Michael:
Unlike First Boston's Marc Cabi, who I think has a specific malicious agenda, I am more sanguine about Merrill's Michael Ching. Given what people are paid in this industry, I really shouldn't cut him any slack, but he is a decent kid who seemed to get a little overwhelmed.
Remember that he had a "hold rating" on the stock prior to the earnings release...so he clearly wasn't totally up to speed on current events. Now factor in the stock being up nine points and consider that his salesforce (and clients) were howling that "he blew the call". Being a little young and probably a little immature professionally, cognitive dissonance kicked in and he spewed out a rather thoughtless and inaccurate First Call note. He clearly did not understand the license and royalty accounting (which is very conservative) or the profundity of the company's guidance regarding forward handset margins and infrastructure profitability. Fine. Often we forget that "analysts" are human beings with emotions and foibles just like the rest of us, so I am inclined to cut Michael a little slack (and to spend some time working to get him educated).
I continue to be amazed by all the focus on the June quarter...which was, to my mind, a throw-away interim to be endured not enjoyed. As I noted in my last detailed post, the real excitement should begin with the September quarter. Total revenues will be up; handset volumes will be rise and margins should surge due to improved mix (i.e. Q800 shipments) and the absence of rework costs (which the company noted were "significant" in the June quarter); infrastructure revenue should be up sharply (due to both cellular and Globalstar shipments); ASICs will benefit from worldwide growth, including the Japanese launch, network development throughout the Americas and a stable Korea; royalties should rise, tracking accelerating subscriber growth. It's astonishing, after all the previous focus on the Korean Won's devaluation, that nobody and I mean nobody, seems to be talking about the Won's recent strength. Prior to the Asian crisis, the won was trading around 900 to the dollar. At the bottom it got to 2000 to the dollar. Overnight it rallied another 2% (against the dollar) and is now trading at 1245 to the buck (versus 1390 at quarter end). Besides the obvious positive impact on QC royalties, I would note that the strengthening currency is indicative of Korea's progress and improving financial stability...this is another positive.
Wars are not won in a day. Three weeks ago, people on this thread were worrying about a return trip to the 40's. Today people seem disappointed that the stock did not go straight-line into the 70's. But let's be realistic...the June quarter simply provided us with important clues as to what will happen prospectively. These clues were obvious to some and lost on others. Some of the shorts probably covered, but others probably continue to believe Marc Cabi's drivel and may be doubling up right here. That's how markets work and that's why this business is so wonderful...each day professional investors are required to synthesize all the available facts and near-facts and make a judgment. Some are smarter than others, some are more diligent than others, some get trapped by their emotions and ego and some are simply rat poo-poo. So be it.
In my mind, the September quarter--not the June quarter--will be the seminal period for the Qualcomm faithful. In September investors--for the first time--will get a snapshot of the company's underlying profitability as the infrastructure unit moves toward breakeven. Margins will gap higher on rising revenues and the company's enormous operating leverage will become obvious to all. When this happens, the shorts, the lazy and the malicious will figuratively and literally get their heads handed to them. I, for one, plan to enjoy it immensely.
Best regards,
Gregg |
