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

To: Michael who wrote (31043)	5/26/1999 9:51:00 AM
From: slacker711	Read Replies (2) \| Respond to of 152472

Lehman report from last week....makes me want to go buy more at these levels. lehman.com Headline: QUALCOMM: Confirms Strong Trends In 3Q99, Rebutting WSJ Article Author: Tim Luke (212)526-4993 Rating: 1 Company: QCOM Country: COM CUS Industry: TELECM Ticker : QCOM Rank(Old): 1-Buy Rank(New): 1-Buy Price : $103 3/16 52wk Range: $120-19 Price Target (Old):$107 1/2 Today's Date : 05/19/99 Price Target (New):$107 Fiscal Year : SEP ------------------------------------------------------------------------------ EPS 1998 1999 2000 2001 QTR. Actual Old New Old New Old New 1st: 0.29A 0.33A 0.33A - -E - -E - -E - -E 2nd: 0.13A 0.41A 0.41A - -E - -E - -E - -E 3rd: 0.17A 0.65E 0.65E - -E - -E - -E - -E 4th: 0.27A 0.72E 0.72E - -E - -E - -E - -E ------------------------------------------------------------------------------ Year:$ 0.85A $ 2.11E $ 2.11E $ 2.78E $ 2.78E $ - -E $ - -E Street Est.: $ 1.84E $ 1.84E $ 2.62E $ 2.62E $ E $ ------------------------------------------------------------------------------ Price (As of 5/17): $108 3/4 Revenue (1999): 3.6 Bil. Return On Equity (99): N/A Proj. 5yr EPS Grth: 35.0 % Shares Outstanding: 148.0 Mil. Dividend Yield: N/A Mkt Capitalization: 16.10 Bil. P/E 1999; 2000 : 51.5 X; 39.1 X Current Book Value: $6.86 /sh Convertible: YES Debt-to-Capital: 99.8 % Disclosure(s): C, A ------------------------------------------------------------------------------ * We believe QCOM is continuing to benefit from extremely rapid growth in the global CDMA market. We are encouraged the company confirmed in a press release yesterday that it is seeing increased sequential demand in 3Q99 across its 3 core product lines of CDMA Chipsets, handsets and royalties and expects to meet or exceed current analyst estimates. * Confirmation of strong demand trends should help rebut a negative article in yesterday's Wall Street Journal which highlighted slowing CDMA subscriber growth in Korea (following a change in government regulations on subsidies) as well as some insider selling by senior management as a selling widow opened. * In our opinion, some slowing in the domestic Korean market is being offset by a surge in CDMA subscriber growth around the world notably in US, Japan & Brazil. In fact, we estimate the number of global CDMA subscribers may jump from 23 million in 1998 to over 50 million by year end 1999. * With the majority of chipsets sold to Korea being used in phones for the export market (eg; to the US) & management continuing to see good order visibility (2Q99 Book-to-bill was 1.7), we look for solid growth in chipsets over balance of 1999. QCOM remains well positioned to potentially deliver earnings upside in 3Q99 based on strength across chips,royalties & phones * Shipments of new Thin Phone are now ramping on schedule. With QCOM poised to benefit from rapid expansion of the global CDMA market, we are reiterating our Buy rating & continue to believe our high end estimates remain conservative. Our price target of $150 is based on QCOM achieving a 40 multiple off our initial CY01 estimate of $3.75 ------------------------------------------------------------------------------ Investor Concerns Over Sub Growth In Korea, 1 Million Per Month Ain't Bad Over the last several weeks, investors have focused on the potential impact of slowing subscriber growth in Korea on Qualcomm's chipset sales. Following the Korean government's decision to elimate phone subsidies by cellular operators subscriber growth slipped from around 1.5 million subscribers in March (excluding new subscribers simply placed on waiting lists) to an estimated 800,000 in April. We believe the slowdown may partially reflect exceptionally strong growth in March as customers attempted to beat the "no subsidy" deadline. While it remains possible according to some industry executives that the government may review its position on subsidies, we currently look for growth in the 800,000 to 1 million a month range going forward in 1999. We would highlight that while this rate is slower than the exceptionally strong March additions it still represents a healthy growth rate. With subscriber additions running at an average of more than 1 million per month to date this year, we believe Korea remains on track to see its sub growth move from around 13 million in 1998 to as high as 23 million subs by year end 1999. The question of Korean subscriber growth resurfaced following an article in yesterday's the Wall Street Journal that highlighted the issue. Sizing The Korean Chipset Business & Sales To Korea; Focus On The export Market At approximately $950 million in estimated sales for FY99, we believe QCOM's chipset business may represent around 25% of total company revenues in FY99. We estimate the business has impressive gross margins in the 57/58% plus range making chipsets Qualcomm‘s most profitable business after CDMA royalties. We believe more than 70% of these chipset sales