qcom_valuation model

Qualcomm Incorporation

Company Profile

22nd Oct 2013

Table of Content

Section 1

Section 2

Section 3

Section 4

Section 6

Section 5

Section 7 Valuation: Recommendation

Comparable Company Analysis

Industry Overview & Qualcomm Strategies

Investment Thesis

Earnings Drivers Analysis

Share Price Performances

Company Profile

4,304

2,735

4,758

6,862 7,549

8,936

-

2,000

4,000

6,000

8,000

10,000

2008 2009 2010 2011 2012 TTM

5-Yr EBITDA Growth

Business Overview • QUALCOMM Incorporated designs, develops,

manufactures, and markets digital tele-

communications products and services

• QUALCOMM Incorporated was founded in 1985

and is headquartered in San Diego, California,

operating primarily in China, South Korea, Taiwan,

and the United States

• It operates in four segments: QCT, QTL, QWI, and

QSI. The QCT segment develops and supplies

integrated circuits and system software based on code

division multiple access (CDMA), orthogonal

frequency division multiple access (OFDMA), and

other technologies with solid patent advantages

• It has a market cap of $117.97bn, and sales ttm of

23.26bn

Company Profile

QUALCOMM, Inc. (NASDAQ: QCOM)

Source: Company Website

Qualcomm24%

TI12%

Broadcom5%

STMicro9%

Intel6%

Philips5%

RFMD4%

Skyworks5%

Others30%

Cellphone Semiconductor Market Share(1)

Notes:

1. Based on 2013 market capitalization

2. The first year of serving the firm

Source: Capital IQ

US$ MM

11,142 10,416

10,991

14,957

19,121

23,255

-

5,000

10,000

15,000

20,000

25,000

2008 2009 2010 2011 2012 TTM

5-Yr Revenue Growth

Financial Highlights • Apr 24, 2013 2Q13 total revenue of $6,124mm

increased 23.9% y/y, surpassing analysts consensus.

On GAAP basis, net income was $1,866mm or $1.06

per share compared with $1,438mm or $0.86 per

share in 2Q12. Pro forma EPS was at $1.05, in line

with consensus

• 2Q13 gross margin was 61.3% compared with 63.9%

in 2Q12, and operating margin was 30.7% compared

with 30.6% in 2Q12

• Qualcomm shipped appr. 173mm CDMA-based

MSM chipsets, up 14%y/y

• The 28 nanometer Snapdragon S4 processor is well

positioned in the market as it is used in high-end

smartphone/tablet s and is also way ahead of its

competitors in the 4G LTE-based smartphone

chipset category

Dr. Paul E.

Jacobs Ph.D.

1997(2)

Chairman and

Chief Exec.

Officer

Mr. Steven M.

Mollenkopf

2002

Pres and Chief

Operating

Officer

Mr. Donald J.

Rosenberg 2007

Exec. VP, Gen.

Counsel

Mr. Derek K.

Aberle 2007

Exec. VP and

Group Pres

Key Executives

Key Statistics

Market Cap 117.97Bn

Trailing P/E 18.27

1-Yr est. P/E 13.89

EV/EBITDA 13.09

Revenue 23.26Bn

Gross Profit 12.02Bn

Net Income 6.60Bn

D/B 0.05

LFCF 4.67Bn

(As of 22nd Oct 2013, US$)

US$ MM

US$ MM

-

10.0

20.0

30.0

40.0

50.0

60.0

40.0

50.0

60.0

70.0

80.0

Volume

QOCM

NASDAQ-100

16.75%

19.00%

Fundamental Analysis

Share Price Performances (52-weeks from Oct 2012 to Oct 2013)

