Alex Cena's latest on QCOM>
Fact Sheet - QUALCOMM, Inc.
Qualcomm Inc(QCOM)*
Rating: 1H
19980915
Salomon Smith Barney ~ November 22, 1999
11/22/99 QUALCOMM, Inc. (QCOM $355.81,1-H,Tgt $370.00) Alex M. Cena
--FUNDAMENTALS--------------------------------------------------------------
Price (11/19/99)......:$355.81
52 Wk Range...........:$378.00-$24.56 2000 P/E Rel. to S&P 500:312.1%
Target Price..........:$370.00 Dividend/Yield..........:$N/A/N/A%
EPS 09/2001E..........:5.30 Book Value/Shr(00)......:$9.90
EPS 09/2000E..........:4.00 Cash Flow/Shr 2000E.....:$N/A
EPS 09/1999A..........:2.47 ROE 1999................:48.9%
EPS Proj 5 Yr Grwth Rt:44.3% LT Debt-to-Capital(a)...:0.2%
P/E 09/2001E..........:67.1x S&P 500 (11/19/99)......:1,424.94
P/E 09/2000E..........:89.0x Shares (Million)........:159.0
(a) Data as of the most recently reported quarter.
11/22/99 QUALCOMM, Inc. (QCOM $355.81,1-H,Tgt $370.00)
--OPINION:------------------------------------------------------------------
COMPANY DESCRIPTION: San Diego-based QUALCOMM derives its revenues from
several telecom businesses: OmniTRACS (a satellite-based system for
two-way messaging and position reporting), contract services (revenue
under a development contract with Globalstar for gateways, handsets, and
ground control units), wireless handsets and infrastructure, and fixed
wireless equipment and manufacturer royalties. Licensees for the
company's CDMA technology include Lucent, Lucky Goldstar, Hyundai,
Motorola, Northern Telecom, Nokia, and Oki. The adoption of CDMA (for
which QUALCOMM holds numerous patents) as the de facto U.S. digital
wireless standard could create a window of opportunity for the company to
become a major provider of subscriber and network equipment, in our
opinion.
INVESTMENT THESIS: We believe QUALCOMM represents one of the best
investments for exploiting the dynamic trends in the wireless
communications industry, including the migration from analog to digital
by the cellular industry domestically and abroad, as well as the construct
ion of new wireless networks. Our investment thesis is based on
QUALCOMM's ability to capitalize on the success of CDMA technology that
has now been widely deployed in the United States, Korea, and Hong Kong,
as well as current under-deployment in Japan and Brazil and other regions
of Asia and Latin America. In fact, there are now 38 countries around
the world that are deploying CDMA digital wireless networks using CDMA
chips, phones, and infrastructure products manufactured by QCOM and its
licensees.
QUALCOMM's CDMA technology already: 1) has captured more than 50% market
share in the U.S. personal communications services (PCS) market; 2) is
used by most of the large U.S. cellular operators; and 3) has been
accepted, or is acceptable, in more than two-thirds of the world market
when measured by population, and more than 30 countries have announced
CDMA plans. There are currently 30 million CDMA subscribers worldwide.
Perhaps the most notable endorsement of CDMA comes from Ericsson, which
over the last several years had religiously professed that CDMAOne would
not work or would fail once launched on a commercial basis. Not only has
Ericsson had a change of heart, but it purchased (May 1999) QUALCOMM's
CDMA infrastructure business and became a CDMA licensee. Among other
things, this means Europe will clearly be using CDMA-based 3G technology,
as the wireless industry moves in that direction over the next two to
three years.
As a further testament to the virtues of the technology, virtually every
major telecommunications equipment company in the world, including
Ericsson, Lucent, Motorola, Nokia, Panasonic, Siemens, and Sony, has
obtained a license from QUALCOMM to manufacture CDMA-based equipment.
