Replies to post #20545 on Qualcomm Inc (QCOM)

[demi22]

From: peterk on the moderated Here is ML's take on Motorola's announcement. They still rate the Q a buy with target at 60.

Limited scope for Qualcomm at Motorola

Motorola’s comments at its Analyst Day suggested that Qualcomm’s position in
WCDMA chips is more limited than perceived before. We explain the issue below,
and note that it does not change our positive stance on the stock. We do not
make any changes to our model, given that Motorola is still expected to launch
Qualcomm-based handsets in 1H2008 and given that we did not change our
market share assumption back when Qualcomm announced the win.
Understanding the background
Motorola, like Nokia, is focusing on a platforming strategy, implying that many
types of handsets, including future models, are based on the same platform,
gaining better economies of scale via component reuse, quicker time to market
and shared R&D resources. As such, Motorola and Nokia prefer to only buy the
baseband chip (not the entire off-the-shelf product), customizing it to their
platform, and using their own modems, software and other components.
Qualcomm has taken the other approach, supplying its customers with complete
and integrated chips, including the software elements. While this strategy enabled
smaller players to “outsource R&D” to Qualcomm and reduce time to market, it
worked against the platforming strategies of Motorola and Nokia.
Motorola’s relationships with Qualcomm
Recently, Qualcomm announced it will be providing WCDMA chips to Motorola,
raising hopes of it becoming a key vendor. However, Motorola apparently sees
Qualcomm as a gap-filler, enabling it to quickly overcome market share losses in
WCDMA, temporarily putting aside its platforming strategy. However, over time
Motorola intends to shift to vendors that will be willing to design a chip to
Motorola’s specs. While some investors tried to paint Motorola’s comment in pink
colors, calling for some confusion in the message, our discussions confirmed the
temporary nature of Qualcomm’s business with Motorola. Qualcomm said in
return that it believes that one temporary phone will be followed by another
temporary phone, leading to a permanent flow of temporary products.
Game is not over though
Per management, Motorola is now discussing with semiconductor vendors (including
Qualcomm) a second source position, in addition to TI. Qualcomm management told
us that it is not ruling out adhering to Motorola’s requirements, given the size of the
customer. This leads us to believe that Qualcomm’s business with Motorola could
develop over time (in the positive scenario) into a relationships that resembles the
Motorola/TI relationships, implying higher volumes but lower ASPs and margins, given
that it may not include all of Qualcomm’s offerings, especially its software.

[Eric]

QUALCOMM WCDMA (UMTS) MSMs for Motorola: 3 Analysts Assess the Potential

The news last November was encouraging ...

QUALCOMM and Motorola to Collaborate on UMTS Handsets: Companies Expand Relationship Beyond CDMA2000 [San Diego And Libertyville, IL, November 13, 2006] QUALCOMM and Motorola today announced an expansion in their relationship. In addition to collaborating on CDMA2000®, the two companies will now be working together to bring UMTS handsets to global markets. ...

http://www.qualcomm.com/press/releases/2006/061113_motorola_collaborate_umts.html

The January news was sobering ...

Motorola Expands Strategic Relationship With Texas Instruments To Include High-Volume 3G, Wimax And OMAP™ Technologies: Breadth of Relationship Now Spans Current and Future Experience-Rich Designs [Libertyville, IL And Dallas, January 29, 2007] Motorola, Inc. and Texas Instruments today announced that the companies are expanding their strategic relationship to include 3G, WiMAX and OMAP technologies in the design and development of new, experience-optimized mobile devices. The expanded relationship covers current, emerging and next-generation wireless standards and leverages intellectual property from both Motorola and TI. As part of the expansion, Motorola is developing 3G handsets based on a TI customized 3G solution that will include high-performance, power-efficient processors from TI's OMAP 3 architecture, as well as advanced, unique 3G and 3.5G building blocks from both Motorola and TI. New handsets using this solution are expected to be available to consumers as early as 2008. Additionally, TI is supporting Motorola's mobile WiMAX initiative, including development of a customized Motorola WiMAX solution, and providing digital design elements, high-performance analog components, RF solutions, and manufacturing process and fabrication expertise.

http://focus.ti.com/docs/pr/pressrelease.jhtml?prelId=sc07024

With Motorola intent on platformization that long was promised but neglected, this May news sent a chill ...

