bdog:
It has never been my practice to immediately opine on QC's reported results because I presume the thread is interested in thoughtful analysis rather than cheerleading. It takes time to understand and process all the new information, not to mention discuss trends with management, so I generally defer until I have something of value to say
First of all, the September quarter was spectacular. Anyone criticizing the company for a "revenue shortfall" must be an analytical horse's ass. The company generated 50%+ revenue growth during a period of near chaos in many emerging markets. It's seems bizarre that the market sold the stock down below $40 due to fears that the company's business would be impaired by world events only to criticize a performance that exceeded expectations by over 30% (adjusting for Leap). Moreover, the gross margin expansion demonstrates that (a) the company is getting its operational house in order, (b) there is no structural reason for inadequate manufacturing margins and (c) QC's has operating and EPS leverage. Looking backward I was very satisfied with what the company accomplished during the period.
The stock's weakness in my judgment derives from the company's very conservative guidance for calendar Q4. Remember all the arrows in the back that Dr. Jacobs took after the company was forced to recant its bullish guidance last February? Remember all the stupid diatribe about how management "deliberately deceived everybody?" Well, management seems bound and determined to make sure that external expectations do NOT get out of hand, particularly given the unsettled conditions in Asia and Latin America.
Now here is the important wrinkle. Given the company's improved gross margin performance (and management's expectation of further margin expansion), the only way to hold forward estimates in check was to talk down revenue projections. For example, management pointed out that while Korean domestic demand has held up better than expected so far, it would be logical to presume some slowing in subscriber growth due to high penetration rates. While North America, i.e. U.S., subscriber growth is accelerating nicely, DDI's network in Japan has struggled with some network problems, apparently now resolved, that slowed the subscriber ramp. As Mexico and Brazil won't be a factor until the middle of next year, the company bent over backwards to be cautious regarding handset and ASIC revenue growth over the next couple of quarters. Moreover, management is concerned that infrastructure revenues will remain choppy as network operators struggle to secure the financing necessary to commercialize their networks.
Bottom line. QC is currently blessing 1999 EPS estimates in a range between $2.50 and $2.70, versus $1.88 (excluding Leap and other noise) for FY98, on revenues around $4bb. Given the $0.66 Q498, some analysts have expressed disappointment regarding this guidance, suggesting that the company should be doing much better. I, for one, do not think that guidance to 33%-to-44% EPS growth is a tragedy, particularly given the uncertainties in the world business climate and my sense that the company is being EXTREMELY conservative. I also think the company can, should, probably will, better this guidance...but management is determined NOT to repeat the February debacle.
A dispassionate man from Mars, looking at QC from the standpoint of prospective earnings growth (33% to 44%), forward PE multiple (~22x), upside potential, economic opportunity and the likelihood for standards convergence around QC's technology, would probably determine the stock to be extremely undervalued...particularly in comparison with most other technology companies in the marketplace. However, sell-side analysts are hardly dispassionate and the market rarely rewards companies that reduce forward expectations, regardless of management's conservative intent. I absolutely believe that had management given the Street no guidance, and analysts been left to extrapolate September's results, we would be looking at consensus estimates between $3.25 and $3.50 and a stock well on its way to $100. That would have been fun, right up until circumstances potentially necessitated guiding these estimates lower, then there would have been hell to pay and QC would (again) find itself back in the dog house. In contrast, I believe that management has deliberately low-balled the Street, setting the company up to consistently meet or exceed all expectations. Since the stock is very much undervalued measured against even baseline expectations, I think it will work higher as the momentum crowd finishes selling and more thoughtful investors evaluate the fundamentals. Those of you looking to trade out after a quick pop to $80 will be disappointed; those of you who prefer a more consistent financial performance, reduced stock volatility and more predictable appreciation should be content.
Best regards,
Gregg |
