullens asked a question about the MSM6300 and its attractiveness to Unicom and Vodafone.
IJ: Vodafone is very interested since it would like its GSM users in Europe to be able to use the 1x Verizon system when they travel to the U.S. Unicom has a large GSM network [in addition to its new CDMA network] and wants to offer data to its GSM users using the MSM6300 chipset and to offer voice using the GSM features. These phones will be a significant part of our business.
Don Schrock: Vodafone is very excited about the MSM6300; lower cost is one of the real strengths of this chipset.
[After the meeting I was told that at the outset the market for MSM6300 based handsets would be the higher tier - probably business people that travel to the U.S. frequently. But, as the price of MSM6300s drop with greater volumes, I would expect customers in the mid-tier who only occasionally traveled to the U.S. might buy these phones. I personally would probably switch from Sprint to Verizon (which I may do anyhow) if Verizon offers a MSM6300 handset that I could use on Vodafone’s system in Western Europe even though I only go there once a year – especially if the cost for calling back home were reasonable. If these Verizon phones also had a push-to-talk feature, I might buy my adult children phones we could talk cheaply when one of us is in Europe. But with the rate that Verizon has been approving 3G handsets, I’ll probably have to wait two years or more!]
[I do not remember if it was covered in the answers to Jim’s question but after the meeting I was told that Unicom would like to use this chip for data rather than offer GPRS to its GSM customers. Note that Unicom has many more GSM customers than it has 1x so this could be a large market if the price of the 6300 based dual-mode handsets is competitive. Anyone have the latest figures for the total number of Unicom GSM subscribers?]
Question about GSM licenses running out in 2008
IJ: They may well renew the licenses. This is very valuable spectrum that is being used for less effective technology.
Question about royalty income
Steve Altman: generally the royalty is the same for each country. The exception is China which has a lower rate to encourage them to employ CDMA nationwide.
Question about Chapter 11 – think it was about Leap Wireless
TT: Leap is not in Chapter 11 but it is talking to its lenders, including Qualcomm.
Question from man over 80 years old about confusing handset interfaces.
Paul Jacobs: BREW allows the customer to choose different handset interfaces. You will start to see that happen. This will be a differentiating feature for CDMA operators.
What about bugs and viruses coming to handsets?
BREW has a key consideration in that the applications have to be authenticated before they can be downloaded.
Paul Jacobs: BREW also allows the buggy applications to be withdrawn over the air and replaced with updated ones.
Question about using synchronization in WCDMA.
It is a software issue. There are other ways to synchronize besides GPS [a U.S. controlled system that the Europeans apparently did not want to use]. But GPS is available worldwide. The Chinese are using it.
Prior to most of the rollouts of 1x, 1xEV-DO, GPRS, Qualcomm always had a slide showing the importance of data speed in terms of the cost of providing 1 MB of data to the customer: GPRS was 42 cents; WCDMA 7 cents; CDMA 6 cents and 1xEV-DO was 2 cents. What has been the actual experience?
IJ: Maybe we need to update that slide. The experience has been fine although with more time some of the 1x cost figures have gone down.
Is there any risk that the pessimistic statement in Cannes two years about the timeframe for commercial quantities of WCDMA handsets could now be viewed as optimistic?
IJ [chuckling]: That refers to a statement I made at Cannes that we would see commercial quantities of WCDMA handsets in the 2004-2005 timeframe. We are working hard to accomplish that.
Question about royalties on WCDMA to Qualcomm if royalties have to be paid to others claiming WCDMA IP.
Steve Altman: If a licensee is using one claim of one patent, it must pay the full royalty to Qualcomm regardless of what it pays to third parties. The same rate is payable and this is provided in the contract with the licensee.
Think the question was about coverage problems.
IJ: Many of the problems are due to neighbor opposition in locating cell sites. But cell sites are becoming less expensive and less intrusive.
Closing Remarks of Dr. Jacobs
This has been a “very exciting” year. Something else was “very exciting” too.
[I have long been an observer of the number of “very excited” or “very exciting” comments from Dr. J. I think the high was three in a presentation before the huge run-up in 1999. I don’t believe that Dr. J has said “very excited” more than once in a presentation in the past couple of years. This count of two is very bullish signal!] |
