1/6/2011

Qualcomm Moves Into Tablet Business With Atheros

By REUTERS
Filed at 4:33 p.m. ET

BOSTON (Reuters) - Qualcomm Inc plans to dominate the supply of wireless chips for
tablet devices such as Apple's iPad with its $3.2 billion planned purchase of Atheros
Communications Inc.

The San Diego based company is already a major supplier of microchips that handle
data and voice communication in phones. But until now, Qualcomm has made less
progress on its own in developing chips that incorporate advanced networking
functions in tablet devices such as the iPad.

With Atheros, it is buying a key producer of chips used in WiFi, Bluetooth and Ethernet
networking, along with GPS systems.

The companies sell complementary products: Qualcomm is best known for supplying
chips to the telecommunications industry for running mobile phone systems and
modems. Atheros sells WiFi chips and other communications chips to makers of
consumer electronics such as video games, tablets, televisions, printers and other
devices.

"They are buying them to expand their business," said Philip Solis, research director for
ABI Research.

Qualcomm is betting the deal will beef up its position in the market for new types of
mobile devices, which is expected to explode in 2011 with tablet computer offerings to
compete with Apple Inc's iPad. It will also grow as manufacturers of devices such as
video games include chips to connect them to the same networks as mobile phones.

BIDDING WAR?

Atheros shareholders will get $45 a share, a 22 percent premium to the stock's closing
price on Monday, before talk of a takeover began to circulate. Analysts said the size of
the premium leaves room for another bidder to emerge.

Intel Corp and Marvell Technology Group Ltd are potential suitors, said Roth Capital
analyst Arnab Chanda.
"If you look at the purchase price, it is clear there were not multiple bidders," Chanda
said.

Atheros shares traded below Qualcomm's offer at $44.53, suggesting investors were
not holding out hope for a better offer.

Atheros is the No. 2 maker of WiFi chipsets, claiming 21 percent of that market last
year, according to data from ABI Research. It was behind Broadcom, which
commanded 26 percent of the market, which ABI estimates was worth some $2.6
billion.

Acquiring Atheros will help Qualcomm cement relationships with new customers.

Atheros' two biggest customers are Hon Hai Precision Industry Co Ltd, which builds
Mac computers and iPhones for Apple Inc, and Nintendo Co Ltd, according to its most
recent annual report. Others include Dell Inc, Hewlett-Packard Co and Microsoft Corp.

Qualcomm, by comparison, lists its two biggest customers as mobile phone giants LG
Electronics Inc and Samsung Electronics Co Ltd.

Daniel Amir, an analyst with Lazard Capital Markets, pointed to three positives in the
deal for Qualcomm: It could become a "big combo chip player in the handset or tablet"
market; it gets access to Atheros' strong customer lineup; it quickly gets a shot to
expand into new markets, including home networking.

Still, Amir said in a research note: "We recommend taking money off the table. With the
shares trading at close to the $45 potential bid, the stock price has surpassed our fair
value price target.

"We believe the risk-reward is balanced at these levels -- this is not a judgment on the
quality of the bid. We are aware that there is potential for a bidding war if others make
an offer and we may even see an offer of (around) $50."

In afternoon trading on Wednesday, Atheros shares were up 46 cents to $44.46 and

Qualcomm shares rose $1.07 to $52.04.

Based on 71.6 million outstanding Atheros shares as of October 20, the acquisition is
worth $3.2 billion.

Qualcomm said the "enterprise value" of the transaction, or its market capitalization
and debt minus cash, is $3.1 billion.

