Qualcomm reported $0.75 operating EPS which was $0.12 above our estimate and
consensus of $0.63. Lighter-than-expected revenues were primarily the result
of component shortages in phones which we expect will persist for the next
several months. We estimate Qualcomm sold approximately 1.6 million phones
this quarter which places it behind Motorola, which produced 1.8 million
cdmaOne handsets. We believe this heralds the beginning of aggressive
competition from the two largest handset OEMs and will eventually lead to
accelerated pricing and margin declines. 1998 A 1999 E 2000 E
Q1 EPS $0.29 $0.33A $0.79 Q2 EPS 0.13 0.41A 0.69
Q3 EPS 0.17 0.75A 0.60 Q4 EPS 0.27 0.84 0.62
FY EPS 0.86 2.33 2.70 FY REVS (B) $3.347 $3,982 $4.452
CY EPS 0.90 2.79 2.39 CY P/E NM 56.8 66.5
FY Ends Sep Current Price $158 5/8
52-Week Range $19 - 164 Market Cap(M) $29,815
Shares Out(M) 187.9 Book Value $7.50
Net Cash/Share $2.39 2-Year EPS Growth 16%
CY00 P/E-to-Growth 4.16
Strong Quarter on Increased Margins and Light Revenue
Excluding one-time charges, Qualcomm posted EPS of $0.75 (vs $0.17) on revenue
of $1,004 million which was slightly below our $1,054 revenue estimate but
well ahead of our $0.63 EPS forecast. The upside was derived from strong
gross margins which came in at 40.5% versus our estimate of 34.6%. As
expected, the company took a large one-time charge on the sale of the
infrastructure division to Ericsson. The $116,887 charge consisted of mostly
expenses related to the transfer of resources to Ericsson and yielded an
unadjusted EPS of $0.31.Handset Sales Limited by Component Shortages
The slightly revenue shortfall was due primarily to component shortages in the
company's handset operations. Unlike Motorola, which reported shortages of
display's and filters, Qualcomm reported shortages across many parts; the
depth and breadth of which varied "day to day". The fact that Motorola
shipped more cdmaOne phones than QPE this quarter suggests its size enables
the company to get priority with component vendors. Although Qualcomm is
working with suppliers to eliminate the problem, management expects phone unit
and revenue growth to be limited by component shortages next quarter.
Source: Company Reports, H&Q Estimates.
As we expected, Motorola has now overtaken Qualcomm as the second largest
supplier of cdmaOne phones. We believe Motorola will continue to gain share,
passing Samsung next quarter to become the leading cdmaOne phone OEM. Nokia
is also ramping capacity this quarter with the introduction of the 6185,
followed by the 5100 series in 3Q and the 8800 series in the fourth quarter.
We believe the Nokia will exit the year just ahead of Qualcomm in unit sales.
Because the two big handset OEM's are increasing their share of the cdmaOne
handset market faster than growth in demand, Qualcomm's market share of
cdmaOne ASICs will also likely decline. This trend would be obviated if Nokia
began using Qualcomm's ASIC.Source: Company Reports, H&Q Estimates.
Source: Company Reports, H&Q Estimates.
The company's guidance for increased unit sales in ASICs offset by declining
prices suggests revenue and margins will be relatively flat quarter-to-quarter.
cdmaOne Handset Supply Expanding
As we had forecasted, ASIC sales came in at about 11 million units. This 22%
sequential increase combined with a 1.2 book-to-bill indicates Qualcomm's ASIC
customers continue to increase cdmaOne phone production capacity. Because
ASIC sales are a leading indicator of handset supply, we expect to see an
increase later this year in phones that use Qualcomm's chipset.
cdmaOne ASIC Conversion Into cdmaOne Handsets
cdmaOne ASIC Sales
Period Sep-98A
Dec-98A Mar-99A
Jun-99A Sep-99E
cdmaOne Handsets Using QCOM's ASIC
Source: Company Reports, H & Q Estimates
Management indicated that ASIC demand was strong across the company's 20 chip
customers which suggests that the ramp in capacity is not concentrated in a
few vendors. This makes it more likely that any excess capacity will be
spread over many suppliers making it less obvious early-on. Adjusting our
total cdmaOne handset forecast for the increased ASIC book-to-bill raises our
1999 cdmaOne phone capacity forecast of from 42.7 million to 44.7 million units.
