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

To: Asterisk who wrote (17763)	11/4/1998 6:56:00 PM
From: deeno	Read Replies (1) \| Respond to of 152472

Here's one, so sneer away. I'm still long. Quarter Results Merrill Lynch QUALCOMM reported a 54% increase in revenues to $926.0 million versus $601.4 million. Communications Systems revenues increased by 66% to $802.0 million versus $482.2 million, license and development fees increased by 5% to $52.5 million versus $49.7 million, and revenues from contract services increased by 3% to $71.5 million versus $69.5 million. License, royalty and development fees were much higher than expected. As a result, the company reported EPS of $0.54 versus $0.41, above consensus expectations of $0.50. Gross margins were also better than expected despite the slightly lower sales. For fiscal 1998, revenues increased by 60% to $3.3 billion versus $2.1 billion and operating EPS were $1.64 versus $1.11. However, operating EPS for fiscal 1998 include losses associated with businesses that have been divested, and are now a part of Leap Wireless International. Excluding these losses, operating EPS would have been $1.88 in fiscal 1998. As for the balance sheet, cash and equivalents were $303.3 million as of September 27, 1998, about $107 million below the previous quarter. Total receivables were $956.2 million (93 days sales outstanding), and inventories were $386.5 million (6.4 inventory turns ratio). Business Trends QUALCOMM reported a solid quarter with EPS of $0.54 versus $0.41, above consensus expectations of $0.50. Gross margins improved by 500 basis points sequentially and were 250 basis points better than we expected. Gross margins reflected a higher percentage of chipset and infrastructure revenues as well as some improvements in the company's cellular phone manufacturing process. However, revenues were about $25 million lower than expected, offsetting some of the benefits from higher gross margins. Part of the revenue shortfall was due to the fact that $29 million of infrastructure shipments to Russia were not recognized as revenues because of uncertainties regarding payment; part was due to the fact that the cellular Q-phone was introduced a couple of months later than expected. The revenue shortfall occurred despite strong shipments of infrastructure equipment to Pegaso (Mexico) and Globalstar. After a flurry of initial construction activity, it is likely that shipments to these two customers will be down in the December quarter. The timing of shipments to several other QUALCOMM customers in Russia and the Ukraine remain questionable. Offsetting that will be a sequential increase in handset sales in the seasonally strong December quarter. However, a greater mix of handset sales has a negative impact on gross margins. Furthermore, we think QUALCOMM will begin to see signs of more credible competition in the near future. For example, Motorola has recently launched its StarTAC CDMA phone in Kansas City and has recently won a contract award with S K Telecom in Korea. Also, significant contributors to the positive EPS performance in the quarter were the solid ASIC sales and stronger than expected royalty payments, both primarily involving Korean cellular phone manufacturers. However, we remain concerned about the sustainability of these trends given the relatively high default rates being experienced by Korean cellular operators. In our view, there are too many uncertainties with regards to the delivery of infrastructure equipment in several emerging markets, QUALCOMM's ability to cut the manufacturing costs of its phones as new competition emerges, and the continued reliance on sales of chipsets to Korean cellular phone manufacturers. Furthermore, the company's backlog declined by about 13% to $2 billion. We continue to have concerns about the future profitability of QUALCOMM's cellular equipment manufacturing businesses, and the probability of continuous improvement in the company's gross margins. This causes us to have limited confidence in our fiscal 1999 EPS of $2.35, which we are maintaining at this time. Despite the positive EPS report, we are not changing our Neutral (3) intermediate term investment opinion.