Motorola Appoints Alain Mutricy as Senior Vice President for Platform Technology for Mobile Devices Business: Former Texas Instruments VP Will Drive Global Strategy for Silicon and Software [Schaumburg, IL, May 3, 2007] Motorola, Inc. announced that Alain Mutricy has joined Motorola as senior vice president, Platform Technology, within the company’s Mobile Devices business. He will be responsible for defining and directing the business unit’s global strategy for silicon and software platforms and will be based at Motorola’s Libertyville, Illinois, facility. Mutricy will report directly to Terry Vega, head of products and technology as well as co-leader of the Mobile Devices business.

http://tinyurl.com/2wyusv

In my opinion, every top tier handset manufacturer should have a dual source of supply for silicon for each technology segment, but none can justify tri-sourcing in that segment. With Freescale still in the picture QUALCOMM will need to scrap to get a share of Moto's business at the same time they try to maximize their 3G share with Samsung and LG, both of whom will 2nd source. Here are 3 analyst views on what Moto is up to (and why) with their 3G UMTS roadmap, after participating in Moto's recent Analyst Day ...

>> QUALCOMM, Inc. (QCOM): Long-term Motorola Opportunity In Question, Near-Term OK

Brantley Thompson: Americas-Telecom Eqpuipment
Goldman Sachs
September 9, 2007

Motorola held its 2007 Financial Analyst meeting in New York on Friday. Key executives discussed Motorola’s silicon strategy, indicating that Qualcomm will likely be only a tactical WCDMA chip supplier to Motorola and that Qualcomm is not currently being viewed as a the long-term WCDMA chip supplier. This was a change from comments by Motorola earlier this year. It is now clear that FreeScale and Texas Instruments are being viewed as the long-term partners.

(1) We believe that Qualcomm will be used tactically by Motorola for WCDMA phones in the coming years which will drive Qualcomm’s market share higher. As a result, we are not adjusting our estimates at this time. Our checks indicate that Qualcomm will initially only supply Motorola WCDMA phones in Korea.

(2) Poor financials, high debt, and customer concentration is likely driving FreeScale to be aggressive on price and other terms.

(3) Qualcomm has a technology and time to market lead compared to FreeScale. However, Qualcomm will likely have to be more supportive of Motorola’s software and chip architecture demands to put itself in the running as a long-term partner and convince Motorola that it is worth the high switching costs to partner with Qualcomm over the long-term.

(4) Motorola’s management clarified that Qualcomm’s legal issues did not play a role in the decision to adjust its long-term view of Qualcomm as a partner.

Implications: We remain buyers of Qualcomm. Qualcomm shares continue to be attractive as the legal overhang has driven shares to an attractive valuation and the fundamental outlook for 3G adoption remains strong. We maintain our estimates and price target for Qualcomm. However, Motorola’s comments are a clear negative. ###

>> Motorola, Inc. Company Update: Positive Themes at Analyst Day

Jeff Kvaal and Tim Luke
Lehman Brothers
September 10, 2007

Silicon and Software Remains a Challenge – Focus on Texas Instruments: Motorola indicated several times that its software and silicon platforms are a challenge. We believe that Motorola is leaning more towards Freescale and Texas Instruments than towards QUALCOMM in its 3G architecture design. Management appears interested in controlling the architecture for it’s mid to high tier phones, although not for the low tier. We believe this favors Freescale, for whom Motorola is of course the signature customer, and Texas Instruments. We believe that QUALCOMM has historically been less flexible in supporting vendor specific platforms, and thus Motorola’s plan may be to use QUALCOMM chips primarily in specific situations, such as when a carrier demands it or an ODM partner uses them.

