THE JUICE ON QUALCOMM
stockjungle.com
Company Summary
Qualcomm, Inc., designs, develops, manufactures, markets, licenses, and operates digital wireless communications, infrastructure and subscriber products.
The Jungle View
What the above means: Qualcomm is bringing the world one step closer to the wireless revolution. Soon, if you choose to be a part of it, you'll have a cellular telephone that will enable you to make and take calls wherever you are. Not only that, this same phone will serve as a pager and voice mail system. What? You say you already have a phone do all that for you? Well, how about receiving your e-mail? How about signal clarity through CDMA, the Qualcomm developed standard? How about using your wireless phone to connect you to the Internet. What if all that was so inexpensive that you wouldn't need a regular hard line any longer?
This is the future of phone service, and Qualcomm is leading the way.
June 15, 1999
724 Solutions launches a secure wireless banking and brokerage transaction solution, which takes advantage of the capabilities of the Qualcomm pdQ Smartphone.
This phone offers the Palm Computing platform and supports full-time access to the Internet based upon standard Internet protocols, enabling end-to-end security for wireless applications, making it the ideal device for a broad variety of solutions.
The software developed by 724 Solutions enables financial institutions to deliver personalized banking, brokerage and informational content on a wide variety of Internet access devices. Information such as lottery results, news, sports, weather, and programmed alerts can all be broadcast through the phone.
Here is the first indication of what the future may hold. Qualcomm's phone gives everyone access to the Internet. If the Internet is the most revolutionary communication platform in history, then what follows is that phones and computers used to access the Net become so much hardware. What will make the hardware valuable is the speed and variety of services it can offer the consumer. Qualcomm seems leaps and bounds ahead of the competition to me. (GG)
June 1999 - Globalstar Launches Satellites
The San Jose-based Globalstar, a consortium of 12 companies, of which Qualcomm is a founding member, whose mission it is to put satellites into orbit to serve as the backbone for their wireless phone network, launched four more satellites in June.
Globalstar plans to begin providing wireless telephone service beginning this fall. Among the regions to receive initial service: parts of the United States, Europe, South America and South Africa.
Globalstar will make telephone service faster, and more inexpensive than ever before. Though it loses money now, think of it as a cable network being built out. There will come a day when they turn on the faucet and money comes pouring out.
July 19, 1999 - Qualcomm Releases Third Quarter Results
Revenues came in at $1 billion, an increase of 15% over the $875 million reported a year ago.
Excluding one-time charges of $117 million, the company reported net income of $135 million, or $0.75 per share, an increase of 445% from the year before. The charges were related to the sale of the company's Code Division Multiple Access (CDMA) wireless infrastructure business.
Including the charge, net income was $59 million, or $0.35 cents a share.
The company attributed revenue growth to increases sales of Application Specific Integrated Circuits (ASICs), OmniTRACS units and CDMA phones, as well as a significant increase in royalties.
The company announced they had achieved the number two position in the digital phone market in the U.S., and that they'd shipped over 11 million MSM chips to CDMA phone manufacturers. The company was also added to the S&P 500 index during the quarter.
The wireless world is coming ever closer to becoming a reality. About 68 million people, or 25% of the U.S. population, currently use some kind of wireless communication. Sprint's wireless unit has been adding subscribers at an increasing rate, and this year we've seen Microsoft take a $600 million stake in pure-play wireless communications company Nextel, and another pure-play, AirTouch, being acquired. Their stock prices have soared.
But Qualcomm has done even better. Its stock price has tripled since the middle of March. And their growth rate looks like it's set to get even bigger.
Imagine what will happen when phone companies are able to bring the wireless world into the residential market, a market that for the most part has been left out of the wireless revolution, but is potentially the most valuable. What will we need hard lines for when prices for wireless service become comparable to current phone prices? AT&T charges about $.15 cents a minute right now for their wireless service.
European penetration is already between 30 to 50 percent. Once prices here come down, helped through such measures as pre-paid calling plans and caller-payment measures (where the caller pays, not the receiver) I see no reason why the penetration here should be any less.
THE BUSINESS
Qualcomm, based in San Diego, California, has a number of segments in their business.
They own and operate two facilities, one in San Diego and another in Brazil, between which they produce cellular phones. These plants turn out 625,00 such phones per month.
Phones, however, are increasingly becoming more than phones. They are, in effect, becoming total communication devices, capable of storing a host of personal information, supporting the Palm computing standard, and communicating through the Internet. I see a possible future where we carry phones as we today carry portable computers. Why not a phone and mini-hard drive all in one? All we'd need, instead of phone booths, are plug-in stations equipped with keyboards and monitors.
But I'm getting ahead of myself. We'd need much more than clever phones to achieve this vision. We'd need a wireless network.
