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Technology Stocks : The New Qualcomm - a S&P500 company -- Ignore unavailable to you. Want to Upgrade?

To: Ramsey Su who wrote (55)	7/23/1999 12:02:00 AM
From: Ruffian	Read Replies (1) \| Respond to of 13582

Q Spending> Where The Q spends Its Money, WSJ> July 23, 1999 Page One Feature High-Tech Gore Lags in Silicon Valley As a Dark Horse Steals Some Thunder By GLENN R. SIMPSON and PHIL KUNTZ Staff Reporters of THE WALL STREET JOURNAL In the hotly fought contest among presidential hopefuls for high-tech funds, Al Gore is starting to look like an also-ran. Arguably the nation's first high-tech politician, the vice president dines regularly with a group of top technology executives dubbed the "Gore-techs." He didn't invent the Internet, but even his opponents concede that he has spent two decades studying and promoting leading-edge technology. Nonetheless, when it comes to wresting contributions from the newly wealthy nabobs of U.S. technology, Mr. Gore, by one key measure, has fallen behind a dark horse from the industrial state of New Jersey. In Silicon Valley, former Sen. Bill Bradley has drawn the most money, according to an analysis by this newspaper of campaign contributions from Santa Clara County and the surrounding region. "The bottom line is, I think he gets it," says Joe Horowitz, chief executive of the Menlo Park, Calif., firm Geocast Network Systems Inc. Describing himself as an economic conservative and social liberal, Mr. Horowitz says Mr. Bradley is "a thoughtful listener" who processes "information to form opinions and views that then tend to stick." Mr. Bradley's success in Northern California has even won him grudging respect from fund-raisers and contributors in the George W. Bush camp. Venture capitalist Floyd Kvamme attributes Mr. Bradley's popularity to his free-trade views, a big plus among export-dependent high-tech companies. Two Productive Events Mr. Bush has done well with technology companies, too. A pair of events in San Francisco and the Silicon Valley grossed $1.7 million for the Bush campaign just as the second-quarter fund-raising period was closing, helping him reach his $37 million total for the first half. Though edged out by Mr. Bradley in the geographic confines of the Silicon Valley, he appears to have raised much more than either of the Democrats from donors employed by companies with such high-tech terms as cyber, digital and .com in their names, as well as some high-profile companies such as Hewlett-Packard Co. In that unscientific analysis, Mr. Gore did somewhat better than Mr. Bradley. High-Tech Bets Sum of donations to major presidential candidates from donors listing Silicon Valley addresses Recipient Amount Bill Bradley $408,600 George W. Bush 371,145 Al Gore 242,200 Elizabeth Dole 27,750 John McCain 26,201 Gary Bauer 17,430 Dan Quayle 4,671 Source: The Center for Responsive Politics As of June 30, the candidates had collected about $103 million -- more than three times the amount that had been gathered at a similar point in the 1996 campaign. Mr. Bush raised the most, with $37.3 million, followed by Mr. Gore's $19.6 million, Mr. Bradley's $11.7 million and $6.3 million for Sen. John McCain, the Arizona Republican. After these top four fund-raisers, the totals for the rest of the field drop off sharply. Traditional Sources For the most part, The Wall Street Journal's analysis shows, both Mr. Bush and Mr. Gore have relied heavily on traditional sources for their funds -- particularly lawyers. Mr. Bush raised $900,000 from Texas lawyers, much of it coming from just four big law firms specializing in corporate defense -- Vinson & Elkins, Jenkins & Gilchrist, Baker & Botts and Haynes & Boone, according to a separate study of major financing sources by the Center for Responsive Politics, a nonprofit research organization based in Washington, D.C. Mr. Gore relied heavily on trial lawyers and raised more money than the others in the first half from Hollywood and Beverly Hills. His total was almost $210,000, compared with Mr. Bush's $174,000 and Mr. Bradley's $76,000. He also raised nearly $200,000 from federal government employees. Tracking the money behind political