Craig Barratt, Atheros' chief executive, will become president of Qualcomm Networking
and Connectivity following the acquisition.
Qualcomm expects the deal to close in the first half of this year and to add "modestly"
to earnings per share in its 2012 fiscal year, excluding one-time items

Qualcomm
Qualcomm Fast
 
Facts Smartphones are everywhere, and there will undoubtedly be
many long-term winners in the field.
Market
$76.8 billion
Capitalization:
But we're also in the midst of a platform war between
Communications Google's Android and Apple's iPhone. As the battle
Industry:
Equipment intensifies, there's a tremendous amount of uncertainty
about which companies will dominate the field five years
Revenue (TTM): $11.0 billion
from now.
Earnings (TTM): $3.2 billion
However, the one certainty investors can bank on is that
small, mobile, connected device demand will continue
surging across that time. And there's one company that is
perfectly positioned to profit immensely from that certainty: Qualcomm [Nasdaq: QCOM].

Qualcomm: A history of innovation

Take a swing by Qualcomm's San Diego headquarters and you'll immediately be greeted with an
unusual sight. The company literally has a wall of patents.

Photo courtesy of Barry Dodge. Used with permission under Creative Commons 2.0.
Qualcomm's proud of its history of innovation and the vast patent portfolio that resulted. The wall's a
reminder of that. However, the wall is also a statement of something else:

Qualcomm has patented the technology behind every 3G data network in the world.

If you want to use a phone that can connect to a modern data network, Qualcomm is profiting.

How Qualcomm did it

To understand how Qualcomm gained such vast influence over the telecom industry, take a look at the
company's past. Qualcomm was founded by a team of engineering geniuses who had a radical plan to
reshape the wireless industry. In the late 1980s cellular networks were extended beyond capacity.
Qualcomm believed it had the solution to fix the problem, a technology known as Code Division
Multiple Access (CDMA), which was much more efficient than any existing or future technologies. 

However, the wireless industry is standards-driven, and by the time Qualcomm began heavily pushing
for its solution, most of the world had already coalesced around a different technology. While
Qualcomm's solution worked best on paper, there were a number of powerful detractors who said the
technology would never work in real life and loudly opposed CDMA's use. The company was
essentially alone to both patent and promote its technology.

Despite vast challenges, Qualcomm managed to persuade a limited number of wireless companies to
go against the industry and adopt its standard. To get support, Qualcomm had to build the handsets
for its technology, build the network equipment, and train its partners in how to work with this new,
complex technology. In short, it was a small start-up that had to do everything required to get a
massive network off the ground. The odds against Qualcomm getting traction were staggering, but the
company eventually succeeded in widespread adoption of its technology.

The patent king

Qualcomm later got out of capital-intensive fields like making cell phones and network equipment.
However, the experience of learning how to best optimize its technology across wireless networks
proved invaluable. The company used this experience to build out a massive patent portfolio for its
CDMA technology.
With most patent companies there's uncertainty around whether their patents will hold up or how
much money the company can generate from the patents. Not with Qualcomm.

In the wireless world, the only two certainties are death and paying Qualcomm. While each of its
license contracts differs, Qualcomm has said it typically receives royalties that range between 4%-5%
of the wholesale selling price on phones utilizing its technology. Many top of the line smartphones
have wholesale prices up to $600. That means Qualcomm could be collecting up to $30 on each of
those smartphones flying off the shelves with little to no costs incurred.

To make matters even more compelling, Qualcomm used the knowledge it gained from implementing
CDMA to start selling chipsets based on the technology. The company's closely held trade secrets
assure that it's extremely competitive in the space. Thanks to that expertise, Qualcomm is one of the
largest chip makers in the world.

The buy opportunity

Qualcomm's share price struggled over the last year because of concerns over declining phone selling
prices and fear over a transition from 3G networks (the current standard) to newer 4G networks
where Qualcomm's patent portfolio is a bit weaker and hasn't withstood the same legal challenges.
These concerns are overblown for a couple of reasons.

First, the lower selling prices mean Qualcomm collects less royalty revenue per phone. However, the
volume gains from emerging countries should more than compensate for any selling price declines in
developed countries like the U.S. Many emerging markets are just launching 3G networks, and growth
rates should be fantastic in coming years.
Also, the growth of Google's Android has been a huge boon for Qualcomm. Not only have Android
sales helped prop selling prices back up, but Qualcomm has scored a number of high-profile wins on
Android phones in its chipset business. As Android excels, Qualcomm's own future becomes brighter.