Semiconductor Suppliers: With regard to chip suppliers focus on Freescale and TXN; Motorola indicated it would continue to use Freescale's chipsets, and is set to embrace the new TXN platform in 2H08, and will continue to use QCOM for CDMA with some opportunistic use for WCDMA. This suggests that Motorola may be somewhat behind our earlier expectation for UMTS phones with TXN (2H now vs 1H) but TXN appears to be playing a key role in. "Controlled (Nokia like) Architecture" and that Freescale's role (possibly with price aggressiveness) may be larger than previously thought while QCOM role as a merchant supplier with MOT may be more focused on CDMA and less significant for W-CDMA than some prior investor expectations. MOT highlighted key role of flexible app processor software. We believe negotiations with chip suppliers may continue in coming months. ###

>> Qualcomm Loses Big Client, Buy Rating

Mark McKechnie
American Technology Research
Barron's
September 10, 2007

http://tinyurl.com/2e6xbt

We are lowering our rating on Qualcomm from Buy to Neutral as Motorola has disclosed plans to remove Qualcomm from its third-generation roadmap in favor of Freescale Semiconductor for now and Texas Instruments in the second half of 2008.

The absence of Motorola has removed a key driver of our positive rating with the backdrop of ongoing legal issues. We are also removing Qualcomm from the American Technology focus list.

We have confirmed that Motorola has already begun to shift resources away from Qualcomm 3G efforts towards Texas Instruments. Checks suggest a dramatic about-face on business rather than technical issues, with designers now encouraged to minimize Qualcomm in new products. We had previously expected Qualcomm in Motorola's mid- and high-end for 2008.

We believe Motorola's decision was purely business as our technical contacts had suggested many Qualcomm-based [third-generation] WCDMA designs in the pipeline and a general preference amongst Motorola designers for Qualcomm, despite the higher pricing. Our checks reveal that Motorola found Qualcomm "hard to do business with," which we interpret as either too high-priced, or also having something to do with the royalty rates.

We also suspect that Motorola has bear-hugged Texas Instruments, taking advantage of Nokia's recent chipset announcements in which it has moved away from Texas Instruments as a sole supplier. Indeed, our checks suggest a fairly significant shift of resources at Texas Instruments away from Nokia products towards Motorola. Texas Instruments may have motivated Motorola's move away from Qualcomm in return for its engineering commitments.

We estimate 35 million 3G phones for Motorola in 2008, which would mean $700 million in sales and 10 cents in earnings per share of lost opportunity for Qualcomm. We had viewed Motorola as upside to our calendar year 2008 forecast but could see an impact if Motorola garners share from Qualcomm-based phones.

Qualcomm also faces upcoming legal volatility. The next legal events include:

1) remedy from then Broadcom patent case in U.S. District Court in Santa Ana, Calif

2) outcome for Qualcomm's request for a "stay" of the International Trade Commission ban [on importing future 3G handsets]

3) updates from Qualcomm/Nokia arbitration [regarding royalty rates.]

We look for Qualcomm to potentially mount an offensive against Nokia following the Sept. 30th deadline for Nokia's "full" royalty payment for the June quarter.

We are confident of Qualcomm's long-term patent position, but would wait for signs of a legal victory before committing new money given the removal of Motorola as a chipset customer and now as a potential new threat to Qualcomm's royalty model.

The legal upside/downside is hard for us to handicap with a big potential move in the stock over the next six to 12 months on the outcome of the Nokia royalty battle. The current business appears solid and valuation reasonable.

We do note that Motorola faces tough headwinds given its recent product cycle miss and that the remaining Qualcomm handset customers (Samsung & LGIC) could offset the impact of the Motorola loss. These customers still need to compete with Nokia, however, which is rapidly moving down the 3G learning curve and will likely drive Qualcomm chipset pricing down whether or not Motorola emerges a 3G player in 2008. ###

- Eric -