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QCOM AT A GLANCE

P/E ► 45.5 AVG EV/EBITDA ► 27.7 HIGH ROA ► 8% AVG ROE ► 10.3% AVG Debt to Equity ► 0.407 AVG Current Ratio ► 4.98 HIGH Interest Coverage Ratio ► 147 VERY HIGH

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating Expenses Research & DevelopmentSG&AAmortization & Depreciation

QUALCOMM, Inc. (NASDAQ: QCOM) is the leading manufacturer of the CDMA chip-technology that is used in 3G wireless communications. 3G networks have boomed in the past five years, with 3G subscriptions growing 33% to 705 million,^[1] and this has translated to QCOM more than doubling its sales since 2004.^[1] The company has made and marketed a CDMA module named the "Gobi" that will be installed in high quality PCs from companies including Dell (DELL) and HP, and has seen so much success from its CDMA technology that its competitors have attempted to replicate it. In particular, the company has had legal disputes with Nokia (NOK) and Broadcom (BRCM) within the past two years. In mid 2007, NOK settled a patent infringement with QCOM and paid the company $560 million.^[2] QCOM may be number one in CDMA modules, but wireless networking has become more competitive since Apple's IPhone supports GSM technology -- CDMA's rival in 3G networking. Furthermore, 4G networking has been in development within the past year. With 70% of its sales coming from Asia,^[3] QCOM has not been totally crushed by the U.S. recession. From 2007 to 2008, QCOM has seen sales increase 25.6%, while competitor Motorola (MOT) has seen sales decrease 15%.^[4]

[edit] Business Financials

Qualcomm operates in four segments:

[edit] Qualcomm CDMA Technologies (QCT) (60.3% of Total Revenue, 36.8% of Net Income)^[5]

QCT is the number one developer and supplier of CDMA -based integrated circuits and system software for wireless voice and data communications, multimedia functions and global positioning system products. QCT’s integrated circuit products and system software are used in wireless devices, particularly mobile phones, data cards and infrastructure equipment. From 2007 to 2008, QCT revenues increased 27.3% due to higher CDMA sales.^[5]

[edit] Qualcomm Technology Licensing (QTL) (32.5% of Total Revenue, 63.2% of Net Income)^[5]

QTL grants licenses to use portions of Qualcomm's intellectual property portfolio, which includes certain patent rights essential to and/or useful in the manufacture and sale of certain wireless products, including, without limitation, products implementing cdmaOne, CDMA2000, WCDMA , CDMA TDD, GPRS/EDGE and/or OFDMA standards and their derivatives. QTL receives revenue from license fees as well as ongoing royalties based on worldwide sales by licensees of products incorporating or using Qualcomm owned intellectual property. License fees are fixed amounts paid in one or more installments. Ongoing royalties are generally based upon a percentage of the wholesale selling price of licensing products, net of certain permissible deductions (e.g. certain shipping costs, packing costs, VAT, etc.). Qualcomm reports that the vast majority of this segment's revenues are generated primarily through licensees’ sales of cdmaOne, CDMA2000 and WCDMA products. From 2007 to 2008, QTL sales increased 30.7% due to a $560 million settlement with Nokia (NOK).^[5]

[edit] Qualcomm Wireless & Internet (QWI) (7.0% of Total Revenue, loss of $1 million in Net Income)^[5]

QWI, which includes Qualcomm Enterprise Services (QES) (formerly Qualcomm Wireless Business Solutions, or QWBS), Qualcomm Internet Services (QIS) and Qualcomm Government Technologies (QGOV), generates revenues primarily through mobile communication products and services, software and software development aimed at support and delivery of wireless applications. From 2007 to 2008, QWI revenues decreased 5.2%.^[5]

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From fiscal 2007 to 2008, QCOM revenues increased 25.6%, while net income decreased 4.3%.^[1]

