Tero:
You were one of the anti-Qualcomm cheerleaders on the Frezza Forum, who "knowingly opined" about CDMA's imminent failure. Track record, historical accuracy, intellectual integrity...that's why I recall the Forum's words and deeds in general and your comments in particular.
Your thoughts regarding QC's handset sales versus CDMA subscriber growth demonstrate either deliberate dishonesty or a profound lack of understanding of the company's business model. You have heard us talk about the ASIC division? You know...that little $650mm operation that sells chipsets to Samsung, LG Electronics, Hyundai, Sony and so on and so forth? The company's economic opportunity in subscriber equipment is twofold, but you characterized it as limited to only QPE's direct handset sales. When a licensee (like Nokia or Motorola) sells a phone, Qualcomm gets paid a royalty on the phone's wholesale transfer price. For a licensee that uses QC chipsets (like the Koreans and several of the Japanese), Qualcomm earns a margin on the chipset and then collects a royalty on the transfer price of the phone. The latter relationship allows QC to attain greater manufacturing volumes for its semiconductor operations (read higher margins) and to afford the substantial R&D investment to produce best of breed chipsets. Duh.
So QC probably has something approaching a 5% profit margin on phones sold by Nokia and Motorola (based on the wholesale transfer price from NOK to the carrier) and it probably garners a 7%-8% margin on phones sold by everybody else (based on the royalty payment plus the chipset margin). I find it incredibly difficult to believe that you are learning this for the first time, but such a presumption is the only way to reconcile the misperceptions highlighted in your response.
As for the expectations built into QC's stock, I wish you would stop speaking for me...after all, I am QC's largest institutional shareholder and I probably have a better handle on my expectations then you do. My investment in Qualcomm is predicated on the following:
IS-95, and its derivatives, is a rapidly growing digital standard that has achieved important market position in major markets like the U.S., Korea, Japan, Brazil, Mexico and thirty-two other countries. QC commercialized CDMA in advance of all others and holds key intellectual property rights for direct sequence spread spectrum that are frequency independent. By licensing its technology, on fair and equitable terms to almost sixty telecom companies worldwide, QC has accelerated CDMA's deployment by creating a competitive dynamic that has improved the technology, reduced equipment prices, enhanced availability and driven marketing push. In this regard, CDMA has proven sufficiently superior to TDMA-based technologies that the incumbents are attempting a backdoor entrance which Qualcomm is committed to prevent (at least until equitable terms are negotiated).
Due to the business model described above, Qualcomm has an ability to compete head-to-head for CDMA equipment sales through its handset and infrastructure operations. It additionally sells enabling technology, i.e. products that facilitate CDMA's deployment, through its ASIC operation. The company has partnered with five major OEMS: Nortel, Hughes, NEC, Hitachi and Alcatel. The company also collects royalties on all IS-95 sales worldwide.
As of the most recent quarter, QC's royalties were approximately $48mm. Assuming (ridiculously) that CDMA has no growth, this foots to a $192mm run rate, which I would argue has a net present value between $3bb and $4bb, i.e. the right to get such royalties in perpetuity is worth something between these two metrics. Interestingly enough, Qualcomm's current market value is just $4bb and this excludes investments in Globalstar, Shinsegi and highly profitably non-core operations such as Omnitracs; the latter, by itself, is probably worth $700mm to $1bb.
I would argue that today the market is paying nothing for a portfolio of manufacturing operations (ASICs, handsets and infrastructure for cellular, WLL and Globalstar) that will conservatively generate $3.7bb in revenue (excluding Omnitracs) in FY99. The valuation also suggests that the market is betting with Ericsson and against Qualcomm in the 3G debate and implicitly expecting the WirelessKnowledge venture to fail. In contrast, I believe that convergence will be achieved on terms favorable to Qualcomm. I expect that there is a reasonable probability the such convergence will significantly increase the royalty opportunity while expanding Qualcomm's equipment market from the IS-95 universe to all of 3G, which includes Europe (won't that be special). Of perhaps even greater importance to shareholder value, convergence should put an end to the he-said, she-said, war-of-words that exists currently between Ericsson and Qualcomm. This will be a key development because I have met few truly emphatic investors in my career. Most portfolio managers want a clean, uncontroversial story that can be easily explained. Within this context, I believe that Qualcomm's valuation has been impacted adversely by the continuing controversy as investors have been forced to pick sides.
If I am right, then my investors and I will be well rewarded. If I am wrong, my investors will suffer and I will bear the consequences professionally. Unlike you Tero, I have verifiable skin in the game.
Gregg
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