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Technology Stocks : Qualcomm Incorporated (QCOM) -- Ignore unavailable to you. Want to Upgrade?

To: GO*QCOM who wrote (12797)	7/22/1998 8:28:00 PM
From: JGoren	Read Replies (4) \| Respond to of 152472

After Hours Trading--Two large blocks Two 25,000 share blocks traded after hours at 65-1/16. The small trades were near close. Last trade at 67-3/16 if I recall. fast.quote.com

To: GO*QCOM who wrote (12797)	7/22/1998 8:29:00 PM
From: Gregg Powers	Read Replies (7) \| Respond to of 152472

Food for thought Having just read Marc Cabi's (First Boston) desperate and rather pathetic attempt to justify his bungled estimates and historical (and continuing) bearish position on QC, I am reminded that the Street has only just begun to understand the Qualcomm story. Here are some thoughts on the quarter and the future. The $47mm recorded in the "license and royalties" category during the June quarter was comprised entirely of royalties (i.e. no large, one-time payments were recorded). Royalties therefore annualize to a $188mm run-rate prior to Japan's commercial launch, prior to continued appreciation of the Korean won and prior to continued, and accelerating, CDMA subscriber growth worldwide. Assuming only a few license deals, and relatively modest (i.e. 25%) equipment revenue growth among the Qualcomm's licensees, $250mm would seem to be an extremely conservative estimate for FY99 license and royalties. Assuming a 40% tax rate, and 78mm (fully-diluted) shares, royalties alone should generate $1.90 in FY99 earnings per share. The June quarter's communication systems gross profit margin improved to 24.3% from 22.4% despite manufacturing problems, Q phone warranty expense, reduced factory productivity (due to rework-related issues) and the absence of high margin Q phone sales. Irwin disclosed that QPE shipped 1.3mm phones during the quarter, so assuming an average selling price of $320, handset revenue would have been approximately $415mm. Management has indicated that the manufacturing problems have been resolved (which should improve factory output and margins), that the higher-priced, higher-margin Q800 will ship in volume during the quarter and that the company is working hard to improve margins for the QCP product family. This implies collectively that volumes should be up (let's guess to 1.5mm phones) and average selling price (ASP) should also be up (due to higher priced Q800's being added to the mix). Let's hazard a guess that ASP's increase modestly to $340, then revenue should climb to $510mm. Equally important, handset margins should be much, much higher (i.e. more profitable product mix, no rework costs, better unit cost absorption etc.). If the company can boost overall corporate margin by 1.9% during a quarter marred by manufacturing problems, it is not difficult to imagine something on the order of a 3%-4% sequential increase in the handset division for the September quarter. I would note that each 1% in handset margin is worth $3mm in after-tax profits, so this would increase sequential profits by $9mm to $12mm ($0.12-$0.16/shr) minimally. The company also disclosed that it had shipped 4mm ASICs during the quarter. Nobody on the conference bothered to ask an obvious question.where did all these chips go? Netting out the 1.3mm used by QPE, leaves 2.7mm "unaccounted for". Korea probably consumed 2.2mm to 2.4mm, which strongly suggests that 300k to 500k were shipped into the Japanese market. Understand that the IDO/DDI system has undertaken a real, full-blown commercial launch, so it would appear that the Japanese market is already consuming a meaningful amount of ASICs. Remember also that ASIC sales are followed by handset royalties once the manufacturers sell their phones to service providers. I suspect the Street is meaningfully underestimating Japan's emergence as an important and lucrative new market. I was also amazed that the Street glossed over the new members of the Pegaso consortium. Marquee names such as GTE, Citicorp Capital, AIG-GE Capital and Nissho Iwai Corporation will be ponying up $400mm for equity in Qualcomm's system. This should completely eliminate the criticism that QC was simply selling infrastructure to itself. Equally important, the combined infrastructure backlog is now big enough to make a breakeven operating performance a near-term reality. Since I estimate that the infrastructure group has lost something between $130mm and $150mm over the last twelve months, the inflection to breakeven, in and of itself, would add something north of $1.00/shr to QC's bottom line (after-tax). Bottom line. I think the Street estimates are way, way low. Royalties are again growing rapidly. Handset margins should improve materially in the coming quarters. ASIC growth should continue, bolstered by CDMA deployments worldwide (and QC's 100% marketshare in Japan). Infrastructure losses, at a minimum, should be reduced sharply. Try as I might, I cannot come up with an EPS estimate short of $3.25 for fiscal 1999. If I am right, then the Street still doesn't have a clue and we should forget the move today and go into a cave for the next twelve months. Best regards, Gregg