It just so happens that Qualcomm is involved, with several other companies, in the Globalstar satellite system. There are two parts to the system. One is the launching of satellites, and the second is the design and development of ground stations to complement the system.
It's expected that the network of satellites will be operational after September of this year. By then, the group should have deployed the required minimum of 32 satellites.
Qualcomm also licenses and builds the ground stations required to work as conductors between the phones and satellites. In the countries where the ground stations are deployed, Qualcomm will collect license fees from service providers in the countries who will service and maintain the stations.
So the physical parts are covered. Qualcomm has the phones, the satellites, and the ground transmitters taken care of. But what about the signal?
Engineers at Qualcomm developed what's called the CDMA (code division multiple access) standard. Last March, when you could have picked up the stock for a split-adjusted $38 a share, Qualcomm was in the middle of negotiations with Ericsson, a Swedish telecom company, to settle a dispute they had over CDMA. Thankfully, they did settle the disagreement, and as part of the settlement, both companies have agreed to support the standard throughout the world. And Qualcomm takes a cut every time a CDMA-equipped product is sold.
What makes CDMA different is that it allows more conversations and data downloads into the existing broadband spectrum. It is estimated that CDMA can provide up to 10 to 20 times the capacity of analog and 3 times the capacity of other digital systems. It has the capacity and moves data fast enough to make wireless phone access to the Internet practical.
Qualcomm took a $60 million dollar charge to reflect the settlement, and agreed to sell Ericsson a part of the company's terrestrial CDMA infrastructure business, including its R&D resources. They will also split revenues for certain patents each company holds that will be cross-licensed.
Qualcomm also designs and sells semiconductors that are used in CDMA chips to the licensed manufacturers of the chips. Qualcomm's chips are inside 9 out of every 10 CDMA phones sold today.
BUSINESS AND THE FUTURE
38 countries around the world are currently deploying CDMA digital networks using CDMA chips, phones, and infrastructure products made by Qualcomm and its licensees. They shipped over 20 ground stations to Globalstar to support the deployment of its worldwide low Earth orbit satellite communications system. They also shipped over 7 million phones last year.
The pdQ smartphone. This unique phone, which is expected to be available in mid-1999, combines high quality voice with the popular Palm Computing operating system. It provides users with wireless access to personal productivity tools such as calendaring and scheduling, access to e-mail and the Internet, as well as compatibility with the more than 1,000 Palm III applications now on the market.
The company will collect revenues from several sources. It will collect license fees from the CDMA technology, it will collect on sales of the CDMA chips, and it'll collect on sales of ground communications equipment for Globalstar. Finally, it'll collect revenues from the sale of cellular phones and other communications products and services.
They also have formed a partnership with Microsoft, in the form of equal ownership in a development stage entity, Wireless Knowledge, which, from the company's 10-Q, "...intends to form strategic partnerships with computing, software and telecommunications companies, as well as with wireless carriers, for the purpose of enabling secure and airlink-independent Internet access to mobile users."
If there is one company that exemplifies the phrase "wireless world," that company is Qualcomm. They make the phones, they make the chips for others' to make CDMA products, and they're forming the right partnerships.
RISKS/COMPETITION
There are many risks facing the company, not the least of which stems from the fact that Globalstar is still being built out. It's supposed to become live in the latter part of 1999, but they still have rockets to launch and satellites to put into orbit. As such, they're still spending significant amounts of money to build it out.
Once the satellite system is in place, they have to find licensees to pay them to install the ground stations necessary from the whole system to work. For this to happen, it is in the material interests of the company that the economic health of, well, the world, continues to be robust.
The company has also made several financial commitments, not the least of which is a part of their agreement with Ericsson. They've promised up to $400 million in financing to Ericsson.
A significant amount of the company's revenues will come from international clients, and so they are subject to currency fluctuations.
The wireless market is highly competitive, and so the company is relying on the fact that everyone will convert to their CDMA standard. Wireless phone companies experience a churn rate, estimated right now at about 25%, meaning that all the major carriers lose 25% of their customers every year.
The CDMA "standard" currently has approximately 25 million users at the moment. There is a more popular technology, called GSM, which has 162 million subscribers. Getting these people to switch largely depends on the promise of CDMA truly becoming the fastest transmitting technology out there. And it might not be. The company is predicting that it will become the fastest in 2001, after a few upgrades. The fact is that the potential is there, but the practicality isn't quite.
There is no indication that anyone will ever have to change. Ericsson is trying to develop a system that will translate signals from one to the next, so that no matter what technology becomes the standard, you'll be able to use your existing phone through any network. Ericsson did buy Qualcomm's infrastructure unit, giving them a strong interest in CDMA's success, so this might not be as bad as one might think.
Originally posted: July 26, 1999
|
