some notes from Brian Modoff - DB
Qualcomm Investor Day
At Qualcomm’s spring 2005 analyst day meeting, we had a chance to spend time with
management and gather information regarding the current status and future roadmap of the
company. Some of the key highlights of the meeting were:
Linux support
QCOM announced its plans to support 3rd party operating systems for its base band chips.
As part of this new initiative, the company plans to support Linux and will release its first
product, MSM6550 in late 2005. We believe this is a smart move on part of QCOM, as it will
not only increase its total addressable market, but will help handset OEMs reduce the BOM
on their phone (saving approximately $6 - $8 of OS licensing costs per phone for a Symbian
or Microsoft OS).
MediaFLO
Our first opportunity to see QCOM’s MediaFLO demo was back in March at the CTIA show
in New Orleans. At that time, the company was demonstrating MediaFLO on a hardware
platform (was not on a form factor phone). Since then the company has started showing
demos on form factor handsets (we saw this demo on a clam shell phone). We were quite
impressed with the quality of the demo, and note that the company plans to support around
100 channels of audio and video programming. The commercial launch of MediaFLO is
anticipated to be around the end of CY06.
Management announced that it plans to spend $800 million to build a network to broadcast
TV to phones next year in the US, and expects video on phones to be one of the more
popular advanced mobile services. The company expects to spin off the TV network after it is
up and running and is currently in trials with ABC News, Court TV, the Weather Channel and
A&E.
802.11n
Unlike the past IEEE standards (802.11 a/b/g), QCOM has been taken a proactive role in the
IEEE 802.11n standards bodies. The company has had a track record in delivering diversity
based cellular solutions, and 802.11n was a natural step forward for the company. We note
that 802.11n is WiFi on steroids (WiFi+MIMO) and increases coverage and data throughputs
to approximately 100Mbps. QCOM’s special interest in this technology underscores a
growing need for advanced receiver solutions in high data throughputs environments.
Single Chip RF CMOS
The company has been gaining traction in the low tier RFCMOS CDMA chip market. QCOM
currently has 40 design wins for its MSM6000 and MSM6025 solution. RF CMOS is a lowcost,
high-volume process technology that allows wireless device manufacturers to leverage
process technology and economies of scale across both digital and RF products, thus driving
the cost of components down. The MSM 6000/6025 devices are integrated with single-band
cellular RFCMOS transmitter, receiver and power management chip (the RFR6122 receiver,
RFT6122 transmitter and with low cost PM6610 power management chip). Current
customers include Compal, Curitel, Huawei, Hisense, Konka, Kyocera Wireless, LGE,
Motorola, Ningbo Bird, SK Teletech, TCL, Telson and ZTE are among others. Based on this
low cost solution, the company is currently designed into a sub $50 LG phone being shipped
to Reliance Infocomm.
This brings us back to our thesis on transceiver companies such as RFMD, SWKS and SLAB.
As we have mentioned in the past, all face strategic obstacles ahead. Major ASIC providers,
such as QCOM have been integrating greater functionality (such as the FEM, RF etc) into
their chipset solutions, which is a potential squeeze out for independent transceiver players.
4GV: Unified voice codec suite
QCOM announced its new next generation vocoder, dubbed 4GV, this core voice codec suite
offers CDMA2000 and EV-DO operators the flexibility to make network adjustments that
prioritize voice quality and network capacity. The company noted that the vocoder was
specifically designed to support wireless VoIP on EV-DO Rev-A. QCOM’s 4GV solution
supports both circuit-switched and packet-switched voice networks in a combined core.
Technology trials of 4GV are expected to begin in the 2H/CY05, with commercialization as
early as 2006.
Receive Diversity+ Equalizer + Pilot Interference Cancellation
QCOM outlined its plan to support advanced receiver solutions for both the mobile and the
base station. At present, there are approximately 6 EV-DO handsets and 6 PCMCIA data
cards in the market that support dual diversity. Dual diversity increases the performance of a
mobile by approximately 3dB thereby doubling the voice capacity of a CDMA network, and is
particularly beneficial for data rates at the cell edge. Currently, QCOM leads the mobile
market with dual diversity based solutions. Apart from the innovations on the mobile, the
company also talked about pilot interference cancellation solutions for base stations. This
technology improves performance on the uplink (aka reverse link).
Key product status
Some of the key highlights of QCOM’s products were;
30 WCDMA customers, of which 16 have been announced. This list includes 3 of the top
6 WCDMA manufacturers, 3 of the top 5 FOMA manufacturers and 6 of the 7 top
Chinese WCDMA handset manufacturers. (Announced customers include Samsung, LG,
Siemens, ZTE, Huawei, Option, Novatel Wireless, Sierra Wireless, BenQ, Hisense, Seiko,
Toshiba, Curitel, Sanyo and Vitelcom). Also, the company currently has 10 design wins
for its MSM 6275 to date. QCOM’s MSM6250 HSDPA solution will be incorporated in
the following devices:
Figure 2: MSM 6250 HSDPA design wins to date
Samsung Z130,Z140,Z300,Z500,Z700
LG U8200
Siemens SXG75
Sierra Wireless 850
Sanyo S750, S103
Huawei D208, E600
Option Globe Trotter Fusion
BenQ X4
Source: Company Data
WCDMA carrier launches of devices using QCOM’s chipset to date: Vodafone, 3,
Cingular, Orange, T-Mobile, mmO2, Swisscomm, Telecom Italia.