[edit] Qualcomm Strategic Initiatives (QSI) (0.5% of Total Revenue, loss of $304 million in Net Income)^[5]

QSI manages the Company’s strategic investment activities, including MediaFLO USA, Inc. (MediaFLO USA), the Company’s wholly-owned wireless multimedia operator subsidiary. QSI also makes strategic investments to promote the worldwide adoption of CDMA-based products and services. Qualcomm's current strategy is to invest in CDMA-based operators, licensed device manufacturers and start-up companies that are believed open new markets for CDMA technology, support the design and introduction of new CDMA-based products or possess unique capabilities or technology. From 2007 to 2008, QSI revenues jumped from $1 million to $12 million due to the commencement of its MediaFLO business.^[5]

[edit] Nonreportable Segments

Nonreportable segments include: the Qualcomm MEMS Technologies division, which is developing an IMOD display technology based on micro-electro-mechanical-system (MEMS) structure combined with thin film optics; the Qualcomm Flarion Technologies division, which is developing OFDM/OFDMA technologies; the MediaFLO Technologies division, which is developing our MediaFLO MDS and FLO technology and markets MediaFLO for deployment outside of the United States; and other product initiatives.

[edit] Trends and Forces

[edit] QCOM Profits from 3G Networks with "Gobi" Module.

Third Generation, 3G, networks boomed in 2007 and 2008. These networks are used in cellular data transmission of internet access and real-time video. The 3G technology is superior to other networks, such as Wi-Fi or WLAN, because of its faster data transfer capabilities. Thus, mobile telecommunications users ranging from teenage IPhone text-a-holics to corporate communications companies benefit immensely from 3G's faster transfer times and the capability to partake in more advanced cellular activities. There are two chip set technologies that are compatible for 3G networks -- CDMA and GSM. CDMA has 270 million subscribers worldwide while GSM has over 1 billion subscribers.^[6] Handsets that have AT&T (T) and t-mobile as carriers use GSM technology, while Verizon and Sprint Nextel (S) handsets use CDMA technology.^[7] From 2007 to 2008, the number of 3G cell phone subscribers grew 33% to 705 million, with 50% being Japanese.^[1]

QCOM is at the center of 3G development. QCOM uses semiconductors to create chip sets compatible with 3G service. In 2007, QCOM unveiled the Gobi -- a 3G-compatible module used in computer notebooks for wireless internet access.^[8] As of 1/07/09, Panasonic and HP were Gobi's biggest supporters, as Panasonic's new ToughBook laptop and over 10 HP PC models carry Gobi.^[9] At the 2009 Consumer Electronics Show, PC manufactures (Acer (2353-TW) and Lenovo, as well as eight wireless carriers (including AT&T (T), Verizon, and Vodafone) have pledged to support Gobi in 2009.^[9] Furthermore, Dell (DELL) has announced that it will offer its first Gobi-installed notebook in 2009).^[9]

While QCOM is the number one developer of CDMA for the 3G market, wireless technology is evolving at a blistering pace. Sony-Ericsson has released its 3G-compatible "P-series" chipset, and Fourth Generation 4G technology is on the way. Also, the top selling Apple (AAPL) iPhone does not use CDMA technology for its phones; it uses GSM technology because it has AT&T (T) as its carrier.^[10] As iPhone sales continue to increase, QCOM could lose market share if the phone does not use CDMA carriers. Also, Intel has already manufactured products for the WiMax 4G platform,^[11] while QCOM has developed WCDMA products for the LFE 4G platform.^[12]

[edit] Qualcomm Snapdragon

Snapdragon is an ARM architecture platform developed by Qualcomm for powering mobile computing devices. It is designed for real time ubiquitous computing with low power consumption for day-long battery life. The first releases of Snapdragon are the QSD8650 and the QSD8250, available since 4Q2008, both integrating a 1GHz AP and including cellular modem and GPS.The latest QSD8672 chip (to be sampled in the second half of 2009) uses 45 nm technology and includes two CPU cores running at up to 1.5GHz. QSD8672 product targets advanced mobile computing devices and includes integrated HSPA+, GPS, Bluetooth, high definition video recording and playback, Wi-Fi and mobile TV technologies (MediaFLO, DVB-H and ISDB-T). The first mobile internet device to use Snapdragon rated at 1GHz is Toshiba's TG01 smartphone.

