Everyone:
Tim Luke at Lehman Brothers reduced his estimate for FY99 infrastructure revenue from $675mm to $575mm and pulled down his fiscal 1999 EPS estimate from $2.70 to $2.50 (the latter being current Street consensus). I spoke with Tim this morning and to paraphrase his position, he is concerned that the emerging market financial crisis will impair the build-out of networks in Mexico, Russia et cetera as operators struggle to obtain capital. His conclusion was to pull his numbers down to consensus rather than risk being ahead of the curve were QC to achieve infrastructure breakeven later in the year than he originally anticipated.
I believe Tim to be a conscientious analyst, but think he has fundamentally blown this analysis. Let me offer some perspective. During the June quarter, Qualcomm reported $46mm in royalty revenue. With subscriber growth accelerating world-wide, not to mention a significant recovery in the Won versus the dollar, I find it near impossible to model QC's royalties for FY99 to much below $235mm (which represents just a 27% increase over the June quarter run-rate). On a tax-affected basis, royalties alone should produce something close to $2.00 in EPS during Fiscal 1999. Consequently, for Tim's estimate to be right, he is modeling the entire $4bb manufacturing operation to earn just $0.50 per share ($38mm after-tax), which implies an all-in operating margin of just 1.5%. Now here is where things get really strange. Tim believes that QC will earning at least $0.54 in the September quarter. Based on the current run-rate of royalties, his model necessitates a 2.5% manufacturing margin in order to support such an estimate. Therefore, in order for his FY99 model to be correct, he must be assuming that QC's operating margins decline by 40% despite improved infrastructure volumes, higher handset margins , a new ASIC product cycle (MSM 3000) and significant G&A leverage. In contrast to these mechanical implications deriving from his estimate cut, Tim's written note suggests that he is simply estimating slower IMPROVEMENT rather than a wholesale deterioration in the business model.
Suffice to say, I disagree with his logic and I disagree with his conclusion. Tim is entitled to his opinion, and despite my disagreement with it, I ascribe no malice to his actions. Time will tell who is right and who is wrong.
Best regards,
Gregg |
