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

To: SKIP PAUL who wrote (17563)	11/3/1998 10:49:00 AM
From: Gregg Powers	Read Replies (3) \| Respond to of 152472

Handsets: There is more to QC's handset mosaic than simply an urge to compete in a "low margin consumer electronics business." First, note the obvious: everybody else selling CDMA handsets has to pay QC a royalty. Based on the anguished cries from Korea, which I might add are in contravention of non-disclosure agreements, it appears that this royalty is north of 5% of the phone's transfer price from manufacturer to carrier, i.e. what Sprint pays Samsung, NOT the subsidized price that Sprint charges its customers. Also consider that most licensees, save Nokia and Motorola, are also buying QC chipsets, which provides an additional margin umbrella. Let's attach some dollars to the above. Let's assume that Samsung charges Sprint $250 per phone and that a QC ASIC costs $45 and yields a 20% operating margin. Under this scenario, QC would collect a $12.50 royalty plus earn $9.00 on the ASIC, yielding a $21.50 profit per phone. This $21.50 profit obviously provides QC with an embedded margin advantage over its handset competition (equal to 8.6% of the Samsung transfer price). But what about MOT and NOK? You could argue that they cut out the $9.00 ASIC margin, but you would be technically right and economically wrong. Remember that MOT and NOK have to fund ALL the R&D to develop their own chipset and that they are prohibited from selling these chips to the merchant market. The combination of lower manufacturing volume and greatly reduced R&D cost absorption certainly results in a material cost-per-chip disadvantage for both MOT and NOK. So I would argue that QC's structural margin advantage over NOK and MOT is probably larger than it is versus the Koreans. Now, let's get more basic. What is a handset? If you think about it, you have a plastic case, a screen and user interface, a battery, a little support RF circuitry and THE BRAIN, i.e. the ASIC. QC is already the dominant manufacturer of "THE BRAIN", and there is no reason why is cannot purchase the commodity parts as well as anybody else. QC must master the art of high volume manufacturing, but this is ostensibly why the company partnered with Sony in the first place. So there is no structural reason why QC cannot be a low cost manufacturer...which would allow it to leverage its structural margin advantage. Finally, QC has been investing a fortune building its infrastructure operation. Capturing the follow-on handset sales is part of the economic equation that underlies this effort and I am reticent (to say the least) about dismembering this relationship without careful consideration. Hope this discussion is helpful. Best regards, Gregg