"Already, BellSouth International is making the decision to overlay CDMA-based 1XRTT technology over its existing TDMA networks in Latin America."
FROM RAGING BULL -IMPORTANT-First Union Securities confirms that several TDMA and iDEN carriers are looking at implementing CDMA2000 1x.
Check out this announcement.
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FIRST UNION SECURITIES Covers QCOM
By: FIRST UNION SECURITIES
11/3/00 7:58:25 AM
Morning Notes:
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QCOM: F4Q’00 EPS OF $0.25 – BETTER THAN EXPECTED – REITERATE STRONG BUY
QUALCOMM, Inc. (QCOM-OTC)
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PRICE: $62 13/16
52-WEEK RANGE: $200-$22
KEY POINTS
-- Yesterday QUALCOMM reported F4Q’00 earnings of $0.25 per share (pro-forma), up 4% and $0.01 above consensus and $0.02 above our estimate. Revenues were $635.4 million, down 11.3%, and slightly below our estimate of $640.6 million. The decrease in revenues was attributed to the on-going handset subsidy ban in the Korea domestic market.
-- It was a somewhat sloppy quarter. Don’t be surprised if both QCOM “lovers” and “haters” find evidence in the quarter to support their case.
-- Management said F1Q’01 orders for the domestic Korean market are recovering. They expect phone sales in Korea are expected to reach 2.7 million units in the F1Q’01 and F’01 sales to reach 10 million units – about the run rate of the 1H’00. Better, but not as much as we had hoped for.
-- There is no Globalstar exposure in our estimates. There is potential balance sheet exposure – a one-time charge of about $0.47 per share if Globalstar goes “completely bust.”
-- We are reducing our F1Q’01 EPS estimate to $0.28 from $0.30 and our F’01 EPS estimate to $1.30 from $1.38. Our new estimates bring us more in line with management guidance but we think management is likely being typically conservative. We suspect our original estimates will likely be closer to reality.
-- We reiterate our Strong Buy rating on the shares. We think investors can justify a $70 share value based on our CAPM that assumes a very conservative set of assumptions. Our $90 price target makes several assumptions outlined below which we don’t assume in our base case model.
KEY ISSUES
Yesterday, QUALCOMM reported earnings of $0.25, a penny above expectations and 2 cents ahead or our conservative estimate. Revenues were below expectations but that negative variance was offset by a mix shift toward royalties. As we expected, the quarter was a little bit sloppy. We believe that the better-than-expected earnings were driven in large part by up-front license fees paid by an unexpectedly large number of new licensees who signed on to pay royalties to QCOM for 3G CDMA. This point will no doubt be camped on by investors who have traditionally been negative on QCOM shares. On the other hand, the company gave an upbeat view of F’01.
In their outlook, management said they are seeing order flow indicating that demand in the domestic Korea market has returned to early 2000 levels.
There is no exposure to Globalstar in our estimates or in management’s guidance. Management confirmed that balance sheet exposure to Globalstar is about $618 million, or less than $0.50 per share. If Globalstar were to default, what we think QUALCOMM is likely to do is take a one-time write-off, which we think most investors have already factored into their expectations.
We reiterate our Strong Buy on the shares for five reasons:
1) We think the risk profile of the shares is falling. QCOM shares may be incresingly viewed as the proxy for the overall growth of the wireless industry because of their patent and royalty position. The company is positioned to collect royalties on much of the next generation of equipment because most of it will be based on some form of CDMA.
2) There is virtually no revenue from China built into our model. QCOM management’s guidance apparently includes 1-2 million subscribers in China in the second half of fiscal ’01. Our previous model assumed 5 million. We believe there is strong evidence that China, through China Unicom, is preparing for an aggressive nationwide build-out. China is potentially the world’s largest wireless communications market, and we believe we have been very conservative in modeling growth of CDMA in China.
3) We have assumed, just to be conservative, in our models that QCOM gets no marketshare of the demand for W-CDMA marketshare. QCOM management said their target is 50% marketshare of W-CDMA chips.
4) We have confirmed that several TDMA and iDEN carriers are looking at implementing CDMA2000 1x instead of previously announced migrations to EDGE or W-CDMA. This is not contemplated in our estimates or valuation models.
5) We think the demand for new 3G services and technology could be stronger than expected. The experts have consistently underestimated the demand for wireless communications and we think that the experts could be surprised at how popular new multimedia 3G services will be with consumers. Consequently, we suspect we are underestimating the demand for 3G CDMA technology.
Upfront fees for new licenses and license renewals could contribute to earnings over the next several quarters. QCOM signed up 28 new licensees in F’00 and has already signed up 8 in the first month of F’01. Most of these licensees pay multimillion dollar upfront license fees.
