Telecom Overview: No Reason to Give up on This Name Page 2 Reviewing Research in Motion Earnings

Issue 338: Wednesday, October 1, 2008

In This Issue

Page 1 Telecom Overview: No Reason to Give Up on This Name Page 2 Reviewing Research In Motion Earnings

Page 3 Emerging Market Subscriber Growth

Page 4 New Connections in the World of WiMAX

Page 6 The Telecom Connection Portfolio

Telecom Overview: No Reason to Give Up on This Name

As the markets continue to rock and roll with concerns about the proposed $700 billion congressional financial bailout/rescue bill, I’ll review the Research In Motion (RIMM) earnings in this week’s issue of The Telecom Connection. The reaction to the stock is clearly over the top, but that’s what happens when a highflier disappoints in a tenuous market. Despite the drop, there were clearly positives on the revenue front, which I’ve noted in detail below.

Once again, I’m looking at new cellular subscriber growth in emerging markets. The data are in for the month of August and the numbers remain weak. Despite that, I think there are clearly some positives for Qualcomm (QCOM). After the restructuring of the Chinese wireless industry is completed, China Telecom -- the country’s largest wireline carrier -- will have acquired China Unicom’s Code Division Multiple Access (CDMA) assets and subscribers. Its aggressive plans to expand China’s CDMA footprint should bode well for Qualcomm.

In last week’s issue, I noted that the distribution of SunPower’s (SPWRA) B shares would take place at the close on Monday, which it did. (SunPower’s ticker changed Monday from SPWR to SPWRA for its class-A common stock and to SPWRB for its class-B common stock.) Cypress Semiconductor’s (CY) stock jumped 63% from the close of the “when issued” price from the day before. These positions in the model portfolio have been updated to reflect the changes.

Last, I’ve provided an update on what’s happening in the world of WiMAX. Sprint (S) launched its Xohm service in Baltimore this week, and has plans for more launches in selected U.S. cities. Mobile WiMAX in the U.S. actually commenced June 30 with DigitalBridge Communications’ launch in Jackson Hole, Wyo. So it’s nice to see the WiMAX momentum starting to build.

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Issue 338: Wednesday, October 1, 2008

Reviewing Research In Motion Earnings Research In Motion has certainly become an exasperating investment, which is little solace for those who hold the stock. When the company reported its May quarter, it announced that operating expenses were being ramped up to take advantage of what management saw as an opportunity to accelerate its penetration of the market. The higher spending levels in May were expected to carry over into the August quarter as well and then begin to work their way down as the company increased the top line.

Unfortunately, the actual results bore little resemblance expectations. While revenue was near the midpoint, earnings per share (EPS) missed by a penny. How that miss came about is somewhat bizarre. Gross margin was expected to decline from the fiscal first quarter but it didn’t: It was flat sequentially.

However, the operating expense growth that was expected to be in the 26% to 28% range sequentially wasn’t even close. It increased only 23% from the May quarter. It would seem logical that the slower spending would have led to an upside to earnings but that was eaten up by a tax rate about 160 basis points higher (at the midpoint) than anticipated. On the plus side, Research In Motion had little trouble correctly forecasting unit and new subscriber growth.

In the subsequent trading days after the earnings release, Research In Motion’s stock was again pummeled on the company’s guidance. Revenue guidance is actually above the Street consensus with the figure expected to be in the $2.95 billion to $3.10 billion range (up 76% to 85%, year over year). However, gross margin is expected to decline to about 47% because the introduction of new units will have a higher cost of goods, which is estimated to be around a “mid-40%” level for the foreseeable future.

Operating expenses are once again expected to grow between 11% and 12% from fiscal second-quarter levels. The tax rate is once again expected to be in the 29%-30% range; all of this puts EPS in the 89 cents to 97 cents range. Consensus at the time was for revenue of $2.93 billion and EPS of 98 cents.