US$, as of 22nd Oct 2013 MM

Sep 1-Qualcomm

announced new

$5bn stock re-

purchase program

Jun 20-Youku Tudou

and Qualcomm

collaborated to provide

high quality video on

its mobile platform

Jun 4-Qualcomm integrated

multimode 3G/4G LTE into

Qualcomm Snapdragon 400

processors with Quad-Core

CPUs for high-volume

smartphones in emerging

regions

Apr 4-Qualcomm,

Mlbam announced

techmology

collaboration

Jan 28-Imec and

Qualcomm extend R&D

collaboration to advance

CMOS technologies for

next-generation products

• The most recent

adjusted close price is

$68.92, which has a

CAGR of +16.75% and

TSO is 8.05mm

• The 52-week highest is

70.37 and lowest is

57.29, the % to high/low

is -2.0%/+20.3%

• QOCM is trading

relatively above the S&P

500 index on a average

basis during 52-week

horizon, and CAGR

(+19.00%) is close

• Recent wall street

analysts and consensus

recommendations(1)

have 87.9% positive,

12.1% neutral and 0.0%

negative ratings on the

stock performances

Note:

1. Source from Bloomberg

7,467

10,181

14,822

555 897 967

2,906

3,879 3,332

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2010 2011 2012

Asia(2) US Other Regions

QCT64%

QTL33%

QWI3%

2012A Segmental Sales


Earnings Drivers Analysis

QCT66%

QTL31%

QWI3%

2013E Segmental Sales

QCT65%

QTL32%

QWI3%

2014E Segmental Sales• QCT(1) is a developer and

supplier of CDMA-based

integrated circuits and

system software for data

communications, and other

products, its revenue in

1Q13 was $4,120mm, up

33.5% y/y, and 31.7% q/q

• QTL grants licenses to use

portions of its intellectual

property portfolio, it

receives revenue from

license fees, as well as the

ongoing royalties, its

revenue In 1Q13 was

$1,757mm, up 22% y/y and

11.8% q/q

• QWI primarily comprises

three divisions - Qualcomm

Internet Services (QIS),

Qualcomm Enterprise

Services (QES), and

Qualcomm Government

Technologies (QGOV), its

revenue in 1Q13 was

$146mm, down 3.9% y/y

and 9.3% q/q

• Other Reconciling Items’

revenue in 1Q13 was

$5.0mm

Notes:

1. Qualcomm’s CDMA Technology Segment (QCT); Qualcomm Technology Licensing Segment (QTL); Qualcomm Wireless and Internet Segment (QWI); Qualcomm Strategic

Initiative Segment (QSI)

2. Coverage mainly includes China, South Korea and Taiwan

Source: Broker Research

Revenue Breakdown by Segments

Geographical Revenue Growth

US$ MM

Customers Concentrations

• Consolidated revenues from international customers

and licensees as a percentage of total revenues were

95%, 94% and 95% in fiscal 2012, 2011 and 2010,

respectively

• During fiscal 2012, 42%, 22% and 14% of our

revenues were from customers and licensees based in

China, South Korea and Taiwan, respectively, as

compared to 32%, 19% and 17% during fiscal 2011,

respectively, and 29%, 27% and 12% during fiscal

2010, respectively

• In fiscal 2012, 2011 and 2010, revenues from

Samsung Electronics constituted more than 10%; in

fiscal 2011, revenues from HTC constituted more

than 10%; and in fiscal 2010, revenues from LG

Electronics constituted more than 10%

Source: 2012 AR

175183

200

222

16 18 19 22

0

50

100

150

200

250

2009 2010 2011 2012

# of Licensees Royalty Beaming


Investment Thesis Arguments

Positioning

Macro/Micro

Catalysts

Risks

• Qualcomm is the leader in the semiconductor industry, and is the leading innovator of new

products which has resulted in a large patent portfolio which gives Qualcomm security in

such a competitive market

• Qualcomm is in the perfect position to take control of emerging markets and to lead the

development of 3G, 4G and LTE networks worldwide

• Demand for smartphone is on the rise, and Qualcomm supplies key products for the most

popular smartphones such as the iPhone 5s and Samsung Galaxy S4

• Qualcomm will benefit greatly from the global turnover of 2G to 3G networks as lower tiers

of smartphones are developed, and as more and more places demand wireless connectivity

through handheld devices

• Macroeconomic Outlook

- Sales of smartphones/tablets are expected to grow by 44%/125% respectively in 2013