OUTLOOK
Management guidance for F1Q’01 – they expect QCT to ship 14 million MSM chips and suggested flat year-over-year revenue. Management indicated its comfort with the current EPS consensus of $0.28.
Management attributed the expected sequential increase in MSM shipments to higher expectations for the Korean domestic market. The company expects Korean handset sales to reach 2.7 million units in F1Q’01 and 10 million units in calendar 2001. This represents a significant change from previous expectations. The company forecast the CDMA handset market at 90 million units for calendar 2001, up 50% from the company’s calendar 2000 estimate.
Management said it is not aware of any other company in the market offering samples of CDMA2000 1X chipsets for either handsets or infrastructure. Management also indicated that it is expecting to maintain its chip market share in 2001 for CDMA technologies, which suggests to us that QUALCOMM is perceiving Nokia’s CDMA handset efforts as underperforming. (Nokia is currently one of the only companies that does not purchase CDMA chips from QUALCOMM.)
We believe ASPs in the chipset business could be flat as the company begins commercial sampling and ramp of its 1X chipset. Management indicated ASP erosion at the end of September was about 10% on annualized basis. Historically, ASPs were expected to erode 15-20% annually. Lower ASP erosion would be positive for QCOM.
Management said that at the end of the quarter the company’s exposure to Globalstar (GSTRF) was about $618 million (<$0.50 per share). This exposure continues to decline as Globalstar continues to make payments to QUALCOMM. The exposure is reflected in the balance sheet only (i.e. no impact on the income statement). The company has taken no reserves to date as it does not expect Globalstar to fail. Our estimates assume Globalstar does in fact fail and we expect that the company will take a write-off and move on. We are being conservative.
We reiterate our Strong Buy rating on the shares. We think the shares are attractive because there are so many potential positive announcements that could lift earnings expectations over the next several quarters.
REVIEW
Yesterday QUALCOMM reported F4Q’00 earnings of $0.25 per share (pro-forma), up 4% and $0.01 above consensus and $0.02 above our estimate. Revenues were $635.4 million, down 11.3%, and slightly below our estimate of $640.6 million. The decrease in revenues was attributed to the on-going handset subsidy ban in the Korea domestic market.
QCT. FQ4’00 ASIC shipments decreased sequentially, as expected, to nearly 11.3 million units. Revenue for the QCT segment was higher than expected at $269 million versus our estimate of $253.3 million. The segment shipped more than 11 million MSM chips during the quarter, versus 14 million in the year-ago quarter. The decline in MSM shipments reflected the on-going handset subsidy ban in the Korea domestic market and was in line with management’s guidance at the end of F3Q’00.
The company shipped 1X MSM and CSM chips for SK Telecom’s launch of the world’s first cdma2000 1X network. This SK Telecom network has demonstrated a near doubling of voice capacity and data rates exceeding 140 Kbps.
QTL. The QTL segment (licensing and royalties) reported revenue of $186.1 million, above our estimate of $170.6 million. The upside to revenues was due to additional licensing agreements for 3G. During the quarter the company entered into eight new licensing agreements, bringing the cumulative total to greater than 90. The company also signed 13 R&D agreements with Chinese manufacturers in the quarter. Approximately 20 companies have extended, or entered into, 3G licensing agreements with QUALCOMM.
QWS. Segment revenue was $150.5 million, below our estimate of $184.6 million. The company shipped approximately 12,000 of OmniTRACS units and related products, down 20% from FQ4’99. The segment also shipped about 28,000 Globalstar (GSTRF) handsets. The variance from our segment revenue estimate was attributed to the unwinding of the company’s development contract for the Globalstar system.
Margins. Pro forma gross margin and operating margin for the quarter were 63.3% and 38.3%; we had estimated 61.5% and 37.1%, respectively. Gross margin variance was mostly due to a higher mix of royalties (which are very high margin). Operating expenses were generally in line with our expectations.
Additional information is available upon request.
First Union Securities, Inc., maintains a net trading market in QCOM. An author of this note owns stock in QCOM. QUALCOMM is on the Analyst Action List.
This is for your information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments mentioned. Interested parties are advised to contact the entity they deal with, or the entity that has distributed this report to them. The information has been obtained or derived from sources believed by us to be reliable, but we do not represent that it is accurate or complete. Any opinions or estimates contained in this information constitute our judgement as of this date and are subject to change without notice. First Union Securities, Inc. (“FUSI”), or its affiliates may provide advice or may from time to time acquire, hold or sell a position in the securities mentioned herein. FUSI is a subsidiary of First Union Corporation and is a member of the NYSE, NASD and SIPC. Copyright © 2000 First Union Securities, Inc. FUSI is a separate and distinct entity from its affiliated banks and thrifts.SECURITIES: NOT FDIC-INSURED • NOT BANK-GUARANTEED • MAY LOSE VALUE
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