Investors are concerned that reduced margins will require much higher revenue levels to support earnings growth. In today’s “results now” market, investing, even for the short term, carries a high risk. If the company had been missing on the top line or had weak top-line guidance, I would have far greater concerns. But it’s not!

Thus far, revenue is quite solid and with the holiday shopping season around the corner, I see no reason to give up on this name at this point. While this holiday season will be tepid, smartphones in general, and Research In Motion specifically, are gaining market share. So we’ll stick around to see how their “investments” pay off.

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Issue 338: Wednesday, October 1, 2008

Emerging Market Subscriber Growth As most readers know, I closely follow the new subscriber growth rates in China and India. They function as something of a proxy for the emerging markets of the cellular world.

When I commented on new subscriber growth in these two countries last month, I voiced concerns that the slowdown in new subscriber growth would translate to weaker overall handset sales. Since that point, Nokia (NOK) has announced that sales of its handset units will be weaker than anticipated. The company is the direct beneficiary of handset demand in China and India.

The subscriber data are now available for the month of August and we’ve seen no real change from prior trends. The graph below shows fairly steady new subscribers in the 16.5 million to 17.5 million per month range. However, the overall year-over-year growth rate has fallen to 10% from 12% last month. China actually bumped up slightly to 10% in August from 8% in July, whereas India fell from 14% to 10% over the same time period.

China & India - Net New Subscribers (millions) 25

15 India 10 China 5

1/06 3/06 5/06 7/06 9/06 1/07 3/07 5/07 7/07 9/07 1/08 3/08 5/08 7/08 11/06 11/07 Source: Telecom Regulatory Authority of India, China Mobile & China Unicom

When looking at the individual components, it’s interesting that China Mobile continues to hum along, posting growth in the high 20% range quite consistently. In China, the problem has been China Unicom, which has seen decidedly negative growth rates for some time -- not only in its CDMA business, but also in its Global System for Mobile Communications (GSM) operations.

Both have had negative growth for the last four months. This may be because China Unicom’s cellular operations are being split, but even that does not make a lot of sense from my perspective.

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Issue 338: Wednesday, October 1, 2008

While this does bring into question the Qualcomm position in the model portfolio, my reasons for that have more to do with the intentions of China Telecom, which purchased China Unicom’s CDMA operations. Recent comments from CCID Consulting in DigiTimes are suggesting a major push by China Telecom. The consulting firm is expecting a dramatic ramp in CDMA units very quickly, with an anticipated demand in 2010 reaching 60 million handsets -- up from only 10 million in 2007. The 2012 target is expected to hit 80 million units. Even if only half of that goal is reached, it will be a big plus for Qualcomm. The company is getting paid on both the handset and infrastructure side; plus, weakness is hitting the industry elsewhere.

The more troubling aspect of the graph below is India. Obviously, a slowdown in new subscriber growth has taken place, but other than macroeconomic issues, I haven’t seen a good explanation for it. In fact, I haven’t seen any explanation for it. Qualcomm has far less exposure to India because its largest service provider, Reliance Communications, is focused upon its GSM buildout rather than its CDMA operations. Overall, GSM dominates the landscape with about 75% of the industry.

New Subscriber Growth 80%

60% TRAI

40% China Mobile

20%

-20% Apr-08 May-08 Jun-08 Jul-08 Aug-08

-40% China Unicom -60%

-80% Source: Company reports, Telecom Regulatory Authority of India

New Connections in the World of WiMAX Last year, I noted on a number of occasions that WiMAX was a 2008 story. We are finally beginning to see that take place with a number of new announcements recently.

For the longest time, Sprint and Clearwire (CLWR) were perceived to be driving WiMAX technology. Although it couldn’t have been further from the truth, perceptions become reality, especially when it comes to investing. There may have been no better example of that than “Curtain Rises on WiMAX,” the title of a recent article in The Wall Street Journal highlighting the Monday launch of Xohm, Sprint’s mobile WiMAX service in Baltimore.