- Sales of feature phones, which contain Qualcomm basebands or generate licensing

revenues, fell by only 3% in 2012

• Microeconomic Outlook

- Qualcomm currently has an estimated market share of 48% (by revenue) for mobile

processors; the remaining 52% is split between Samsung, NVIDIA, Texas Instruments

and Intel

- We foresee no material threats to Qualcomm’s market share in the near future, and expect

continued dominance in mobile semiconductors

• New Snapdragon System on Chip will be more powerful and improve mobile battery life

• 100% of handsets for Windows Phone 8 and Blackberry are powered by Snapdragon chipsets

• Texas Instruments has announced that they are dropping out of mobile processing

• New “iPhone mini” rumored to be based on Snapdragon chipset

• Both NVIDIA and Intel are trying to establish presence in smartphone market, any success by

them would likely reduce the market share of Qualcomm

• Investors expect considerable expenditures on R&D by technology companies, and the

industry has clear economic cycle which is sensitive to any High-Tech update, creating huge

system risk

• Qualcomm currently produces chipsets for CDMA versions of Samsung’s high-end handsets,

but threats exist since Samsung will increase capacity and shift some of the production on

other product in 2013

• Qualcomm has a pioneering

position of holding intellectual

property containing patent

rights, it can be understood

that any competitor that

wishes to develop,

manufacture, or sell these

products must obtain a patent

license from Qualcomm, and

revenues stemming from

licensing include licensing

fees and royalties

• Qualcomm has over 33,000

granted patents, 77,000

patents and royalties in

application, and over 200

licensees over the world

Number of Licensees

Source: Executive Presentation

410

450

490

360

380

400

420

440

460

480

500

2010 2011 2012

Developed Market 3G/4G Device Shipments


Industry Overview & Qualcomm Strategies

• Acquisitions

- Qualcomm made

acquisitions on a fairly

consistent basis, and will

most likely continue to do

so in the future to aim at

desired products or

intellectual properties

- Qualcomm acquired the

communications chipsets

maker Atheros for $3.1

billion, net of cash, and

integrated into QCT

segment on May 24, 2011

• Expansion

- Qualcomm was acting as

a leader in expanding

emerging markets and has

expressed intentions to

continue that push

- Third quarter of fiscal year

2012, the QCT segment

opened a new non-united

States headquarters in

Singapore

- Operations within the

United States will continue

to expand with the

implementation of new

technology such as the

4G/LTE wireless network

Industry Overview • Semiconductor Industry

- The communications technology industry is

extremely competitive, barriers to entry are quite

large due to the large amount of capital that is

necessary to design and produce the products

- Demand for mobile communications products is

generally cyclical with highest levels seen in the

two quarters following the holiday season

- The market which QCT competes in is even

more competitive, in order to stay at the

forefront of this industry, companies must be

releasing new and innovative products to keep up

with the increasing performance demands

• United States

- The most advanced and developed mobile

communications industry in the world

- The demand will continue to come down to the

cost of production for manufacturers

• Emerging Market

- Huge increase in demand for smartphones and

wireless communications technology due to the

continued decrease in pricing of smartphones

- 3G device shipments saw a 43% increase over

the past year, and are expected to grow further

- More and more less developed countries are

getting connected to the wireless network

• Competition

- Capex and R&D expenses are high among the

large companies like Qualcomm, broadcom,

Intel, etc.

- Companies are forced to innovate if they wish

to survive in this industry

2010 2011 2012

240

340

410

0

50

100

150

200

250

300

350

400

450

2010 2011 2012

Emerging Market 3G/4G Device Shipments

MM

MM

Source: Executive Presentation; 10-K

3

5

1

6

10

0

2

4

6

8

10

12

2007 2008 2009 2010 2011

Acquisitions Per Year


Comparable Company Analysis (As of 22nd Oct 2013)

US-Listed Large Cap Semiconductor Manufacturers

Price/ Enterprise Value/

Share % of 52-wk. Equity Enterprise LTM 2013E 2014E LTM 2013E 2014E Div. Implied Valuation From Comparables

