Michael:
First things first, QC will be much closer to $4 billion in revenue for FY98 than $2 billion, as the first quarter run-rate would imply $3.2bb and management expects Q2 revenue to be up from Q1. Since we're debating size (and assuming it matters), it would not be out-of-line to gross up the royalties. Think about it this way, most companies would kill to have 20% operating margins. Well, QC's royalty stream is 100% pretax income, so if we gross this cash stream up by a factor of five to reflect manufacturing-equivalent revenue, it would make the company almost $800mm larger. However, I would argue that QC's current size is less germane than its licensing strategy.
Compare MSFT to AAPL. Early on, Microsoft made DOS available to all comers on commercially attractive terms; Apple refused to license its operating system, and up until its short-lived dalliance with clones, insisted on manufacturing all the hardware. The latter strategy resulted in Apple's increased isolation; ultimately the company lacked the resources to beat CPQ's manufacturing, DELL's marketing, INTC's microprocessors and MSFT's software.
QC has licensed IS-95 to over fifty companies, precisely to avoid Apple's mistake. Irwin Jacobs has publicly stated that its better (with respect to the company's manufacturing operations) for QC to have 10% of a huge market than 100% of a stillborn one. Given this perspective, it drives me crazy when the pundits claim that competition is going to obviate QC's manufacturing operation. The company's entire business model was constructed to foster dynamic competition, insuring that CDMA would evolve and improve rapidly.
I don't think that QC needs to partner. It IPR position is self-evident; it is dominant in ASICs and handsets (and the latter is more profitably than it appears if one deconsolidates Sony's piece of the business). The infrastructure business appears to be gaining significant momentum (was I the only one who heard Harvey allude to a breakeven quarter on the near horizon?). Finally, as I've said before, QC has already partnered with Nortel, Hughes and Hitachi for CDMA infrastructure, Loral for Globalstar and Sony for handsets. Management has not proven to be shy in this regard.
Best regards,
Gregg |
