Qualcomm Inc (QCOM)

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Qualcomm: Top of the Wireless Food Chain(II)

CDMA ADVANTAGE. This month, Qualcomm announced its first delivery of a 90-nanometer, low-power MSM chip with its foundry, Taiwan Semiconductor, thus reducing mobile-application power consumption, boosting processor capability, and enabling the integration of more service features on a smaller chip. We believe it will be a steep challenge for Qualcomm's competitors to catch up in the CDMA integrated-device market, when so much is demanded from handset suppliers and wireless service providers. Advertisement

Qualcomm's CDMA offers superior performance compared to other digital technologies, allowing a greater number of calls within the allocated frequency. The outfit holds many patents related to CDMA and derives royalties from more than 100 license agreements tied to its technology. Royalties are paid when the manufacturers earn revenue from the sale of CDMA-based equipment. The technology-licensing business accounted for 28% of its December-quarter revenues.

Qualcomm's third-generation CDMA2000 1X technology was commercially deployed in October, 2000, in South Korea and had picked up 17 million subscribers as of February, 2003. In North America, most CDMA-based operators had commercially deployed CDMA2000 1X at the end of 2003.

GROWTH NICHE. In January, 2004, Verizon Wireless (VZ ) selected Qualcomm's CDMA2000 1X-EV-DO third-generation technology for high-speed, wireless data service applications. We expect Vodafone (VOD ) to deploy WCDMA or UMTS in its markets in Asia and Europe during the second half of 2004.

Global CDMA handset forecasts are a useful gauge to determine Qualcomm's expected royalty stream from vendor and carrier license agreements. S&P's Equity Research forecasts total handsets to reach 515 million to 520 million in 2004, compared with 472 million handsets shipped in 2003. Qualcomm expects CDMA handsets to reach 142 million units in 2004, from 100 million in 2003.

Hence, the CDMA market segment is growing four times faster than the overall handset market. Qualcomm should benefit from the expanding demand in emerging markets, such as China and India, as well as a faster handset-replacement cycle in North America, Japan, and South Korea.

STRONG BREW. Qualcomm forecasts that WCDMA in Europe and other markets should contribute 10% of total CDMA handset shipments in 2004, compared with less than 2% in 2003. It targets North America at 37% of total CDMA handsets shipped in 2004; China and India at 19%; South Korea, Japan, and Southeast Asia at 22%; Latin America at 9%; and the rest of the world at 3%. Qualcomm sees ASPs for handsets declining only 7%, as the market looks to buy more high-end phones in developed countries to offset low-end phones shipped in emerging markets.

The wireless and Internet segment accounted for 11% of Qualcomm's December-quarter sales. It provides satellite-based, two-way data messaging and position-reporting equipment to transportation companies. The segment shipped 10,900 products in the quarter, bringing the total to nearly 500,000 units shipped.

Qualcomm's BREW software is reported within this segment, and we expect it to be the outfit's third sales driver. BREW is software on a chip capable of providing a user interface in the handset with e-mail, photo sharing, messaging, location-based services, push to chat, a Web browser, video player, and a Java applet. Qualcomm has established partnerships with hundreds of software developers to leverage BREW, which is able to operate on different radio frequency technologies, including GSM/GPRS, UMTS, cdmaOne, as well as CDMA2000 1X-EV-DO.

The fourth business segment is Qualcomm's strategic investments in wireless-technology developers and service providers in emerging markets. This unit has materially reduced Qualcomm's reported earnings, but with the sale of its 16% interest in Vesper, a Brazilian carrier, we expect this segment to have less of a negative impact on earnings.

Note: Kenneth Leon has no stock ownership or financial interest in any of the companies in his coverage area. He's a registered representative of Standard & Poor's Securities, Inc. Other S&P affiliates may provide services to the companies under discussion.

http://www.businessweek.com/investor/content/mar2004/pi20040312_1829_PG2_pi044.htm