POST OF THE DAY
QUALCOMM, Inc.
In Reply To:
A Case for the Analysts

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By BRational
November 11, 2002

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Bob-- you present a good attempt at worst-case scenario analysis; several of the points you make echo some of what I had said before, here and on the Nokia thread. However, even as a worst-case scenario, I believe the analysis may be missing the mark on several facts (or what would be facts if you believe that Qualcomm management is not lying outright, a la Enron or WorldCom).

First, the short-term significance of the CDMA 1X business is well recognized, most of all by Qualcomm management, as we have seen in the stellar performance turned in by (QCT boss Don) Schrock's unit. I had made the case in a post at the very beginning of the year for the absolute need to focus on selling more chips now, not in three years, and Qualcomm has been doing just that. The "risk factors" you identify about the CDMA marketplace are all valid, but there are three elements in the guidance, the conference call, and most important in the actual numbers that contradict you:

1. Schrock stated that more than 90% of the December quarter is already logged; so how "aggressive" can guidance be when 90% of it is already reality, not prediction? The company has done that quarter after quarter, and I think they have a good handle on their visibility for at least the next quarter.

2. The strong profits in chipsets are not only due to selling more of them, but also to dramatically improved margins-- now up to 33% in that segment; Schrock indicated those were holding steady (I think he was being conservative given what he said last quarter). We have no reason to believe the company was aggressive about that; the proof is in the performance we have seen quarter after quarter.

3. You bring up the inventory concern, as though there is currently a large overhang of chipsets in the channel; (COO Anthony) Thornley addressed that and indicated that if anything there are reports of shortages, of handsets, not of channel stuffing.

Any product is subject to market risk; the moment market risk disappears, there will be no significant appreciation remaining in the stock, as perfect information about a certain world will quickly lead to full valuation. So examination of market factors is certainly appropriate to assessing how the company is likely to do in the near to medium term. Let me address some of the factors you noted.


Conclusion - CDMA and GSM are currently like Ford and GM. They are two competing products that currently deliver essentially the same type of product to the consumer. Their relative success depends upon old fashion marketing factors such as the availability of cool devices and advertising. Ford isn't going to destroy GM - GM isn't going to destroy Ford, and similarly, in the short run, CDMA isn't going to destroy GSM.

I agree with your conclusion, but I will ask the same question I had asked on the Nokia board: so what? Who said that CDMA is going to destroy GSM, and where is it that Qualcomm's guidance is predicated on that thesis? Now this really sounds like analyst misconception!


The chip sales are not currently being made into a mature market, but rather into a developing market, and therefore guidance is harder to make.

Indeed, the market is in development, which is why the guidance is less, not more aggressive. In a mature market, additional growth on the high end is questionable. In a developing market, the take-up rate is higher-- and what is clear here is exactly what you noted in the previous point, namely that what will drive the market is not technology but cool handsets and nifty features. There is ample evidence from everywhere now that the handset replacement rate is being driven by color screens, camera phones, etc...This is exactly the point you make in favor of Nokia's model, which I totally agree with. The Asian CDMA markets have taken off big time with the replacement cycle triggered by the new camera phones etc... Europe is not a factor for CDMA and this is where Nokia's new camera phone models are going. This really leaves the US; Nokia is not producing these models for TDMA, nor for the US GSM band yet, and neither AT&T nor Cingular have sufficient GSM coverage nationally. The CDMA handsets available to US consumers have more features than the corresponding TDMA and GSM ones, and while Sprint and Verizon are embarrassingly behind Korea and Japan, they are still ahead of AT&T and Cingular, and will have more advanced handsets to sell this Christmas season.


You should check out all the really cool phones and devices that Nokia is rolling out for the GSM/GPRS network that it is not rolling out for the CDMA network.

I agree with Nokia's prowess on the consumer side, but neither is it rolling its coolest handsets for TDMA or for GSM in the US spectrum. I have pointed to that in one of my "misconceptions" posts on the Nokia thread-- what Nokia rolls in Europe is not directly usable in the US. In fact in a search I recently conducted I found that the only multi-band GSM handsets that work in both Europe and the US are made by Siemens (and Motorola, I believe), and they're far from cool.


Nokia is banking upon cool devices that appeal to the consumer being more important than the nuances of a better technology that the consumers don't understand.

I agree, but Nokia is not the only one, and it is now behind leaders like Samsung and Sanyo in terms of advanced features-- Nokia though is the one that brings these features to the mass market of Europe and the Middle East and Africa.

Nokia is not developing the same devices for the CDMA world because it does not want to exploit its market making capabilities to promote a superior technology that could help crumble the GSM world.

Nokia is not developing the same devices for CDMA because it cannot compete on the high end of CDMA 1X, so it waits until the technology is more mature and will then introduce it for the mass market-- as it has done in the past with CDMA models sold by Verizon and Leap. It does have to satisfy its core GSM constituency first, but it cannot reach its goal of 40% market share in handsets without a more vigorous presence in CDMA. At this point the cast of players has grown to the point that no single handset manufacturer can make or break a technology or an operator.


I am very hopeful about the major carrier that is looking at GSM1x. However, my bet is that it is only China Unicom.

We'll find out soon enough, but if it is indeed China Unicom-- that would be great news! That would be a terrific foothold for GSM1X,in the world's largest mobile phone market. What is so negative about that?

However, the 450 mhz CDMA has not been built out in Europe yet, so it doesn't make sense.

I believe Romania's Zapp Mobile is in the 450 mhz spectrum, as are a couple of Russian operators-- but that is still a minor niche market.

My conclusion-- the points raised are all valid, at some level; but they are less valid than they were before the earnings release-- especially the concern about the near-term guidance being too aggressive.


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