Snapdragon's power and integration are the key selling points. Qualcomm--because of its background in the cell phone market where integration and low-power are the name of the game--has packed a lot of features onto one piece of silicon that is short on power consumption and long on battery life. Another salient point: Qualcomm isn't licensing the technology from ARM in the traditional sense. The company has licensed the instruction set only and then built its own processor, allowing it to boost the clock speed to 1GHz and beyond while keeping the power low. Snapdragon, however, is not a speed demon. It will offer relatively good performance within the targeted power envelope.Snapdragon operates below 0.5 watts, is based on the newest ARM v7 instruction set, runs as fast as 1GHz, and integrates almost everything including the processor, GPS, an ATI graphics core, multimedia (digital signal processor), and 3G modem, all on one 15mm X 15mm piece of silicon

[edit] QCOM Faces Legal Battles with Rivals Nokia (NOK) and Broadcom (BRCM).

QCOM controls an impressive amount of intellectual capital in the CDMA (cellular technology) market, partly because CDMA technology is so difficult to produce. Nokia, as well as other handset manufactures, use QCOM's technology in its cellular devices to obtain fast 3G networking. QCOM had a patent-sharing arrangement with Nokia that expired in April, 2007. A new 15 year agreement was reached in July 2008 which provides an overall rate structure for licensing and royalties between the two companies.^[13] Nokia and Qualcomm were in a legal dispute because Nokia thought the royalty rates it was paying were too high, but the legal battle has ended with this new agreement. Nokia said it has paid QCOM over $1B in royalty payments since the early 1990’s.^[13] In Q408, however, QCOM took Nokia to court because they were not paying QCOM enough royalties. The two firms settled the patent litigation with Nokia paying QCOM $560 million, which boosted its revenues to $3.3 billion for the quarter.^[14]

Qualcomm has also had legal disputes with wireless chip rival Broadcom (BRCM). Broadcom claimed that QCOM's CDMA patent licenses were "unenforceable."^[15] Furthermore, QCOM was accused of, "improperly concealing its patents, reneging on licensing obligations, and exerting market dominance through hidden affiliations."^[16] On August 10,2007, QCOM was found guilty of patent infringement for Broadcom's 3G technology,^[17] awarding Broadcom $33 million in damages. In April 2009, Qualcomm Incorporated and Broadcom Corporation announced that they had entered into a settlement and multi-year patent agreement. The agreement resulted in the dismissal with prejudice of all litigation between the companies, including all patent infringement claims in the International Trade Commission and U.S. District Court in Santa Ana, as well as the withdrawal by Broadcom of its complaints to the European Commission and the Korea Fair Trade Commission. Under the agreement, the companies have granted certain rights to each other under their respective patent portfolios. Qualcomm will pay Broadcom $891 million over a four-year period. Qualcomm will pay Broadcom $891 million in cash over a period of four years, of which $200 million will be paid in the quarter ending June 30, 2009. The agreement does not provide for any other scheduled payments between the parties.The terms of this agreement will not result in any change to Qualcomm's 3G (e.g., CDMA2000®, WCDMA and TD-SCDMA) and 4G (e.g., LTE and WiMAX) licensing revenue model.

[edit] Over 70% of QCOM's Sales are from Asia.

