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

To: Clarksterh who wrote (511)	8/4/1999 12:53:00 AM
From: quidditch	Read Replies (2) \| Respond to of 13582

perhaps the royalty rate for ASICS sold in the merchant market using some proprietary MOT or LU IPR has not been determined yet... I think that this is the least plausible explanation, insofar as, such a license without agreement as to a material term--the key term--would likely be unenforceable. Going back to my earlier post, and this is a shorter way of saying it, the terms under the MOT (and LU, if not merged by operation of law into the MOT license) license can be analogized to ERICY paying a royalty to Q under W-CDMA because it is CDMA--but it would not necessarily be a Q ASIC. Here, MOT, in the merchant market, is selling CDMA chips of its design (analogous to E), but has to pay a CDMA royalty--not an ASIC royalty. I also would not necessarily disparage the language in the 10-K--it probably means just what it says--but may not say all we would like it to say. As Jon keenly observes, MOT and LU sales of ASICs "...to licensees is interesting. If those sales of MOT's own ASICs may be made only to licensees (whose? Q's or MOT's?), maybe Q gets a royalty on the back door. Regards. Steven

To: Clarksterh who wrote (511)	8/5/1999 7:11:00 PM
From: LBstocks	Respond to of 13582

QCOM: The Economics of Royalties and Direct Sales Explained Salomon Smith Barney Wednesday, August 04, 1999 -------------------------------------------------------------------------------- --SUMMARY:--QUALCOMM, Inc.--Telecommunications Equipment * We continue to recommend Qualcomm with a 1-H rating. * Stock weakened when Motorola reiterated that it plans to enter the CDMA chipset market * Regardless of source component supplier, Qualcomm still gets a royalty fee on "every" CDMA phone and infrastructure sold. * If Motorola sells the chipset without software no royalty is paid to Qualcomm by Motorola, BUT the fee would be paid by the company writing the software and/or using the chipset. * Manufacturers that use QCOM's ASICs receive a discounted royalty fee so their rates would rise if they purchase chipsets from others. * Ericsson's recent decision to use QCOM's chipset despite reviewing "ALL" other potential suppliers highlights the QCOM advantage. --EARNINGS PER SHARE-------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Actual 09/98 EPS $0.29A $0.13A $0.14A $0.27A $0.82A Previous 09/99 EPS $0.30A $0.41A $0.75E $0.90E $2.40E Current 09/99 EPS $0.30A $0.41A $0.75E $0.90E $2.40E Previous 09/00 EPS $N/A $N/A $N/A $N/A $4.00E Current 09/00 EPS $N/A $N/A $N/A $N/A $4.00E Previous 09/01 EPS $N/A $N/A $N/A $N/A $5.30E Current 09/01 EPS $N/A $N/A $N/A $N/A $5.30E Footnotes: --FUNDAMENTALS-------------------------------------------------------------- Current Rank........:1H Prior:No Change Price (8/2/99)......:$152.50 P/E Ratio 09/99.....:63.5x Target Price..:$210.00 Prior:No Change P/E Ratio 09/00.....:38.1x Proj.5yr EPS Grth...:44.4% Return on Eqty 98...:48.9% Book Value/Shr(99)..:7.01 LT Debt-to-Capital(a)0.2% Dividend............:$N/A Revenue (99)........:3649.00mil Yield...............:N/A% Shares Outstanding..:159.0mil Convertible.........:No Mkt. Capitalization.:24247.5mil Hedge Clause(s).....: Comments............:(a) Data as of the most recently reported quarter. Comments............: --OPINION:------------------------------------------------------------------ At yesterday's Annual Analyst Meeting, Motorola announced, as it had last year, that it plans to enter the market for CDMA chipsets. We believe there is no negative financial impact to Qualcomm. Thus, we continue to recommend Qualcomm with a 1-H rating. In our opinion, the weakness is an excellent opportunity to purchase shares in a company that is fast becoming synonymous with the wireless internet. 1) Qualcomm is paid a royalty fee by manufacturers of wireless equipment, including mobile phones, base stations and chipsets that utilizes one or all of its several hundred patents. This is true regardless of the source of the components used in the equipment. Moreover, the rate is the same whether the manufacture uses one or all of Qualcomm's patents. 