cdmaOne Handset Demand
Unlike ASIC sales, which are a measure of supply, subscriber growth is a true
measure of demand. To develop our forecast we used the major cdmaOne
carrier's most current subscriber growth reports to derive a calendar year
estimate. To this value we added 35% replacement demand which is lower than
the 40% typical of the GSM/TDMA market but above the 33% replacement rate for
the IS-95 market in 1998.. 1999 World Wide cdmaOne Handset Demand
North America
Sprint PCS
PrimeCo Airtouch
Bell Mobile
Bell Mobility (CAN)
Ameritech Alltel
GTE
Clearnet (CAN)
Others Australia
Korea SK Telecom
Shinsegi
KT Freetel
LG Telecom
Hansol PCS Japan
DDI/IDO
* single month subscriber adds
Latin/South America
Telesp (Brazil)
Iusccell (Mexico)
Telcel (Venezuela)
Others
Source: Company Reports, SEC Filings, H & Q Estimates
1999 Copyright Hambrecht & Quist LLC. All rights reserved. The information
contained herein is based on sources believed to be reliable but is neither
all-inclusive nor guaranteed by our firm. Opinions reflect our judgment at
this time and are subject to change. We do not undertake to advise you of
changes in our opinion or information. In the course of our regular business,
we may be long or short in the securities mentioned and may make purchases
and/or sales of them from time to time in the open market, as a market maker,
or otherwise. In addition, we may perform or seek to perform investment
banking services for the issuers of these securities. Most of the companies
we follow are emerging and mid-size growth companies whose securities
typically involve a higher degree of risk and more volatility than the
securities of more established companies. For these and other reasons, the
investments discussed or recommended in this report may be unsuitable for
investors depending on their specific investment objectives and financial
position. This report is not a recommendation or a solicitation that any
particular investor should purchase or sell any particular security in any
amount, or at all.
on suitability considerations, please contact your account executive.
RESEARCH NOTES: H&Q publishes brief Research Notes covering very recent or
developing events or situations regarding companies or industries covered.
These reports are made available to interested clients of H&Q on a request
basis. They often contain only partial information in very brief, often in
outline form; their purpose is to provide rapid information and preliminary
evaluations of such events or situations which may very rapidly be changed as
a result of subsequent additional information and analysis. Please contactyour
Note Legend:(a) Hambrecht & Quist LLC maintains a market in these stocks.
(b) Hambrecht & Quist LLC has been an underwriting manager, or co-manager, or
has privately placed securities of these companies within the last three years.
(c) Hambrecht & Quist LLC has an investment position in these companies.
(d) A Hambrecht & Quist LLC employee is a director of these firms.
(e) The analysts covering these stocks have investment position.
(f) Options are available on these issues.
(g) Entities associated with Hambrecht & Quist LLC have an aggregate
beneficial ownership of more than 5% of the outstanding equity securities of
these companies.
(h) Hambrecht & Quist acts as a financial advisor to this company.
(r) Restricted. No recommendation at this time. May, but does not
necessarily, designate company in registration.
**** Hambrecht & Quist **** Hambrecht & Quist **** Hambrecht & Quist ****
Company: QUALCOMM Inc.Price: 158.6875Recommendation: Market PerformNotes: a, f
Date: 7/20/99Probable Over-capacity.
Management's suggestion that Korea could break the 10 million unit sale mark
this year is in-line with our forecast. This quarter's increase in Qualcomm's
ASIC sales should result in a commensurate increase in the phone supply which
was already well ahead of our forecasted demand. At 33.4 million, we estimate
that demand falls about 30% below forecasted capacity. The imbalance occurs
even for a 50% replacement market or an increase in subscriber growth by 20%.
Certainly changes in the economic outlook as well as accelerated buildouts in
Australia and Latin America could provide upside to demand estimates while a
weak performance by Nokia could reduce the supply. Still, the magnitude of
the gap between supply and demand suggests that 1999 will see some excess
phone production, which we expect would result in an acceleration of ASPerosion.
Royalty revenue of $86.6 million came in below our estimate of $93.5 but
will increase to quarter-to-quarter. The company reported $86.6 million in
royalties and $6 million in licensing fees. A 50% increase in Motorola's
cdmaOne handset sales and robust demand for the company's premium priced
StarTAC model should have more than offset the lower royalty rate Motorola
pays to Qualcomm (we estimate about 3%). Moreover, the demand for Qualcomm's
ASICs over the last two quarters indicates that handset unit shipments are
growing in 25 % - 30% per quarter rate, which, in a normal pricing
environment, should have boosted Qualcomm's royalties. As it was Qualcomm
posted a sequential increase in royalty payments of just 13% which suggests
that ASP erosion among Qualcomm's chip customers may be accelerating.