campaigns is a tricky business. Campaign officials refuse to identify all the fundraisers who solicit friends and business associates and the amounts they raise. More important, they frequently fail to disclose key information about their donors, omitting employers or occupations; they are required to make their best effort to do so. A quarter of the donors to the top four fund-raising candidates weren't completely identified, according to the Center for Responsive Politics. The records also don't reflect money from relatives, leaving thousands of donors who are undoubtedly tied to corporate contributors listed only as students and homemakers. Biggest Surprise But the records do suggest certain trends, and the most surprising story so far is Mr. Bradley's strong showing in Silicon Valley. Residents of Santa Clara County and the surrounding communities that constitute Northern California's high-tech base contributed nearly $410,000 to Mr. Bradley in the first half of the year -- 70% more than they gave to Mr. Gore. Mr. Bush wasn't too far behind Mr. Bradley, raking in about $370,000. That strict geographic definition of Silicon Valley understates the actual level of support from the executives of technology companies; for each candidate, the true number is much larger, but the reported figure is a useful yardstick. Placing Bets Donations to top fund-raisers in the presidential primaries from selected professions and industries (through June 30) Bill Bradley Al Gore George W. Bush John McCain Lawyers 1.7 3 3 0.2 Real Estate 0.4 0.6 1.3 0.1 Securities, Investments & Misc. Finance 1.6 1 3 0.3 Doctors & Health Professionals 0.3 0.3 1 0.1 Commercial Banks 0.3 0.2 0.7 * Insurance 0.1 0.1 0.4 * Accountants 0.2 0.2 0.4 * Note: In millions of dollars, rounded to the nearest $100,000 *Less than $50,000 Source: Estimates based on Federal Election Commission data and figures compiled by the Center for Responsive Politics ...And From the West Coast Contributions from Hollywood and Beverly Hills Bill Bradley Al Gore George W. Bush John McCain $76,000 $192,465 $151,149 $5,905 Source: Federal Election Committee data The Most Generous Ranking of companies whose employees contributed to presidential campaigns Bill Bradley Lehman Brothers $80,500 Citigroup 74,150 Goldman Sachs 65,000 Merrill Lynch 56,500 Morgan Stanley Dean Witter 55,750 JP Morgan 51,600 Winston & Strawn 45,750 Jeffries 45,500 Mayer, Brown & Platt 44,050 Kushner 40,000 Al Gore Federal Employees $194,564 Ernst & Young 114,200 Viacom 69,250 BellSouth 66,750 Goldman Sachs 58,750 Nat'l Jewish Democratic Council 49,750 Citigroup 43,750 Holland & Knight 42,750 Jenner & Block 38,500 Akin Gump 31,500 Source: The Center for Responsive Politics George W. Bush Vinson & Elkins $184,850 Andersen Worldwide 120,450 Jenkens & Gilchrist 99,450 Enron 86,650 Baker & Botts 82,050 Enterprise Leasing 81,000 Ernst & Young 72,950 Haynes & Boone 72,000 American General 71,223 Bank of America 70,100 John McCain Viacom $48,750 US West 45,600 BellSouth 24,750 Goldman Sachs 22,000 CSX 18,450 Microsoft 17,500 Del Webb 16,000 Sanford C. Bernstein 14,250 MGM Grand 14,163 Charles Schwab 14,000 One of the keys to Mr. Bradley's Santa Clara success is Daniel Okimoto. Born to poor Japanese immigrants, Mr. Okimoto won a scholarship to Princeton in 1960. There, he met what he calls a "country bumpkin" from a one-stoplight town in Missouri, Mr. Bradley. Both outsiders in Princeton's prep-school world, the two men quickly bonded. Mr. Bradley went on to fame and fortune as a professional basketball player and U.S. senator, while Mr. Okimoto pursued a career as a professor of international affairs at Stanford University in Palo Alto. The two stayed in touch, in part because of a mutual interest in Asia. When Mr. Okimoto set up an Asian-studies center at Stanford, he helped then-Sen. Bradley nurture his fascination with Asia by funding numerous trips and conferences. Eventually, Sen. Bradley joined the board of Stanford's Institute for International Studies. By the time Mr. Bradley retired from the Senate in 1996, the area around Stanford had come to be known as Silicon Valley. Mr. Okimoto persuaded the university to offer Mr. Bradley a visiting