To all:
It does get frustrating doesn't it? Oh well. Here's some thoughts on the quarter.
/1/ Handsets. The 'bears' continue to carp about competition and Qualcomm continues to sell all the handsets it can produce. Of greater importance, margins are improving. Rich Sulpizio specifically noted that manufacturing economies, coupled with improved component costs, drove margins rather than mix, i.e. QPE did not benefit from a bubble of Q phone sales. The company has fundamentally improved its operations. Those worried about revenue stagnation in face of flat-out production capacity also should be gratified to hear than QC is looking to increase production capacity during the year. Finally, having seen the new handsets, I would strongly suggest that all interested parties pay careful attention to QC's announcements at CTIA...I think even Tero might be impressed by the form factor and performance metrics.
/2/ ASICs. This business is ultimately a proxy for CDMA growth worldwide although 1998 was distorted by Korea's problems. As we move through 1999, the MSM3000 should entrench QC's technical leadership and help the company maintain average selling prices (Irwin noted on the call that the company had already signed up twenty customers for the new chip...take THAT Cabi-breath). On the demand side, Irwin noted that Japan is beginning to ramp significantly. Large networks in Mexico, Brazil and Chile should enhance demand south of our border. However, sometimes it is most difficult to see what is obvious...simply put, the North American market is exploding. Sprint PCS, for example, will be reporting its fourth quarter net-adds shortly. I expect subscriber growth to exceed 800,000...that's not a typo...800,000. That means that Sprint PCS, by itself, was roughly equivalent to 35% of domestic Korean phone demand during the calendar fourth quarter. Get it? Three "Sprints" now equal the subscriber growth for ALL of Korea. Add in Airtouch, Alltel, Ameritech, BellAtlantic, GTE, PrimeCo and US West and it should be pretty obvious why QC's growth should accelerate as the year progresses.
/3/ Royalties. I was initially surprised by the "modest" $44mm royalty number, but I would direct everyone to Tony Thornley's conference call comments. Tony pointed out that QC estimates royalties and that the combination of seasonal demand and an improved Korean Won could lead to "a larger than normal positive adjustment" during the March quarter. My interpretation is pretty simple. With EPS already 10% above consensus estimates, the company took out a little "insurance policy" for the rest of the year by salting away some royalty income. I am really surprised that none of the First Calls that I read picked up this point as Tony's comment was pretty darn transparent.
/4/ Infrastructure aka "the problem child". First, Irwin specifically indicated that the company was taking steps to reduce and/or otherwise mitigate the division's adverse P&L impact. Important point #1: since current Street EPS guidance already factor in infrastructure losses, anything that reduces the P&L drag will be accretive to earnings, i.e. analyst estimates will have to go UP. Important point #2: Irwin stated that the company was pursuing an additional OEM-type relationship, similar to the one that QC enjoys with Nortel. He specifically commented that the partner would likely come from a geography other than North America. I would note that later in the call, when asked about the Ericsson litigation, Irwin commented that QC believes its position to be very strong, if in fact, the issue is not settled before the trial. Call me stupid, call me silly, but the combined comments had me tap dancing around my office. Since Irwin is not prone to gratuitous comments, I think he was alluding broadly to a pretty significant event....and nobody, to my knowledge, seemed to notice. Important point #3: the company plans to resume shipments to Russia. Beyond the incremental revenue from these new shipments, this implies that the $29mm in deferred revenue (from the September quarter) will get recognized in March. That means that March infrastructure revenue will include the U.S. West contract, Nortel, current and deferred shipments to Russia, Pegaso and Chile....this is a much improved picture and supports management's claim that "infrastructure gross profit margin should improve during the March quarter." Important point #4: Brazil. Qualcomm owns 16% of a consortium that acquired spectrum for a Brazilian wireless local loop system. Given QC's tier one partners, this network should be readily financeable. Finally, Important point #5: Irwin specifically spoke of near-term opportunities in China. This is particularly interesting since China is supposed to be locked up by GSM and working with Ericsson on W-CDMA. I wonder what one should infer from a careful reading of the tea leaves (pun intended) of this disclosure? Hint..hint..think about a geographically diverse OEM partner combined with a litigation settlement and an accelerating move toward convergence.
People...in my humble opinion, the pieces are falling into place. The clues are all there...some of us get it while others (sadly) still do not. One last comment. Jason commented earlier today regarding the supposedly astute H&Q analyst. Well, pardon my (typical) derision, but this guy claimed that QC "made" the quarter on the back of an investment gain. Since management EXPLICITLY pointed out during the conference call that there were charges offsetting this gain, one has to wonder where Mr. H&Q is coming from. Worse, QC has been telling everyone who would listen about the challenges facing its infrastructure business since November and ANYONE who follows the industry knows that March is a seasonally slower quarter...so the analyst's protestation regarding "diminished visibility" strikes me as particularly lame. Oh well.
FWIW...I think the stock traded off today because there were "whispers" that QC was going to announce an "infrastructure deal" during the conference call. When no such deal materialized, I suspect some more impatient institutions and/or hedge funds decided to head for the exits. So be it.
Best regards,
Gregg |