go to the large Korean handset manaufactures including Samsung (the largest), LG and Hyundai. However, we believe the majority of these chipsets are now being used in handsets for the export market with Korean manufactures continuing to benefit from verty rapid subscriber growth in Japan, China and the US. We estimate the number of subscribers in Japan, for example, is likely to climb from 0.5 million in 1998 to over 4 million in 1999 with Brazil seeing similar growth levels. The US market is showing signs that it may climb from 7 million CDMA subscribers at year end 1998 to over 23 million by year end 1999. We are optimistic, therefore, that unit demand in 1999 may reach almost 40 million handsets as global sub growth goes from 23 million to over 50 million with 15% churn. We therefore maintain that the market for QCOM's CDMA chipsets (and its handsets for that matter) is likely to remain strong throughout the balance of this year and into 2000. Samsung for example is planning to manufacture more than 15 million CDMa handsets in 1999. New Thin Phone Handset Shipments On Track We remain encouraged that QCOM is on schedule with the ramp in production of its new Thin Phones. QCOM is initially shipping these phones to celular operators such as US West and Airtouch with the PCS versions following over the next sevral weeks. Sprint PCS is currently in final trials with the Thin Phone which we estimate may retail for as little as $199. The phone maintains a lower cost base than the existing QCP model and its release should boost margins in the current 3Q99. We note that demand for CDMA handsets is actually so strong on a global basis that we are in fact monitoring the outlook for possible component shortages notably in the areas of displays and filters. Stock Opinion; Reiterate 1 Buy Rating, Target $150 We are impressed on that based on strong order visibility QCOM has already confirmed in the press relase issued yesterday that it expects to meet or beat street earnings expectations and that it should see a sequential increase in sales across all of its core business of handsets, chips and royalties. We look for royalty revenues where we have modeled $80 million in 3Q99 as one other possible area of upside. With respect to the insider selling, we note that management has sold stock consistently as windows opened allowing sales. Ownership levels of shares and options by those officers who took advantage of the window remains considerable. Based on this robust outlook with CDMA hitting its stride and visibility improving on 3Q99 and the balance of FY99, we have recently raised our estimates for Qualcomm. We have taken our estimates for FY99 and FY00 to $2.11 and $2.77 respectively. Our new revenue estimates (ex-royalties) are $3.6 billion in FY99 and arouidn $3.9 billion in FY00. We look for royalty revenues to increase from $214 million in FY98 to around $290 million in FY99 and as high as $370 million in FY00. With Qualcomm's gross and operarting margins likely to provide considerable leverage, we believe these estimates may proove conservative. We are currently modeling that Qualcomm's operating margins should move from 3.7% in 2Q99 to around 12.8% by the end of FY99. We anticipate further upward revisions to our estimates during FY99. Looking forward, we remain encouraged by the strong growth prospects for both Qualcomm and the global CDMA market. In the US, we believe the highly successful one-rate plans offered by many major carriers such as Sprint are likely to continue to drive rapid CDMA subscriber growth. Overseas, the removal of uncertainty of standards should help several large new markets such as Japan, Brazil, India and China gain momentum in 1999. Following the conclusion of the landmark settlement between Ericsson and Qualcomm and we believe Qualcomm will benefit from increased royalty revenues as the existing CDMA market expands (following Ericsson's endorsement of that market) and as a converged global third generation wireless standard based on CDMA begins to be deployed. We continue to view QUALCOMM as a highly attractive investment vehicle in the wireless equipment sector. Our 1 Buy rating and our twelve month current price target of $150 is based on Qualcomm achieving a multiple of around 35-40x our new high end calendar 2001 estimate range of $3.60 to $3.75. BUSINESS DESCRIPTION: QUALCOMM provides advanced communications systems & products based on digital wireless technology. These include the OmniTRACS sys. & digital wireless telephone sys. based on CDMA technology. ------------------------------------------------------------------------------ Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities. This document is for information purposes only. We do not represent that this information is complete or accurate. All opinions are subject to change. The securities mentioned may not be eligible for sale in some states or countries. This document has been prepared by Lehman Brothers Inc., Members SIPC, on behalf of Lehman Brothers International (Europe), which is regulated by the SFA. ]