For its part, QUALCOMM has succeeded in becoming a premier provider of
quality communications, technology, products, and services for the
wireless market. It is today producing and selling CDMA phones to
customers, helping to ensure that the marketplace has enough phones to
meet the demand. QUALCOMM sells to carriers such as AirTouch, Bell
Atlantic Mobile, Sprint PCS, and PCS Primeco. Through name- and
technology-recognition advertising, the company is establishing itself as
the "parent" of CDMA technology and further supporting CDMA carriers. As
indicated in September, QUALCOMM plans to exit the mobile phone
business. The company has been approached by several companies, not all
of which are handset manufacturers today.
We believe the outlook for QUALCOMM is significantly improving, as the
company should continue to reap the benefits of the rapid growth in
demand for wireless technologies based on CDMA. QUALCOMM should continue
to profit from this growth through: 1) royalties for the CDMA technology
from such vendors as Ericsson, Lucent, Nortel, Motorola, Nokia, and
several Korean and Japanese manufacturers; 2) strong demand for its ASICs
chip sets as CDMA growth continues in North America and begins to
accelerate in South America and Japan; and 3) mobile phone sales (until
it completes the sale of its handset division). We are also upbeat on
QUALCOMM's future outlook as the company's management changes its focus
from driving CDMA acceptance as a global standard to more consistent
execution and profitability. We believe the sale of the infrastructure
division provides evidence of this.
RECENT RESULTS: Qualcomm reported fiscal 4Q99 (September) EPS of $0.91
(excluding non-recurring items) which compares with $0.27 last year. The
better than expected results were driven by higher ASIC sales and
royalties generated from a booming market for wireless infrastructure and
mobile phone's based on QUALCOMM's CDMA technology. Qualcomm reported
revenues, including licensing and development fees, of $1.06 billion, an
increase of 14% from last year. Licensing and Royalty fees were $113
million in fiscal 4Q versus last year. Gross margin for the quarter was
41.4% versus 33.0% last year, while operating margin was 24.4% versus
9.2% last year.
VALUATION: Given the company's desire to exit the handset business we
believe this will impact the metrics used to value Qualcomm. With the
sale of the handset division, Qualcomm will become a company with an
enabling communications technology that is not only for the fastest
growing digital wireless standard but also for 3G wireless networks,
which is necessary to optimize the wireless networks for high-speed data
access. Other enabling technology companies, such as xDSL, currently
trade at 30 times forward revenues. We believe Qualcomm deserves to
trade at or above 30 times forward revenues based on 1) CDMA is the
fastest growing wireless technology; 2) CDMA has a 15% market share
today, which we believe will grow to approximately 100% within the next
10 years as 3G networks are deployed around the world; and, 3) we believe
wireless has a greater unit demand and ASP potetnial than DSL modems.
For example, we feel it is difficult to imagine there will be more than
one DSL line to each home and it must share the market with cable modems
whereas it is, in our opinion, very possible to have multiple wireless
devices per home. Pro forma the sale of its handset division, we believe
Qualcomm will generate $2.5 billion in revenues and $1.2 billion in
pretax profits in fiscal 2000. Based on our view, QUALCOMM deserves a
valuation of at least 30 times forward revenues.
INVESTMENT RISKS: (1) Ability to Manage Growth. QUALCOMM is experiencing
a period of rapid growth, which places considerable demands on the
company's management and resources. The growth connected with the
commercial implementation of CDMA technology also will require si
gnificant expenditures to build the necessary organization to support
that expansion. (2) Vendor Financing. Cellular, PCS, and wireless local
loop (WLL) operators are requiring their suppliers to arrange or provide
long-term financing as a condition to obtaining infrastructure products.
QUALCOMM will need to arrange or provide financing to these entities in
order to stay competitive. Financing could involve exposure to project,
market, political, and credit risks. Additionally, any inability to
finance could affect the company's competitiveness. (3) Fluctuations in
Operating Results. Revenues and profitability may fluctuate quarterly,
and future results depend on continued revenue and profitability at
OmniTRACS, licensing fees and royalties from CDMA licensees, commercial
implementation of CDMA technology and equipment, successful manufacture
of CDMA equipment, and the continuation of the Globalstar development
contract. The timing of CDMA revenues depends on commercial service
implementation by its customers, which cannot be accurately predicted.
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