Secondly, Verizon and AT&T have begun transitioning to 4G wireless networks. Qualcomm still has
strong patents behind this technology, stating that its royalty revenue is expected to be 3.25% on the
standard that Verizon and AT&T are moving toward. While this royalty rate is less than on 3G, phones
will still have to connect to 3G networks over the foreseeable future as 4G networks will mainly focus
on urban build-outs. That means Qualcomm's royalty revenues shouldn't take much of a hit from this
technology transition.

Also, AT&T's and T-Mobile's recent decisions to upgrade existing 3G networks demonstrate that
carriers remain dedicated to maintaining strong 3G networks, even after the next generation of
technology rolls out. Reports of 3G's death have been greatly exaggerated.

Bottom line and risks

Recently Qualcomm has moved closer to the $50-per-share fair value at which I'd assess the
company. So if you want to buy, don't overpay if Qualcomm's price keeps climbing.

In the long run, the greatest threats to the company are legal challenges to its patent portfolio, added
competition in its chipset business, and the threat that its technology isn't utilized in future wireless
technologies. However, with its position in the driver's seat for both the current and next generation
of technology, Qualcomm's an extremely safe bet with some fantastic growth opportunities. If you're
looking to get back into the market or build out your portfolio, Qualcomm's a top stock pick to get
started

11/24/2010

Telecom Industry Outlook - No. 2010

Zacks Equity Research, On Thursday November 18, 2010, 4:10 pm EST

The telecommunications industry encompasses a lot of technology-related businesses.

Besides the legacy local and long-distance wireline phone services,
telecommunications also include wireless communications, Internet services, fiber
optics networks, cable TV networks and commercial satellite communications. While
our overall view is neutral for the industry, a number of stocks offer attractive
opportunities for the mid-to-long-run time horizon.

Key Attribute

The world economy is currently going through a recovery phase, albeit at a very slow
pace. Although we are not out of the woods yet, and a full-phased upswing may take
longer to establish than previously expected, the Telecommunications Industry will be a
key player in the economic recovery. We believe that the overall economic dynamics
may shift in favor of this industry, primarily due to its key attribute of being a major
infrastructure product for both emerging and developed nations.

Near-term Catalysts

The telecommunications industry benefits from: (1) an improving global economy which
makes the overall macro-outlook buoyant (2) significant technological inventions that
make even a mature market like the U.S. highly lucrative for the telecom operators.

During the downturn, several countries throughout the world initiated economic
stimulus plans as a way out of the recession. Heavy government outlays -- including
the U.S. broadband infrastructure development program and similar structural
subsidies in China and India -- became a boon for select telecom service providers and
equipment manufacturers.

Furthermore, as the global economy continues to recover, demand for real-time voice,
data and video increases by leaps and bounds. All these developments are enabling
wireless carriers to undertake large network extension and upgrade plans.

Big Push by the U.S. Government

The Broadband Stimulus Program of the U.S. government received significant
acceptance among rural carriers. The total allotted fund is $7.2 billion, out of which the
first round will inject $4 billion into the industry.

President Barack Obama has endorsed a wireless spectrum hike plan proposed by
FCC, which will nearly double the currently available spectrum for wireless broadband
services and increased Internet connectivity. The FCC together with the U.S.
Department of Commerce will identify unused airwaves to raise the available spectrum
size to 500 Mhz in the next 10 years.

International Markets

The largest emerging economy China is gradually deploying its home-grown TD-
SCDMA (3G) network and has opened up a market opportunity of more than $10 billion
for several wireless operators, telecom gear makers, and handset developers. India,
the second largest emerging economy, recently completed its 3G spectrum auctions
and some of the spectrum winners have already started 3G network deployments.
Several Central American, Latin American and western European countries are quickly
allotting spectrum for next-generation high-speed networks.