Company Price High Value Value EPS EPS EPS EBITDA EBITDA EBITDA PEG(5-Yr) Yield

Intel(INTC) 23.74$ 98.7% 118,248$ 113,310$ 13.0x 12.4x 12.3x 5.7x 5.3x 5.1x 2.7x 3.70%

Texas Instrument(TXN) 39.73$ 96.4% 43,750$ 46,750$ 21.9x 21.1x 17.8x 12.1x 11.6x 10.5x 2.3x 2.50%

ARM Holdings(ARMH) 46.45$ 88.7% 21,640$ 22,250$ 92.7x 46.0x 37.7x 55.4x 39.7x 31.0x 2.3x 0.40%

Broadcom(BRCM) 26.36$ 69.6% 15,260$ 14,940$ 36.5x 10.0x 10.9x 11.9x 8.2x 9.1x 0.7x 1.60%

Nvidia(NVDA) 15.50$ 96.3% 8,970$ 6,230$ 17.1x 16.9x 16.0x 7.4x 8.3x 7.6x 1.9x 1.90%

Advanced Micro Devices(AMD) 3.14$ 75.7% 2,380$ 3,660$ - - 26.9x 5.9x 10.4x 7.3x (2.3x) -

Qualcomm(QCOM) 67.04$ 95.3% 115,000$ 103,060$ 17.8x 14.7x 13.6x 12.7x 9.2x 8.1x 0.9x 1.70%

Average 33.2x 20.2x 19.3x 15.9x 13.2x 11.2x 1.2x 1.97%

Median 19.9x 15.8x 16.0x 11.9x 9.2x 8.1x 1.9x 1.80% Average Implied Share Price

Implied Valuation From Comparables

Mean Implied Implied Implied Median Implied Implied Implied

Multiple Value EV Equity Value Share Price Multiple Value EV Equity Value Share Price

P/E LTM 33.2x 207,360 119.10$ P/E LTM 19.9x 124,098 71.28$

P/E 2013E 20.2x 139,912 80.36$ P/E 2013E 15.8x 109,758 63.04$

P/E 2014E 19.3x 146,936 84.40$ P/E 2014E 16.0x 121,959 70.05$

EV/EBITDA LTM 15.9x 125,001 128,808 73.99$ EV/EBITDA LTM 11.9x 93,591 96,678 55.53$

EV/EBITDA 2013E 13.2x 122,219 124,889 71.73$ EV/EBITDA 2013E 9.2x 84,583 87,253 50.12$

EV/EBITDA 2014E 11.2x 117,207 119,877 68.86$ EV/EBITDA 2014E 8.1x 84,612 87,282 50.13$

Average Implied Share Price 83.07$ Average Implied Share Price 60.03$

Source: Bloomberg

Recommendation: Buy

Entry Price Market Price Current Price $68.92

Horizon 8-12 Months Target Price $71.55

Stop Loss: $57.00


Valuation: Recommendation

Note:

1. Recommendations from Bloomberg

125

78

88

79

90

74

75

58

69

55

75

54

113

70

72

65

78

64

68

53

57

45

65

47

$40 $60 $80 $100 $120

Mean P/E LTM

Mean EV/EBITDA LTM

Mean P/E 2013E

Mean EV/EBITDA 2013E

Mean P/E 2014E

Mean EV/EBITDA 2014E

Median P/E LTM

Median EV/EBITDA LTM

Median P/E 2013E

Median EV/EBITDA 2013E

Median P/E 2014E

Median EV/EBITDA 2014E

$72

Football Field Analysis Implied Valuation

Method Wieght Price

Comparables(Mean) 50% 83.07$

Comparables(Median) 50% 60.03$

Weighted Average 71.55$

Analyst Recommendations(1)

Analysts Target Price Recommendation

BMO Capital Market 77.00$ Outperform

Stifel 80.00$ Buy

BNP Paribas 81.00$ Outperform

JMP Security 80.00$ Outperform

Cowen and Company 75.00$ Outperform

FBR Capital Market 76.00$ Outperform

Canacoord Genuity Corp. 80.00$ Buy

Average TaR. Price 78.43$

US$, as of 22nd Oct 2013

qcom_valuation model

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