To all:
My partner and I visited Qualcomm last Friday and the "nefarious" reason behind my absence from the forum was a recalcitrant modem in my laptop. Given our visit's proximity to the pending earnings release, we agreed beforehand that there would be no discussion of the December quarter (so I have nothing new to share in this regard). So briefly, what DID I learn?
/1/ management firmly and passionately believes that a converged 3G CDMA standard is an inevitability not just a possibility. One insight that I found particularly interesting was the belief that "3G" is more of a marketing ploy than a specific business opportunity, designed to provide cover for TDMA-based GSM's migration to direct sequence spread spectrum, i.e. CDMA. Perhaps even Ericsson lacks the temerity to simply tell its customers "oops...we sold you a bill of goods and now you need to replace all your network RF equipment and handsets." Suffice to say, Qualcomm remains extremely confident in its IPR position. Beyond this, while the company has tabled a POSSIBLE reduction in royalty rates in exchange for convergence, I do not believe that management would consider any deal that was not accretive to royalties in aggregate.
/2/ We toured QPE and were delighted to see the progress being made in factory automation and cost reduction. Assembly time has come down significantly and testing procedures have been automated and improvements have been made throughout the organization, beginning with the R&D process and extending right down to packaging protocols. While we know empirically that gross margins have been improving, it is nice to understand why this is occurring and even more encouraging to know that there is still much more to go. Thank you Jack Dollard.
/3/ The ASIC business is going very well and benefiting from accelerating subscriber growth in both the U.S. and Japan. The MSM3000 promises to significantly improve phone performance metrics, i.e. size, form factor and talk and stand-by times, and I suspect that, before long, Tero will have very little to talk about in this regard.
/4/ I continue to believe that most analysts are underestimating the company's royalty growth. Royalties will benefit from accelerating worldwide subscriber growth, a strengthened Korean Won and a rapidly growing royalty stream from non-Korean licensees. Since royalties are virtually dollar-for-dollar profit, I believe that Qualcomm is purposely very conservative in its guidance regarding this P&L line item...we'll get an empirical confirmation (or not) of this hypothesis next Tuesday.
/5/ I was pleasantly surprised to hear that Omnitracs is doing very and that the business has a number of interesting growth prospects. Those that are interested should read the 10K and understand the expanded business mandate and new products such as Trailer-Tracs. It's funny, but I think this little "throw-in" business is a jewel that could be worth up to $1 billion.
/6/ Infrastructure. Here is where things got really interesting and more than a little oblique. Management is clearly intent on reducing and/or eliminating this unit's drag on the P&L and balance sheet. Since I believe that the infrastructure unit is costing the company more than $1.00 per share in EPS AND that these losses are reflected in the company's current $2.50 to $2.70 EPS guidance (for FY99), any action that reduces this P&L drag significantly would increase the company's near-term EPS opportunity by a fairly important margin.
Perhaps more important than all the aforementioned sound bites was management's articulated interest in "unlocking the value of the company", to more tightly manage the business and to improve shareholder value. Courtesy of Korea and a handful of manufacturing problems last year, Qualcomm's PE has eroded steadily and, to my eye, unjustifiably so. Based on everything I saw last Friday, I firmly believe 1999 will be the year when the company's manufacturing operations close in on world-class status; where geographic diversity of CDMA deployments prevent a repetition of the Korean fiasco, the business model realizes some powerful operating leverage and the world adopts a single digital wireless standard based on CDMA. It has been a long-time in coming for our diamond in the rough, but I suspect the ultimate outcome with prove worth the wait.
One final comment. I visited seven companies on my most recent road trip. In my opinion, the quality of management that I interviewed varied widely from merely adequate to truly outstanding. But at the risk of sounding like a drooling sycophant, I have to say that Irwin Jacobs is simply in another league. Most every manager can articulate the corporate business strategy, many can do it will passion and fervor, but very few, precious few, are inspirational. Rarely do I feel privileged to have spent an hour with management, particularly so when my firm is a large shareholder. Still that is the only way to describe my sentiment after spending time with Irwin. Enough said.
Best regards to all,
Gregg |
