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QUALCOMM, Inc.
WCDMA Ramp and Perception

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By DaveMock
May 13, 2004

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What I've seen in the past year or so is a significant shift in the industry. While this shift has also been seen by many here and other dedicated QCOM investors, the shift has largely gone unnoticed in the investment community (again, no surprise to many here).

When I look at the big picture, I see an industry and investment community that has been beating WCDMA down at every turn - it's late, it's faulty, it's not worth the investment, etc. The attitude towards the technology and 3G in general was one of near universal distaste - the bloom was off the rose so to speak and expectations were continually notched down. This sentiment was, I believe, a significant factor in the valuation of Qualcomm and their product line, which has a substantial portion of its future in the WCDMA protocol. But events turned very interesting late last year and this year - major players went quiet on WCDMA.

If you remember the mood from CeBit and CTIA, it was very muted, cautious and tempered with respect to expectations for 3G networks and their launch and subsequent proliferation. The problems with handsets and network timing were now tired subjects. The buzz gave way to Wi-Fi and other, farther out speculations.

To me, this mood change signaled the bottom to 3G (WCDMA), at least in the eyes of pop-media, which factors heavily into the market. In my eyes, when companies come out publicly and signal essentially no expectations factored into a technology, this is precisely the time to consider something viable for surprise. Sure enough not long after, surprise, Qualcomm was seeing significant royalty from WCDMA. Then again, surprise, WCDMA infrastructure is growing rapidly and launches have actually been moved up. Surprise, DoCoMo's WCDMA network now has over 3 million subs, signing up 1 million in two months.

A major question stuck in my mind (and many others) over the last few years was Qualcomm's leverage in WCDMA royalties - not whether they would claim it but whether a significant challenge would be mounted against it. No such challenge has materialized, and a challenge at this point is far less likely to produce results than if it were initiated sooner. With the momentum of consensus behind Qualcomm and their licensees at this point, I view their WCDMA position as solid. Again, nothing new to people here, but I think the masses are now agreeing.

The next challenge to Qualcomm's licensing seems to be pointed to when their fundamental CDMA patents expire. By the time this occurs though, I think it will be too late in the game. As long as Qualcomm stays ahead of the CDMA curve, and their developments hold value for licensees, the issue of patent control is secondary once entrenched.

In essence, I think we've just seen the full pendulum swing. It swung wildly in 2000, when 3G hype was at its peak. Now it has hit the opposite peak, where the anti-hype topped. Both periods present significant cues for investors, I believe, to see what opportunities may lie in companies when looking at micro- expectations relative to the macro picture. Again, this market-based view is somewhat disconnected from analysis here, but it factors heavily into analyst views and market forces on the stock.

From here, with respect to WCDMA, it can only get better for Qualcomm. WCDMA networks will spread rapidly and subscribers will start to trickle in. At some point in a few years, the trickle will quickly turn to a flood as the technology matures. While the results being boosted today for growth in CSM shipments and infrastructure are impressive, it's nothing compared to what should eventually transpire in subscriber growth. Qualcomm is in a great position, with many of the past risks muted no longer simply by claims or stated desires, but hard numbers.

Of course, I could be very wrong about all this and such is the chance you take when looking into the future. But to me, a big picture view of global and regional sentiment speaks volumes, even if it is a "touchy feely" sort of analysis. At the very least, I think it should be considered alongside a thorough financial analysis.

Dave


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