2) Qualcomm has licensed others the ability to manufacture chipsets for CDMA in order to broaden the market and to meet the multiple source requirements of other manufacturers. In addition to Motorola and Lucent, LSI, DSP Communications, Prairie Communications and VLSI have the right to manufacture CDMA chipsets under license from Qualcomm. Motorola can sell CDMA ASICs but would have to pay Qualcomm a royalty fee unless the chipset is sold without the software. The buyer of the ASIC, who would then write the software, would be responsible for paying the royalty to Qualcomm. In either case a royalty fee is paid, it is just a question of who will pay Qualcomm. 3) Qualcomm's licensees receive a discount on their royalty fee if they purchase their chipset requirements from Qualcomm. Thus, manufacturers that elect to purchase their requirements elsewhere would have to pay a higher royalty fee. This would be the case if for example a handset manufacturer were to purchase their ASICs from any of Qualcomm's licensees. Despite having to pay a higher rate, companies such as Nokia have elected to use their own ASIC because of their view of the competitive advantage of having written their own software. Others such as Ericsson, most of the Koreans and Japanese manufacturers as well as for some of Motorola's products, the choice was to use Qualcomm's ASICs due to price, features, reliability and time to market issues. After all, Qualcomm only designs the ASICs and writes the software. The production capacity is actually provided by Intel and IBM. The following is an excerpt from our recent Qualcomm report on the economics of Qualcomm's business. We believe it would be useful to reprint it here. The profitability of various outcomes differ, but regardless of the components used and the manufacturer, Qualcomm will get its share of every CDMA phone sold and CDMA infrastructure sold. The economics of Qualcomm's business model vary considerably depending on whether the phone is sold by: 1) QUALCOMM; 2) a licensee that purchases ASICs from QUALCOMM; 3) a licensee such as Nokia and Motorola that use their own ASICs; or 4) Motorola. Thus, we have put together a table that illustrates the different operating margin contributions. Our assumptions are that the average royalty rate paid to QUALCOMM on a mobile phone is 4% of the "factory price" of the phone except for Motorola, which only pays about 2.5% of the factory price of the phone. On ASICs, we assume Qualcomm's gross margin is close to 55% and 50% for operating margin. Thus, a single ASIC can contribute as much as $12 to the pretax line. We have excluded the royalties from wireless infrastructure from this exercise since it is much more concentrated and the infrastructure vendors are likely to continue to purchase all their ASIC needs from QUALCOMM since it is a low-volume proposition. In fact, 10 times as many mobile phone ASICs are sold than infrastructure. Thus, if a phone is sold for a factory price of $200, the following operating income contribution would occur: Figure 1: Economics of Royalties vs. Direct Sales Source of Phone Sale Assumptions Margin Contribution QUALCOMM $200 * 6% operating margin $12 QCOM licensee that is $200 * 4% + $12 $20 also an ASIC customer Licensee w/own ASIC $200 * 4% $8 Motorola w/own ASIC $200 * 2.5% $5 From the chart above, it is clear that: 1) Qualcomm's handset division must generate at least 10% operating margin in order for the company to be able to justify remaining in the business once the industry has sufficient handset capacity; 2) the most profitable outcome for QUALCOMM is for the Koreans and the Japanese manufacturers to be successful not only in their home markets but on a more global basis; 3) and the least profitable would be a world dominated by Motorola. Neither extreme is likely to occur. Our assumptions are for QUALCOMM to continue to grow its mobile phone sales at a rate slightly less than the market, while mobile phone sales whether its CDMA, GSM or D-AMPS continue to be dominated by Motorola and Nokia.