Because pricing on many carrier contracts is "lumpy", this quarter's royalty
growth may simply reflect new contract pricing at some of Qualcomm's largest
customers. On the other hand, aggressive competition from Motorola would also
lead to increased price declines. This would be in-line with our thesis that
the advent of competition from the world's two largest handset OEMs (Nokia and
Motorola) will bring cdmaOne handset pricing closer to the GSM/TDMA market and
put downward pressure on Qualcomm's royalty revenues.
Source:cdmaOne Development Group, Company Reports, H&Q
Estimates.
Increasing our EPS estimate to reflect near-term strength in handset and
ASIC demand. Component shortages notwithstanding, we believe Qualcomm will
improve its operating performance over the next quarter as ASIC customers
continue to expand handset production. We remain cautious about the company's
growth prospects over the next twelve months as Motorola, Nokia and later
Ericsson increase their penetration of the cdmaOne handset market. We believe
Qualcomm's large share of ASIC sales combined with its large handset revenue
stream will expose the company to price and margin pressure from a glut of
cdmaOne handsets likely to reach the market in the second half of this year.
Estimate Changes ($) Q1 EPS
Q2 EPS Q3 EPS Q4 EPS
FY EPS FY REVs ($ B) CY EPS
Source: Company Reports, SEC Filings, H & Q Estimates
Although we certainly expect the stock to do well in the near-term, the
company will likely face difficult as the year progress and the new
competitive environment materializes. At $158 11/16, the stock is trading at
66.5 times our new FY2000 estimate of $2.70 which is a large premium to its
16% EPS growth rate. If the stock were given a mid-group multiple of 38 it
should trade in the $82 - $102 range. Source: Reuters, H & Q Estimates
Variance
( $ Millions) Q3FY99 Q3FY98 %Chg. Q2FY99E Variance
Revenue 1,004,066 875,497 15% 1,054,196 (4.8%)
Operating Income 98,379 53,353 84% 144,985 (32%)
Income Before Taxes 90,689 8,229 1002% 34,981 159%
Net Income 58,948 5,843 909% 23,787 148%
EPS 0.75 0.17 330% 0.63 19%
Shares 187,883 147,956 27% 144,865 30%
Segment Q3FY99 Q3FY98 %Chg. Q3FY99 Variance
Communications Systems 823,561 758,627 8.6% 872,421 (5.6%)
Contract Services 87,860 69,947 26% 83,237 5.6%
Royalties, License & Dvlpmt 92,645 46,923 97% 98,538 (6.0%)
Margins Q3FY99 Q3FY98 %Chg. Q3FY99 Variance
Gross 40.5% 28.6% 11.8% 34.6% 17.1%
Operating 9.8% 6.1% 3.7% 13.8% (28.8%)
Pretax 9.0% 0.9% 8.1% 3.3% 172.2%
Net 5.9% 0.7% 5.2% 2.3% 160.2%
Operating Expenses Q3FY99 Q3FY98 %Chg. Q3FY99 Variance
S&M 50,460 64,693 (22%) 57,981 (13%)
R&D 93,791 92,810 1.1% 107,528 (13%)
G&A 54,424 39,961 36% 53,764 1.2%
Balance Sheet Q3FY99 Q3FY98 %Chg.
Cash 436,100 179,905 142%
Accounts Receivable 747,059 833,107 (10%)
Inventories 212,941 393,805 (46%)
DSO 67.0 85.6 (22%)
Inventory Turns 11.2 6.3 77%
1999 Copyright Hambrecht & Quist LLC. All rights reserved. The information
contained herein is based on sources believed to be reliable but is neither
all-inclusive nor guaranteed by our firm. Opinions reflect our judgment at
this time and are subject to change. We do not undertake to advise you of
changes in our opinion or information. In the course of our regular business,
we may be long or short in the securities mentioned and may make purchases
and/or sales of them from time to time in the open market, as a market maker,
or otherwise. In addition, we may perform or seek to perform investment
banking services for the issuers of these securities. Most of the companies
we follow are emerging and mid-size growth companies whose securities
typically involve a higher degree of risk and more volatility than the
securities of more established companies. For these and other reasons, the
investments discussed or recommended in this report may be unsuitable for
investors depending on their specific investment objectives and financial
position. This report is not a recommendation or a solicitation that any
particular investor should purchase or sell any particular security in any
amount, or at all.
on suitability considerations, please contact your account executive.
RESEARCH NOTES: H&Q publishes brief Research Notes covering very recent or
developing events or situations regarding companies or industries covered.
These reports are made available to interested clients of H&Q on a request
basis. They often contain only partial information in very brief, often in
outline form; their purpose is to provide rapid information and preliminary
evaluations of such events or situations which may very rapidly be changed as
a result of subsequent additional information and analysis. Please contactyour |