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Issue 338: Wednesday, October 1, 2008

While it is another important milestone for the industry and the technology, mobile WiMAX in the U.S. commenced June 30 with DigitalBridge Communications’ launch in Jackson Hole, Wyo. The importance of the event was that DigitalBridge chose Alvarion (ALVR) as its equipment supplier. DigitalBridge offers fixed WiMAX services in an area with a population of more than 2.5 million across six states. More importantly, the company will be upgrading those services to mobile WiMAX with Alvarion equipment.

Alvarion was also announced as the preferred equipment supplier for Azulstar for service in western Michigan and New Mexico. Most recently, it was selected by Wisper High Speed Internet to supply service in Minnesota.

My point is that domestically, WiMAX is not all about Xohm or Sprint’s pending merger with Clearwire. But the launch in Baltimore is certainly encouraging.

As promised in the original introduction years ago, Xohm is a “bring your own” equipment service. It assumes that your laptop or netbook is equipped with WiMAX support. As a result, there is no equipment subsidy for the company to recover with a long-term contract. However, you can buy equipment such as the Xohm modem from the company for $80.

With no long-term contracts, the service plans are a little less complicated. The Home Plan (i.e., fixed WiMAX) is only $25 per month for the first six months and $35 per month thereafter. The On-the-Go plan (mobile WiMAX) is $30 per month for the first six months and $45 thereafter. Xohm also offers a $10-per-day plan for those who may be traveling through an area for a limited period of time.

With the Baltimore launch complete, Sprint plans to install Xohm next in Washington, D.C., Chicago, Dallas-Fort Worth, Boston, Providence and Philadelphia.

The next big step for Xohm will be Sprint’s merger with Clearwire, which is still expected to close before the end of the calendar year. There have been some concerns from the Street and pressure on Clearwire’s stock that the current credit crisis will impede anyone needing to access the credit markets.

Given Clearwire’s current funding gap of about $2.0 billion to $2.3 billion to meet its rollout plan (i.e., 120 million to 140 million POPs, or population of markets served, by calendar year- end 2010), some may be concerned about the firm’s ability to raise the additional capital.

However, the $3.2 billion in capital invested at the close of the merger will be sufficient to take the company through mid-2010 or the rollout of coverage to about 110 million POPs. Hopefully, we will have resolved our country’s credit issues by then.

Issue 338: Wednesday, October 1, 2008

Date Cost Basis No. of Amount Current % IXTC at IXTC Company Name Initiated per Share Shares Invested Price Gain/Loss Buy Date Return Apple 2/15/06 $100.56 300 $30,168.00 109.12 8.51% 235.36 -16.91% AAPL Alvarion ALVR 2/22/07 $8.98 2,510 $22,538.00 5.59 -37.75% 244.90 -20.15% Advanced Micro Devices (call options) 8/29/08 $3.80 2,000 $7,600.00 2.25 -40.79% 245.86 -20.46% AMDAZ – 20 contracts Clearwire CLWR 11/12/07 $13.50 500 $6,750.00 10.46 -22.52% 257.91 -24.18% Cisco Systems CSCO 3/30/05 $22.51 800 $18,009.00 21.95 -2.49% 223.36 -12.44% Cypress Semiconductor CY 7/10/08 $5.36 2,000 $10,720.00 5.11 -4.66% 230.96 -15.33% Dell (call options) DLYAD – 20 contracts 12/6/07 $6.80 2,000 $13,600.00 0.63 -90.74% 259.97 -24.78% First Solar FSLR 8/28/08 $263.55 150 $39,533.00 197.26 -25.15% 239.62 -18.39% Google GOOG 2/9/06 $494.76 75 $37,106.70 411.72 -16.78% 243.87 -19.81% Level 3 LVLT 6/19/08 $3.76 3,000 $11,280.00 2.63 -30.05% 263.91 -25.9% Motorola MOT 4/12/06 $23.20 1,000 $23,205.00 7.44 -67.94% 226.48 -13.65% Netlist NLST 2/14/08 $1.46 3,500 $5,095.00 0.89 -38.86% 232.75 -15.98% Qualcomm QCOM 8/14/08 $55.02 500 $27,510.00 41.52 -24.54% 256.15 -23.65% Research In Motion RIMM 11/19/07 $113.82 200 $22,763.75 66.93 -41.2% 247.44 -20.97% Riverbed Technology RVBD 7/26/07 $32.56 450 $14,654.25 12.42 -61.86% 244.32 -19.96% SunPower 2/14/08 $89.70 300 $26,910.00 93.30 4.01% 239.54 -9.78% SPWRA

