Another opinion any comments? Still long anyway
MERRILL LYNCH
QUALCOMM REPORTS CONFUSING RESULTS
**The views expressed are those of the macro department and do not
necessarily coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
ú The company reported operating EPS of $0.27
versus $0.35, slightly above consensus EPS
estimates of $0.26. Revenues increased by 68%
to $875.5 million versus $520.3 million.
ú We are fine-tuning our fiscal 1998 EPS
estimate from $1.50 to $1.54. We are also
establishing a fiscal 1999 EPS estimate of
$2.35.
ú June quarter results included some confusing
items that make it difficult to assess the quality
of the earnings, and the growth prospects
going forward.
Fundamental Highlights:
ú Revenues were slightly below our expectations
reflecting weaker than expected sales of
CDMA phones offset by strong ASIC and
infrastructure sales.
ú Operating EPS reflect $5.5 million ($0.06 per
share after tax) in equity losses of certain
investees, and a significant adjustment to the
royalty payments to correct under reporting
of royalties in the March quarter.
QUALCOMM - 23 July 1998
2
Highlights of June Quarter Results
QUALCOMM reported a 68% increase in revenues to
$875.5 million versus $520.3 million. Communications
Systems revenues increased by 81% to $758.6 million
versus $418.6 million, and revenues from contract services
increased by 29% to $69.9 million versus $54.1, but
license and development fees decreased by 1% to $46.9
million versus $47.5 million.
The company reported EPS of $0.08. However, reported
results reflect a $20 write-off of the investment in
NextWave Telecom. Excluding this one-time item,
operating EPS were $0.27 versus $0.35, slightly above
consensus EPS estimates of $0.26.
As for the balance sheet, cash and equivalents were $410.0
million as of June 28, 1998, about $138 million below the
previous quarter. Accounts receivable were $787.9 million
(86 days sales outstanding), and inventories were $393.8
million (6.3 inventory turns ratio).
Business Trends
Revenues were slightly below our expectations, reflecting
weaker than expected sales of CDMA phones.
QUALCOMM Personal Electronics (QPE) did manage to
ship 1.3 million phones in the quarter despite having some
problems with the plastic casing on their Q-phones. The
company indicated that they have shipped over six million
phones to date, which would give them about a 50%
share of the global CDMA phone market. With new
phone manufacturers expected to enter the market over the
next six months, we are concerned about
QUALCOMM's ability to defend its market share over
the near term.
QUALCOMM's ASIC division shipped about four million
Mobile Station Modems (MSMs) during the quarter, and
20 million MSMs to date. The ASIC business was a little
better than expected due to strong demand from
Korean phone manufacturers. The number of CDMA
subscribers added in Korea in the June quarter almost
doubled to 2 million versus 1.1 million a year ago.
QUALCOMM has also started shipping chipsets to
Japanese phone manufacturers who will be supplying DDI
and IDO with CDMA phones.
There were positive developments in the infrastructure
business. The company shipped 10 GlobalStar gateways in
the quarter, and announced a $650 million contract with
Pegaso PCS (of which QUALCOMM is a partner) in
Mexico. Management indicated that it expected to start
shipping CDMA infrastructure equipment to Pegaso in the
September quarter.
Based on these events, we are fine-tuning our fiscal 1998
EPS estimate from $1.50 to $1.54. We are also
establishing a fiscal 1999 EPS estimate of $2.35.
However, we are concerned about the quality of
QUALCOMM's earnings. June quarter results reflected
some potentially confusing items on the income
statement including:
1. Operating EPS includes $5.5 million ($0.06 per
share after tax) in equity losses of certain investees.
While these losses will disappear from
QUALCOMM's financial statements when its share of
equity investments in cellular operators is spun off
into a separate company in late September, their
contributions were reflected in our EPS estimates.
2. Gross margins improved by almost 200 basis points
sequentially. However, cost of goods included a one-time
adjustment of about $8 million to reflect the
reclassification of warranty provisions, resulting in
gross margins being overstated by about one point.
The offset was that the minority interest payment to
SONY was also overstated by $8 million.
3. Royalty payments were significantly higher than
expected. Part of this was due to an adjustment in the
$18 million in royalty payments recognized in March.
In the March 1998 quarter, QUALCOMM began to
account for its royalties on an accrual basis based on
its best estimate at the end of the quarter. The strong
results for the June quarter reflect an upward
correction of the March quarter estimate based on
actual results. We estimate this one-time
adjustment at about $10 million.
Because of these items, it is difficult to assess
QUALCOMM's future earnings growth potential. We
remain Neutral (3) on the stock for the intermediate term.
Price: $62
Estimates (Sep) 1997A 1998E 1999E
EPS: $1.11 $1.54 $2.35
P/E: 55.9x 40.3x 26.4x
EPS Change (YoY): 38.7% 52.6%
Consensus EPS: $1.56 $2.44
(First Call: 20-Jul-98)
Q4 EPS (Sep): $0.41 $0.43
Cash Flow/Share: NA NA NA
Price/Cash Flow: NM NM NM
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: C-3-2-9
Mkt. Value / Shares Outstanding (mn): $4,586.6 / 74
Book Value/Share (Jun-98): $15.34
Price/Book Ratio: 4.0x
ROE 1998E Average: 10.5%
LT Liability % of Capital: 38.7%
Est. 5 Year EPS Growth: 25.0%
Stock Data
52-Week Range: $71 15/16-$43 1/4
Symbol / Exchange: QCOM / OTC
Options: Chicago
Institutional Ownership-Spectrum: 26.7%
Brokers Covering (First Call): 16
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-96)
Growth: Overweight (07-Mar-96)
Income & Growth: Overweight (07-Mar-96)
Capital Appreciation: In Line (13-Jan-98)
Market Analysis; Technical Rating: Below
Average
(27-Apr-98)
*Intermediate term opinion last changed on 06-Feb-98. |