Qualcomm, based in San Diego, CA, had 70% of its sales in South Korea, China, and Japan during 2008.^[18] In 2008, China had a GDP growth of 9% due to a sluggish 4th quarter (6.8%),^[19], but hit a historic high of 13% in 2007. South Korea had a GDP growth of 4.3% in 2008.^[20] Comparatively, the U.S. had a dismal 1.4% GDP growth in 2008.^[21] With 9% of revenues coming from the U.S., QCOM is insulated from U.S. consumer timidness. From 2007 to 2008, QCOM revenues increased 25.6%^[1], primarily due to its CDMA sales increasing 28% to $433 million.^[1] Comparatively, Motorola (MOT), who has 44% of its sales come from the U.S., saw sales decrease 15% in 2008.^[4] Unfortunately, QCOM does not gain an international advantage over Nokia (NOK), as 4.4% of NOK's revenues came from North America.^[22] With a global recession looming, QCOM knows that Asian economic hardship would immensely affect its business.

[edit] Competition

[edit] Telecommunications

• QUALCOMM (QCOM) -- QCOM develops and manufactures wireless software and semiconductors for the cell phone industry. It is the largest patent-holder of CDMA (cellular) technologies.
• Motorola (MOT) -- Like Nokia, MOT is a handset manufacturer that attempts to develop its own CDMA technology.^[4]
• Nokia (NOK) -- NOK owns 40% of the handset market,^[23] and uses Qualcomm's CDMA technology in its phones. NOK and QCOM have had legal disputes over QCOM's prized patent, however.^[22] Like MOT, Nokia attempts to create its own CDMA technology.
• Broadcom (BRCM) -- BRCM manufactures similar semiconductor products for wireless communications, especially 3G networking.^[24]
• Alcatel (ALU) -- ALU competes with QCOM in developing CDMA technology.^[25]

[edit] References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6} QCOM 2008 10-k, Item 6: Selected Financial Data, page 42
2. ↑ The Street, "The Truth About Qualcomm's Quarter," 11/7/08
3. ↑ QCOM 2008 10-k, Item 1A: Risk Factors, page 18
4. ↑ ^{4.0 4.1 4.2 4.3} MOT 2007 10-k, Item 6: Selected Financial Data, page 34
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7} QCOM 2008 10-k, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 52
6. ↑ Wise Geek, "What is the Difference Between GSM and CDMA?"
7. ↑ Seeking Alpha, "Apple's iPhone and the Future of Qualcomm," 5/10/07
8. ↑ Seeking Alpha, "Qualcomm's Recent Progress on 3G and 4G Notebooks, 1/11/09
9. ↑ ^{9.0 9.1 9.2} Forbes, "Qualcomm Could Shine At CES," 1/7/09
10. ↑ Apple Website, iPhone, 3G]
11. ↑ Intel website, "WiMax Products"
12. ↑ Qualcomm website, "Qualcomm and 4G Systems Enter Into OFDM/OFDMA Modem Card and Router License Agreement"
13. ↑ ^{13.0 13.1} Qualcomm, Nokia Reach Deal to End Fight Over Patents
14. ↑ The Street, "The Truth About Qualcomm's Quarter," 11/7/08
15. ↑ MarketWatch, "Qualcomm fires back at Broadcom," 10/9/08
16. ↑ Reuters, "Broadcom files fraud complaint against Qualcomm," 4/13/07
17. ↑ MarketWatch, "Broadcom escalates battle with Qualcomm," 10/9/08
18. ↑ QCOM 2008 10-k, Item 1A: Risk Factors, page 18
19. ↑ Time, "China's GDP Slows to Seven-Year Low," 1/22/09
20. ↑ CIA Factbook, "Korea, South"
21. ↑ CIA Factbook, "United States"
22. ↑ ^{22.0 22.1 22.2} NOK 2007 20-f, Item 3A: Selected Financial Data, page 7
23. ↑ Engadget.com, "Nokia grabs 40% of global handset market, nets $2.6 billion in Q4"
24. ↑ ^{24.0 24.1} 2007 Broadcom Annual Report
25. ↑ ^{25.0 25.1} ALU 2007 Annual Report