I love analysis by proxy--Cymer fell, ipso facto, QC must fall a similar amount. OK. But here are some fundamentals worth considering. At $45/shr QC is being valued at roughly $3.2 billion. The "no growth" Omnitrac's business generates between $40mm and $50mm of cash flow, so let's give it a value of $500mm. Add in another $120mm for the company's ownership interest in Globalstar, and we have "non-core" assets worth $620mm--so an investor is paying $2.6bb for the product portfolio (ASICs, handsets, infrastructure), the intellectual property rights (IPR) and the contract services business (i.e. Globalstar development + terminals + gateways).
Let's start with the IPR, which can be valued as the net present value of the contractual royalty stream plus the incremental value achieved through additional license agreements (Ericsson perhaps?). Setting the won issue aside for a moment, CDMA attracted roughly 10mm subscribers in 1997 and current estimates call for something between 15mm and 20mm additional subs in 1998 (driven by network maturation in North America, Japan coming on line, rest-of-world etc. Please note that for 1998 and beyond, the subscriber delta will be outside of Korea (with all due respect to Forbes). Moving beyond 1998, let's assume compound subscriber growth decelerates to only 35% per year on a go forward basis (which seems extraordinarily conservative), and CDMA handset sales ramp to 24mm, 32mm and 43mm (1999, 2000 and 2001 respectively). Now, let's consider royalties and the Won. QC has guided analysts' Q2 royalty estimates down "a few million dollars" from Q1 due to the Won's devaluation, partially offset by increased unit shipments. This conservatively foots to a $37mm-$38mm royalty rate for Q2 (excluding revenue from license agreements). Now let's assume (conservatively again) that 40% of all CDMA subscribers were added during October through December (i.e. 4mm handsets sold during the period) and that 80% of QC's royalty stream for the March period is handset related (the balance deriving from infrastructure). This suggests that with the Won stopped at 1680 to the dollar, QC will earn a royalty around $7.50 per phone. Now, assuming that (a) the Won never recovers, (b) Korean vendors forever remain the only alternative to QPE and (c) QPE holds on to 33% of the market, then (whew!) handset royalties alone for FY99, FY00 and FY01 should be a least $120mm, $160mm and $212mm. Grossing up for infrastructure takes the numbers to $144mm, $192mm and $254mm respectively. Now remember, these estimates are based on very conservative subscriber growth, and the (incorrect) presumption that only the Koreans will make phones (and therefore pay royalties based on depreciated currencies). Furthermore, this model presumes that QC will ship almost 8mm, 10.5mm and 14mm handsets over the same period (revenues of $2.8bb, $3.4bb and $3.9bb billion respective after factoring in price declines).
So what's the point--before this post becomes "War and Peace"--I think any reasonably astute analyst would conclude that QC's valuation (net of Globalstar and Omnitracs) is LESS than the net present value of a very conservative estimation of the royalty stream. Said another way, the Street is currently assigning a negative value to: the CDMA ASIC, handset and infrastructure businesses, the Globalstar development contract, interests in several cellular networks, Eudora and the economic opportunity to attract further licensees. So, for all those experts looking at stock charts and tea leaves, I suggest you do a little fundamental scribbling before buying off on the short "cited" Forbes story. |