(The model portfolio continues on the next page)

Article I. B ullish

Yesterday’s Close: 42.52 1.88

Issue 338: Wednesday, October 1, 2008

SunPower 9/29/08 $70.95 548 $38,880.60 71.47 0.73% 200.82 -2.62% SPWRB Microtune 2/8/07 $5.23 2,500 $13,075.00 2.67 -48.95% 244.96 -20.17% TUNE Micron (call options) 8/28/08 $2.26 12,500 $28,250.00 2.30 1.77% 251.83 -22.34% WGYAZ – 125 contracts

The Telecom Connection Portfolio – Performance Performance results listed here reflect values of stocks as of the Total Average Return - 33.65% close of the most recently completed trading day, and do NOT take into account dividends paid, interest earned or commissions. Results are updated overnight and posted prior to the market open the following business day. Sales are taken from the most recent 2008 YTD Return - 44.15% purchase of that stock unless otherwise stated. The 2008 YTD Return figures reflect changes since the beginning of 2008. The Total Average Return figures reflect changes since inception on 8/14/2001.

Nasdaq Telecom Index Performance % Gain/Loss Since 2008 Portfolio Inception Open Level Current Level Portfolio Inception YTD Return Nasdaq Telecom Index (IXTC) 8/14/2001 262.84 195.56 - 25.60% - 21.73%

At the time of publication, Mr. Faulkner was long CLWR, MU, TUNE, TUNE calls.

To see the full Telecom Connection model portfolio, including closed positions, visit http://www.thestreet.com/k/tc/portfolio.html

Issue 338: Wednesday, October 1, 2008

Contact Info

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This information is confidential and is intended only for the authorized Subscriber. Please notify us if you have received this document in error by telephoning 1-866-321-TSCM (8726).

Robert Faulkner, writer of The Telecom Connection, is a regular contributor to RealMoney, the premium subscription site of TheStreet.com. TheStreet.com, Inc. is a publisher and has registered as an investment adviser with the U.S. Securities and Exchange Commission. The Telecom Connection contains Mr. Faulkner’s own opinions and is provided for informational purposes only. You should not rely solely upon The Telecom Connection for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional, before you make any investment. None of the information contained in The Telecom Connection constitutes, or is intended to constitute a recommendation by Mr. Faulkner or TheStreet.com, Inc. of any particular security or trading strategy or a determination by Mr. Faulkner or TheStreet.com, Inc. that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

At the time of publication, Mr. Faulkner will be restricted in transacting for his own benefit in securities discussed in The Telecom Connection. Specifically, for securities mentioned in The Telecom Connection that Mr. Faulkner does not hold at the time of publication, he may enter orders to purchase such securities only after the hour of 10:30 a.m. ET on the trading day following the date on which the security is discussed in The Telecom Connection.

For securities that Mr. Faulkner holds at the time of publication of an issue of The Telecom Connection, Mr. Faulkner will not be permitted to sell the position until one month from the date the security was first recommended for purchase in The Telecom Connection.

For securities that Mr. Faulkner has held for at least one month following the date the security was first recommended for purchase, and which Mr. Faulkner now recommends for sale, he may enter orders to sell such securities only after the hour of 10:30 a.m. ET on the trading day following the date on which the security is recommended for sale in The Telecom Connection.

If you enter orders to buy or sell securities after 10:30 a.m. ET, it is possible that Mr. Faulkner may have purchased or sold such securities at a price more advantageous than the price you will obtain.