Technological Innovations

However, the major thrust for the telecommunications sector is coming from within the
industry due to continuous network and product upgrade and invention by industry
players. Telecommunications is one of the very few industries that continued to
experience massive technological improvements even under the recession. Strong
demand for technically innovative products has been the silver lining for the
telecommunication industry in an otherwise tough environment.

Less than a decade ago, the telecom operators in the U.S., Western Europe and
Japan were upgrading their existing networks to high-speed 3G technologies. Now the
world telecommunications industry is talking about the installation of next-generation
super-fast 4G technologies.

Several giant telecom operators globally are funding projects to deploy super-fast 4G
networks of WiMAX and LTE (Long-Term Evolution). Cable TV operators, which are
major competitors to the telecom giants, are also upgrading their networks with high-
speed DOCSIS 3.0 architecture. These developments are likely to help telecom
equipment manufacturers consolidate their top-lines.

4G LTE network has already been launched in several Scandinavian countries. 4G

WiMAX is getting increasingly deployed in the U.S. and the country is on the verge of
getting extensive LTE network deployment by large telecom carriers. Japan will also
get LTE from end 2010.
Fundamental Change

In fact the global telecommunications industry is witnessing a fundamental change.

Earlier it was voice calls that brought money to the operators. Therefore equipment
manufactures were concentrating primarily on voice-enabled devices. Now, voice is
taking a backseat, while data and video have become the core focus area. New
network standards aim at faster data connectivity, quick video streaming with high
resolution, and rich multimedia applications.

Smartphones have become the device of choice and are increasingly taking market
share from basic mobile handsets. Smartphones are generally characterized by very
powerful operating systems capable of supporting a variety of services and
applications that need very high-speed network infrastructures.

Various industry sources estimate that smartphone shipments as a percentage of total

mobile handset shipment are expected to increase from 20% in 2009 to more than
50% by 2012. This represents a key growth opportunity for all types of industry players.

Capital spending constraints among carriers over the last couple of years due to
severe recessionary conditions were the main hindrance to the growth of this industry.
However, with the economic recovery more or less in place, large telecom service
providers are gradually expanding their fiber-based networks on the back of significant
subscriber growth.

OPPORTUNITIES

Telecom carriers and equipment providers that offer the most attractive opportunities
are focused on 3G wireless technologies, emerging 4G technologies, broadband and
fiber-to-the-home/premises networking. We have seen that sector diversity is a less
secure natural hedge in today’s increasingly correlated world markets.

The telecommunications industry as a whole offers a number of attributes that are

difficult to ignore from the standpoint of long-term investors.

 Telecommunications is a necessary utility: The need for telecom in both rural and
urban areas, and its role in the infrastructure of both developed and developing
markets, continues to grow. In addition, economic stimulus plans in the U.S. and
throughout the world should boost select service providers and equipment
manufacturers.
 Massive growth of smartphones: In spite of the challenging global economy, the
growth in the smartphone market maintains its impressive trend. This primarily
reflects a shift in consumer preference towards feature-enhanced PDA devices
from ordinary mobile handsets used primarily for voice telephony. This
opportunity provides scope for telecom service providers, equipment
 manufacturers, chipset developers and wireless tower operators to retain new
users and grow revenues moving forward.
 International diversification: While diversification within a country offers only
limited protection in the current highly-correlated world equity markets, it offers
hedging opportunities from local economic weakness and associated currency
exchange differentials.

Companies that match well with the aforementioned considerations include Telephone
& Data Systems Inc. (NYSE: TDS - News), Vodafone Group Plc. (NasdaqGS: VOD -
News), Shaw Communications Inc. (NYSE: SJR - News), Qualcomm Inc.
(NasdaqGS: QCOM - News) and American Tower Corp. (NYSE: AMT - News).

