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Technology Stocks : The New QUALCOMM - Coming Into Buy Range -- Ignore unavailable to you. Want to Upgrade?

To: Jim Mullens who wrote (5137)	5/5/2009 4:15:27 PM
From: slacker711	Respond to of 9129

Great post. I'll try and address your points later tonight. Slacker

To: Jim Mullens who wrote (5137)	5/5/2009 4:17:57 PM
From: DanD	1 Recommendation Read Replies (1) \| Respond to of 9129

Anyone else notice how much more conservative Slacker has been since he had a baby? Anyone? Dan D.

To: Jim Mullens who wrote (5137)	5/5/2009 11:58:38 PM
From: slacker711	1 Recommendation Respond to of 9129

c) IMO, overall ASPs will increase as GSM subs convert to higher priced WCDMA / smart phones and those sales accelerate over the next several years. China will be a major driver in this arena as will all carriers realizing the revenue benefits from data services and the spectrum efficiencies enabled by 3G technology. Another factor to be considered is the added functionality (bells / whistles) within 3G phones, vs the GSM entry level devices. Stable ASPs can clearly be seen when looking a QCOM’s base handset ASPs over the years. Each year a significant ASP decline is guided, only to be revised upwards during the year. I’m not predicting that world wide ASP will continually remain above the $200 mark, but I find it hard to believe they will quickly decline to the $129 level or anything close to that. You are right that Qualcomm has done a remarkable job of keeping ASP's stable over the years. There is a reason for that. The high-end of GSM has moved wholesale to WCDMA. This is true everywhere outside of China. India is one of Nokia's largest markets for WCDMA devices...even though WCDMA networks have yet to be launched. The $400 RAZR's that were selling in '03 became $400 WCDMA handsets in '08. That transition, which has already occurred, allowed Qualcomm's ASP's to remain stable even as the overall market ASP's continued their downward trend. Qualcomm wasnt completely immune though, they just had growth in WCDMA to balance out the pressures in CDMA2000. Take a look at this graph of CDMA2000 ASP's from a few years ago (unfortunately, Q no longer updates this graph). Page 6. npstc.org The ASP for CDMA2000 devices, which of course offer the same possibility for extra functionality and data revenues that WCDMA does, was already around $160 back in the 2nd quarter of 2006. While WCDMA ASP's wont converge with the market average (there will always be low-end GSM), they are going to move decisively lower as the mass market moves to 3G. This is already happening. I believe that it is likely that the guidance for this year will end up being low, but we are currently looking at a total CDMA market that is only supposed to grow 5.3%. Just to throw out a hypothetical. Let's say that the total CDMA market grows to 800 million units in 2011 but ASP's have moved to $160. That sounds like fairly robust growth, but would result in only 12.8% growth over the next two years (a CAGR or around 6%). Fighting the ASP declines is absolutely brutal when we are talking about a market that is already in the hundreds of millions of units. Basically, you are going to need some sort of giant inflection point to get substantial growth back for the overall CDMA market. The current growth in smartphones doesnt look like it will be nearly enough to reverse this trend. Hmmm, this is getting way long. I will try and address your 2nd primary point about chipset share in another post (might be tomorrow). Slacker

To: Jim Mullens who wrote (5137)	5/6/2009 9:08:23 PM
From: slacker711	5 Recommendations Read Replies (3) \| Respond to of 9129

The fact that the baseband supplier community is consolidating, with at least two of the largest suppliers (Texas Instruments & Freescale) exiting the baseband market. Merrill wrote in 2008- “We see several potentially significant opportunities over the next one to two years for QCOM to increase its share in the WCDMA” . Further, Credit Suisse estimates that NOK accounted for about $1.8 bill of TIs $3.4 bill in wireless revenues, writing ---“Even assuming QCOM gains 50% of NOK’s wireless business from TI gradually, which we believe could be conservative, this could mean as much as a further $900 mn revenue opportunity in the long run….” I do believe that Qualcomm is going to continue gain share for the next couple of years and should move from their current 40% or so of WCDMA chipsets to something above 50%. However, beyond that range, they are going to be fighting a couple of trends. One is that the baseband is becoming a commodity. There was once quite a bit of differentiation between WCDMA basebands. If you read handset message boards in 2004, there were constant comparisons between WCDMA handsets for size, talk/standby times, and RF performance. For the most part, that is long gone, and the discussion has transitioned to features supported by the applications processor. The WCDMA baseband has essentially met the performance requirements for most consumers, which means that differentiation now comes mostly from price. QCT should be able to maintain their margins on the low-end for the next year or two due to their lead in single-chip basebands, but that technical lead wont last forever. They are going to be competing on an equal playing field in the out years with competitors with drastically lower cost structures and gross margin requirements. What Mediatek did to GSM is eventually going to be done with WCDMA as well. The 2nd barrier for further share gains is simply going to be the preference of handset vendors to avoid a situation similar ot the PC industry. If you look at CDMA handsets, there is far less variation in specs than in GSM/WCDMA due to the fact that Qualcomm supplies 90% of the chipsets. Look at how many 2 and 3 megapixel cameraphones HTC, Samsung, and LG have released. That was a limitation set by the MSM7xxx series. The handset vendors couldnt distinguish their handsets based on specs since all of them were working from the same platform. As Qualcomm approaches 50%, this will become an increasing factor in handset vendors decisions on how much business to give to chipset providers other than Qualcomm. It is in their long-term best interest to make sure that STM, Broadcom, and Infineon survive. I believe that it is extremely unlikely that Nokia will ever give Q 50% of their business....to do so would be to follow down the path of the white box makers in the PC industry. You can see from Nokia's multiple vendor strategy that they will do everything to avoid that fate. Long-term margins for the handset vendors depend on differentiation....and that means insuring that there continue to be multiple suppliers of chipsets. Without continuing share gains, the ASP pressures will evenutally pressure revenues. That is why I see Snapdragon as being so key to Qualcomm. It allows the possibility to open up entire new markets where Q is the low-cost provider attacking Intel (instead of the high-margin provider being attacked by Broadcom, Mediatek etc.). What does it take to get to ~ $100 / share (about a 15% CAGR for 5 years). And, how can a 15% CAGR be achieved- Honestly, I had thought you would have been looking for higher returns. I wont argue that 15% isnt possible, only that the bulk of the return is likely to come in the next two years or so. I do believe that there is likely quite a bit Q could do on the expense side of the equation to continue delivering outsized returns beyond the next two years....however, I dont believe that this management team is geared up for that kind of discipline. They are still swinging for the fences hoping that one of their many wireless ventures will deliver the results necessary to move the revenue needle at Qualcomm. It might be a decent strategy if they had a better track record of delivering, but management has been abysmal along these lines. It is virtually impossible to have faith that they are going do a better job this time. Slacker