professorship. Presidential politics weren't on his mind, Mr. Okimoto says, just friendship. Nonetheless, he says, Mr. Bradley certainly used the post, and some of Mr. Okimoto's connections to California's Asian community, to gain entree to the high-tech industry. Mr. Bradley also benefited from his ties to a number of other Princeton classmates who made their careers in California's high-tech world, including John Diekman, a major San Francisco venture capitalist. According to interviews with contributors, Mr. Bradley's appeal stemmed from a centrist message laced with sophisticated analyses of often-arcane financial, economic and technical issues. The presentation proved highly alluring to the wealthy, intellectual, libertarian-leaning but rather apolitical population that makes up the industry. Father's Old Allies Meanwhile, Mr. Bush, with the help of some Northern California allies of his father, such as former Republican National Committee Finance Chairman Howard Leach, put together an impressive roster of cyber-entrepreneurs and the people who finance them, including Mr. Kvamme, the venture capitalist. Many had never had much to do with politics before being enticed by the Bush campaign. Gregory Slayton, chief executive of the Internet direct-marketer MySoftware.com, says he had donated to a few candidates in the past but had never engaged in fund raising until agreeing to help head the Silicon Valley money effort. He, in turn, roped in other political neophytes, many of whom previously leaned to the Democrats. Edward Brinskele, president of a new 100-employee software-solution company called MVX.COM, says he reluctantly voted twice for Mr. Clinton, but he and his wife have contributed $2,000 to Mr. Bush. "You're talking about a new culture of companies that embraces change and thrives on change, and right now, George is change and Gore is more of the same," Mr. Brinskele says. There's also the usual self-interest. Mr. Bush's positions on key issues dovetail with those of his high-tech backers: an antiregulation bent, a record of fighting for tort reform, a free-trade philosophy and a sympathetic ear on visas for high-tech workers. To be sure, Mr. Gore remains popular with many technology executives, and he continues to benefit from the support of venture capitalist John Doerr, Mr. Kvamme's colleague at Kleiner Perkins, which has a broad reach in the industry. Roger Salazar, spokesman for the Gore campaign, says Mr. Gore's performance in the technology industry is in line with expectations. The Lawyer Connection In addition, the kind of intensive focus Mr. Bradley brought to bear by spending a year in Silicon Valley while at Stanford wasn't possible for the vice president. Moreover, Mr. Gore has been caught in the middle of the war between two constituencies -- the technology industry and its tort-lawyer antagonists, who often pursue stockholder lawsuits against high-tech companies with volatile stocks. A close inspection of Mr. Gore's receipts indicates heavy reliance on trial lawyers. In Texas alone, Mr. Gore's take from that group exceeds $200,000. In all, Messrs. Bush and Gore received roughly $3 million each from lawyers, but Mr. Bush's were of a much different stripe -- mostly corporate defense lawyers. They favor revamping tort laws by limiting punitive damages, one of the first things Mr. Bush pushed through the legislature after being elected Texas governor in 1994. No one private employer produced more for any candidate than Houston-based law firm Vinson & Elkins, whose partners contributed nearly $185,000 to Mr. Bush, according to a study of campaign records by the Center for Responsive Politics. Thomas Marinis, a partner involved in the fund raising, says 165 of the firm's 225 partners contributed; the total tops $210,000 when friends and relatives of the firm's lawyers are counted, he adds. The firm specializes in the energy industry, represents many major corporations with issues pending before Texas regulatory authorities and also has established a growing presence in the Washington lobbying community. On its Web site (www.vinson-elkins.com), the firm touts its lobbying work. It says that it played "a major role" in the Texas legislature's recent overhaul of telecommunications law and that "30 of the bills signed by Governor Bush ... in 1995 were shepherded, in some part, through the process by the firm's legislative section." 