QCOM: It's Time for Another Ride; Upgraded to a BUY
Qualcomm Inc(QCOM)*
Rating: 1H
2000331
Salomon Smith Barney ~ March 31, 2000
03/31/00 QUALCOMM, Inc. (QCOM $157.50,1-H,Tgt $200.00) Alex M. Cena
--SUMMARY:--QUALCOMM, Inc.--Telecommunications Equipment
* We are upgrading Qualcomm from a 2H/Outperform to a 1H/BUY
* Incremental news flow should be upbeat & positive, incl (1) a rebound in
its ASIC orders on cont growth in CDMA market, (2) 3G licensing deals w/
manufacturers of both W-CDMA & CDMA2000 wrls infra equip & mobile phones
* European spectrum auctions, which will be immediately followed by
contract awards to major vendors that will have to pay Qualcomm
royalties, should add to positive news flow throughout the year
* Recent doubling in Motorola's royalty structure is a strong indication of
the strength in Qualcomm's IPR portfolio
* In-line March Quarter already in the stock i.e. Pro-forma Revenue & EPS
of $660 million and $0.24
* Price target raised to $200 from $150
03/31/00 QUALCOMM, Inc. (QCOM $157.50,1-H,Tgt $200.00) Alex M. Cena
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 09/99 EPS $0.08A $0.10A $0.19A $0.23A $0.62A
Previous 09/00 EPS $0.25A $0.24E $0.25E $0.31E $1.04E
Current 09/00 EPS $0.25A $0.24E $0.26E $0.30E $1.05E
Previous 09/01 EPS $N/A $N/A $N/A $N/A $1.37E
Current 09/01 EPS $N/A $N/A $N/A $N/A $1.40E
Previous 09/02 EPS $N/A $N/A $N/A $N/A $N/A
Current 09/02 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
03/31/00 QUALCOMM, Inc. (QCOM $157.50,1-H,Tgt $200.00) Alex M. Cena
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1H Prior:2-H Price (03/29/00)....:$157.50
P/E Ratio 09/00.....:150.0x Target Price..:$200.00 Prior:150.00
P/E Ratio 09/01.....:112.5x Proj.5yr EPS Grth...:44.4%
Return on Eqty 99...:48.9% Book Value/Shr(00)..:9.90
LT Debt-to-Capital(a)0.2% Dividend............:$N/A
Revenue (00)........:4163.00mil Yield...............:N/A%
Shares Outstanding..:159.0mil Convertible.........:No
Mkt. Capitalization.:25042.5mil Hedge Clause(s).....:
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
03/31/00 QUALCOMM, Inc. (QCOM $157.50,1-H,Tgt $200.00)
--OPINION:------------------------------------------------------------------
We are upgrading Qualcomm (QCOM-1H-$145 15/64) today from a 2H/Outperform
to a 1H/BUY and raising our 12-month price target from $150 to $200. Our
optimism is based on our view that near-term issues such as an in-line
March quarter are already factored into the company's stock price, while
a number of incrementally positive news items are on the horizon and the
excitement over the spectrum auctions in Europe will lead the financial
community back into Qualcomm.
Incremental news flow both on a near-term and long-term basis should be
extremely upbeat driven by a combination of:
(1) a rebound in the company's ASIC business. In fact, Qualcomm's book
to bill ratio for ASICs is expected to move back above one for the first
time in over six months due to the continued strength in the CDMA
marketplace and as manufacturers place orders in anticipation of the
seasonally strong second half of the year.
(2) The spectrum auctions in Europe should raise the profile of the
potential spending that may occur throughout that region over the next
few years. In fact, the capital cost to deploy 3rd generation wireless
technology within the new spectrum is expected to be as much as $60
billion over a three year period. Based on the bids for the spectrum, we
believe wireless carriers will be eager to have their new networks up and
running as fast as possible.
(3) 3G licensing deals with manufacturers of both W-CDMA and CDMA2000
wireless infrastructure, mobile phones and ASICs. Manufacturers, prior
to recognizing revenue on CDMA-based equipment, must obtain a royalty
bearing license from Qualcomm. Thus, we expect the company to begin to
announce on an on-going basis throughout the next 12 months licensing
agreements with numerous manufacturers that plan to compete in the CDMA
marketplace. Many manufacturers will balk at Qualcomm's royalty
structure and claim to have found a way around Qualcomm's patent
portfolio. However, the fact that more than 75 manufacturers have
already signed an agreement to pay Qualcomm royalties on CDMA used for
2nd generation networks and many of those patents and other patents
Qualcomm has filed that also will be essential and necessary to deploy a
3rd generation CDMA network, we believe all manufacturers will at some
point have to reach an agreement with Qualcomm. More importantly, the
royalty paid to Qualcomm is the same whether the manufacturer uses one of
Qualcomm's patents or all of the more than 600 in its portfolio.
We believe the recent resolution of the patent disputes between Qualcomm
and Motorola is a clear indication of the strength of Qualcomm's patent
portfolio. The two companies announced recently that they have settled
their long standing patent disputes that was spread across courts in
several states. This is obviously good for both companies since they now
can concentrate on their respective businesses. However, Qualcomm
potentially could receive more royalties in the future from Motorola,
which has always had a preferred royalty rate of 2.5%, but there are now
instances where Motorola will have to pay Qualcomm rates consistent with
those paid by other manufacturers, which we estimate to be about 5%.
While there were few details offered regarding the settlement, there are
a number of important issues.
(1) There will be no cash payments by either party.
(2) Motorola will continue to receive preferential treatment on royalties
it pays on Qualcomm's patents filed prior to July 3, 1995. In our
opinion, Motorola's preferential rate is roughly 2.5%, which is the same
rate paid by Lucent. In addition, Motorola will continue to be able to
produce and externally market CDMA-based ASICs royalty free.
(3) Motorola, however, "will pay royalties to Qualcomm at rates
consistent with those generally paid by the industry for using newly
licensed patents. In our opinion, this "generally consistent" rate is
about 5%.
The agreement includes 2nd and 2.5 generation standards as well as some
patents that will be required for 3rd generation wireless networks. We
believe the significance of the agreement is that this was in reality a
hidden royalty increase for Motorola since some of the post July 3rd
patents may be used by Motorola this year. In addition, the higher
royalty rate would be applicable to the entire device even though the
phone, for example, was developed using patents before and after July 3rd
1995.
An in-line quarter already is in the stock. That is, we continue to
believe the company is likely to report earnings of $0.24 per share on
revenue of about $660 million. Both revenue and EPS are on a pro-forma
basis that excludes Qualcomm's mobile phone operations that was recently
sold to Kyocera. We do not have the prior year's comparisons since the
company has not provided historical pro-forma information. The lack of
historical pro-forma information, in our opinion, may be the only
remaining source of potential confusion by the financial community since
everyone has pro-forma forecasts but no basis for comparisons. |