30+ design wins for its MSM6550 CDMA EV-DO solution. The MSM6500 DO chip is
currently shipping in products across North America. The company has 40+ design and
15+ manufacturer wins for its low cost RFCMOS based MSM6025 CDMA solution.
Current customers include Konka, Bird, Compal, Curitel, LG, Motorola, Kyocera, ZTE,
Hisense, TCL and Huawei among others.
Figure 3: Current and future products and availability
WCDMA Shipping Date CDMA Shipping Date
Convergence
Platform
MSM7200, MSM7600 Q1/CY06 MSM7500, MSM7600 Q2/CY05 (Engineering
samples)
Enhanced Platform MSM6275, MSM6280
(90 nm)
Q3/CY05 MSM6150, MSM6550,
MSM6800
Q1/CY05 (Engineering
samples)
Multimedia Platform MSM6250, MSM6255,
MSM6260 (90nm)
Q4/CY05 MSM6100, MSM6300,
MSM6500
Not provided
Value Platform MSM6225 Q1/CY05 MSM6000, MSM6025,
MSM6050
Not provided
Source: Company data
BREW downloads increased from 100 million in April 2004 to 300 million in April 2005.
QCOM noted that 32 device manufacturers are using BREW in their phone on 45
networks across 24 countries. Management noted that since its release back in February
2005, “BREW uiOne”: which is a combination of products and services to enable
customized user interfaces (UIs) for mobile phones has gained traction. We believe the
newly announced EV-DO MVNO, Amp'D will use this software user interface in its
products.
Licensing updates
Market commentary has hovered around a recent academic study (sponsored by a QCOM
competitor) which raised questions about QCOM’s share of WCDMA-related IP. We
maintain, however, that this research is biased and overlooks the extent the company has
contributed IP to the commercialization of HSPDA. We note that much of this IP is based on
QCOM’s development of 1x EV-DO. We also learnt that QCOM has made progress with IPR
in China. Management indicated that QCOM has reached licensing agreements with multiple
Chinese vendors (we believe Huawei, ZTE and Hisense) covering WCDMA (approximately 4
standard royalty rates and 1 interim royalty). We view this as a positive development for both
the company and the deployment of 3G in that market. However, while the company has
approximately 60 TD-SCDMA licenses with non Chinese vendors, they have none with local
Chinese vendors.
Current quarter and FY05 outlook
Qualcomm reaffirmed its quarterly guidance of $1.26 billion to $1.36 billion in revenue and
EPS of $0.24 to $0.26 versus our estimates of $1.34 billion and $0.25. The company
continues to invest in R&D in anticipation of an uptick in 3G related deployment in 2H/CY05
and CY06. This increased spending in R&D has benefited the company, and it is the leader in
3G HSDPA, with a plethora of products. We note that these products are quite advanced
compared to the older chips. A chip such as MSM6250 contains dual diversity, equalizer,
HSDPA and multi-media capabilities that were in chips just 8 – 9 months ago. The company
anticipates momentum around its MSM6250, MSM6225 and MSM6275 chipset. We believe
this will drive growth later in the year at QCOM as it reaps the benefit of its major
investments in WCDMA, 1x EV-DO and HSDPA.
Option expensing
Amid the otherwise good news of the day, the company announced that it would begin
expensing option grants in the December quarter in line with FAS 123R. The company
estimates this will lead to approximately a 17% dilution in GAAP earnings. When it begins
expensing these, the company plans to also issue a pro-forma cash earnings figure as well.
The drawback of this method is that the expense cuts across all levels of the income
statement from COGS on down, as well as several balance sheet items, adding a wrinkle of
complexity to their reporting. The advantage of this method, however, is that it will allow
investors to gauge the company’s actual, cash performance better.
While we are neutral on the topic of options expensing, we remind readers that companies
will be given a wide latitude in setting the variables with which they value their options
expense. While we believe QCOM’s management will make these choices in reasonable
manner, some of its competitors or comparables may not be quite as reasonable. Investors
should be aware of this when making comparisons in the future.
Valuation
We have established our price target for QCOM using two methods. Under a comparable
company analysis, at our target price QCOM would trade at a 38x multiple of CY05E EPS and
27x multiple of CY06E EPS. This is a premium to our coverage universe multiples of 23x and
21x, respectively, justified based on QCOM lead position in the market and industry leading
profitability. We have also established the share price using a discounted cash flow analysis
with a discount rate of 10.0% and a growth rate of 5.5% at a price target of $45.
Risks
Down side risks to QCOM include slower than expected industry growth rates, particularly
for the adoption and growth of 3G networks and consumer demand, a slower than expected
expansion of CDMA and WCDMA in emerging markets such as China and India. The
company could also experience greater than anticipated competition in several of its markets
especially in WCDMA. Upside risks include the company gaining greater than anticipated
market gains in WCDMA, improved macro-economic conditions, higher than expected
adoption and growth in emerging markets such as China and India, faster than anticipated
subscriber adoption of 3G.
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