'General Proposition' Heading the firm's fund-raising effort are two of the partners: Mr. Marinis, who grew up with Mr. Bush in Midland, Texas, and Robert Whilden, a friend of Mr. Bush's father. Messrs. Marinis and Whilden say their fund raising for Mr. Bush had nothing to do with the firm's legislative interests either in Washington or Texas. "We didn't do it on that basis," says Mr. Whilden, adding that he has never called Mr. Bush and said, "I have a client who needs something." But "as a general proposition," says the firm's managing partner, Harry Reasoner, "it's certainly true in our system that there's a relationship between access and political contributions." That clearly has helped Sen. McCain, the only other contender with serious fund-raising abilities, though he remains a distant fourth place with his $6.3 million raised so far, much of it transferred from his Senate campaign. He is chairman of the powerful Senate Commerce Committee, which holds sway over many deep-pocketed industries. "Every U.S. senator is important, and the chairman of the Commerce Committee is very important," says Jonas Neihardt a lobbyist for Qualcomm Inc., whose executives hosted a $20,000 fund-raiser for Mr. McCain in May at its headquarters in San Diego. "He has been highly attentive to our industry and our concerns," pushing, for example, to open overseas markets so firms like Qualcomm can sell wireless telephones in Europe and China. Separate Agendas Mr. McCain's biggest contributors are from companies with interests pending before his committee, including media group Viacom Inc., U S West Inc. and BellSouth Corp., according to the Center for Responsive Politics. Solomon Trujillo, CEO of U S West, is one of his top fund-raisers. Richard Notebaert, CEO of Ameritech, headed a fund-raising event in Chicago in March that collected $90,000 for Mr. McCain, who advocates easing restrictions on the Baby Bells' access to the long-distance market. "When someone agrees to support John McCain, that person is signing on with our agenda, we're not signing on with theirs," says McCain campaign spokesman Dan Schnur. In fact, Mr. McCain opposed passage of the 1996 Telecommunications Act, which the Bells supported. Several major sources of contributions for the top fund-raising candidates are refusing to play favorites, at least in the aggregate. For example, employees of the Wall Street investment bank Goldman, Sachs & Co. contributed a total of $60,000 or so each to Messrs. Bush, Bradley and Gore, and $22,000 to Sen. McCain -- earning the firm a spot on each campaign's list of top-12 money sources. -- Kathy Chen contributed to this article. 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To: Ramsey Su who wrote (55)	7/23/1999 7:45:00 AM
From: wlheatmoon	Read Replies (1) \| Respond to of 13582

thank god for a less volatile thread....geez,,,,great of you to start a more informative thread... i still have a question for anyone here----what the heck is the offering price for the additional 6 million shares? anyone know? thanks... mike

To: Ramsey Su who wrote (55)	7/23/1999 12:26:00 PM
From: Kayaker	Read Replies (2) \| Respond to of 13582

Hambrecht & Quist report reformatted... (paragraph & table breaks are mine added solely to improve readability) 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. 1998A 1999E 2000E 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 contact your 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: 158.6875 Recommendation: Market Perform Notes: a, f Date: 7/20/99 Probable 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 ASP erosion. 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 - $102 range. Source: Reuters, H & Q Estimates Variance Q3FY99 Q3FY98 %Chg. Q2FY99E ($Millions) 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 Communica Systems 823,561 758,627 8.6% 872,421 (5.6%) Contract Services 87,860 69,947 26% 83,237 5.6% Royalties, License 92,645 46,923 97% 98,538 (6.0%) & Development 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 contact your...