WEAKNESSES

Generally, telecommunications companies that have been under pressure in the recent
downturn had high debt levels and large financial leverage ratios or were unable to
cope with changing market trend. These companies will continue to have difficulties
should the overall business activity take longer to revive as consumers and enterprises
become more selective in their spending. Other risks that remain include the following:

 Potential business slowdown: Lower overall top-line sales among carriers are
expected to continue weighing on capital spending decisions -- a major problem
for equipment vendors. Companies are expected to remain focused on balance
sheet improvements, financial discipline and free cash-flow generation.
Unfortunately for the equipment vendors, the method of choice for improving free
cash flows remains disciplined capital outlays.
 Weak credit profiles: Over the near-term, telecom companies may be exposed to
high debt levels and limited liquidity, which puts a premium on sustainable cash
flow to service debt obligations. As a result, telecom companies may have free
cash flow impacted by a slowdown in demand.
 Increased competition: The markets for broadband wireless solutions are
emerging rapidly in terms of technological innovation. While the pure
wireless/wireline service providers started entering the video services market for
cable operators, the cable MSOs are in turn started entering the telephone
business for the small & medium sized business enterprises.

Companies that match well with the aforementioned considerations include

Windstream Corp. (NasdaqGS: WIN - News), Sprint Nextel Corp. (NYSE: S - News),
Telecomunicacoes de Sao Paulo (NYSE: TSP - News) and Amdox Ltd. (NYSE:
DOX - News). 
Uu

Stock Brawl: Qualcomm

Published: Thursday, 4 Nov 2010 | 1:30 PM ET

According to the consulting firm PRTM 77% of the 57 phones

that run Google’s Android have Qualcomm chips in them.
With a market cap of $77 billion, Qualcomm is the world's largest semiconductor
producer and wireless chipset and software technology.
Its products help power the majority of 3G mobile, computer, and consumer electronics
devices we use today.
In other words - It’s a good barometer of the tech sector.
ualcomm chipsets are sold to companies such as Motorola, LG, and Samsung. The
company is also involved in creating one of the key components of the presumed
Verizon iPhone, which can look to be a great opportunity for investors. It’s no wonder
why our Bull, Craig Berger, says the stock is a buy. Our Bear, Srini Pajjuri, thinks
otherwise and wants to sell Qualcomm.
Shares of Qualcomm enjoyed a nice gain after beating expectations for fiscal Q4 and
upped its forecasts for the current quarter.
Making Their Case: The Bull
Craig Berger, Senior Semiconductor Analyst, FBR Capital Markets
Berger expects Qualcomm’s calendar 3Q results and calendar 4Q guidance to be
robust given the following:
 The overall strength of the smartphone market
 Android-based smartphones' performance in particular and Qualcomm's high
baseband market share of android-based smartphones
 Recent channel checks that Qualcomm is likely beginning to ship product into
upcoming iPhones, an incremental share driver
 Other anecdotal channel checks from front-end and back-end production
suppliers.
Since Qualcomm will likely supply into CDMA iPhones in 1Q11, Berger estimates that
15 million units of CDMA iPhones would contribute $100M–$150M in Qualcomm’s
annual revenues and $0.03 to $0.05 in EPS.
Making Their Case: The Bear
Srini Pajjuri, Analyst, Credit Agricole Securities
Qualcomm's chipset business is subject to share loss risk and may also face
competitive pricing pressure. The biggest share gain opportunity lies in Nokia and
Apple, which is risky.
Pajjuri explained, “the decision by Nokia to sell its modem business to Renesas makes
us believe that QCOM’s opportunity at Nokia is even smaller than before.”
Although smartphone growth remains strong, Pajjuri sees limited upside to the royalty
business and temporary chipset momentum. He continues to view the CDMA iPhone
as a “zero-sum-game and believe that the lack of a discrete CPU limits QCOM’s Tablet
opportunity.”