Some Holiday Shopping and Browsing Page 2 Model Portfolio Changes

Issue 296: Wednesday, Dec. 12, 2007

In This Issue

Page 1 Telecom Overview: Some Holiday Shopping and Browsing Page 2 Model Portfolio Changes

Page 3 Looking to the Sun

Page 7 The Telecom Connection Portfolio

Telecom Overview: Some Holiday Shopping and Browsing

Earlier in the week, I sent out an Alert indicating that I was making a couple of changes to the model portfolio. Specifically, I closed out the National Semiconductor (NSM) position and elected to buy some SiRF Technology (SIRF) call options .

In today’s issue of The Telecom Connection, I’ll go into more detail on National’s quarter (the company reported earnings on Dec. 6) and why I elected to sell the stock. In addition, I will provide some details about SiRF Technology and its business, as well as my motivation for purchasing 15 call contracts.

In addition to those changes I will be adding to the model portfolio position in eBay (EBAY), as my holiday shopping continues.

Last year, I devoted an issue of the newsletter to outlining WiMAX (IEEE 802.16) -- what it is, the opportunity it provides and some of the players. I’m doing the same thing this week, only this time with the solar energy industry. I think it’s an important element in any alternative energy program, and as an industry it has made substantial strides in the last year or two.

I’m not jumping into anything just yet in terms of the model portfolio, as I want to offer some background and perspective first.

Now let’s take a closer look at the action in the model portfolio this week.

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PLEASE SEE IMPORTANT LEGAL DISCLAIMER ON LAST PAGE

Issue 296: Wednesday, Dec. 12, 2007

Model Portfolio Changes

• National Semiconductor (NSM): Sold 750 shares, closing out the position.

National had a fine quarter and the outlook was OK, but I just didn’t think that there was enough “there there” to keep it around.

Revenue was essentially in line with expectations, but earnings per share (EPS) were slightly above consensus. While revenue was up 6% sequentially, almost all of the growth -- according to management -- came from the handset business. That may be fine during this seasonally strong quarter, but what happens in February?

The balance sheet metrics were very good, with a solid reduction in both in-house inventory and channel inventory. Cash from operations was strong at $200 million, which should lead to additional share repurchases.

CEO Brian Halla commented on the conference call that “business just isn’t that bad.” If that’s the case, why was the growth driven primarily by handsets? Guidance wasn’t bad when you compare it on a year-over-year basis (up 10%-15% year over year), but National’s high end matched the Street’s consensus -- suggesting a bit of a disconnect in expectations.

I just didn’t have a positive feeling coming off the conference call. I might decide to return to this name a little further down the road, but for now the model portfolio doesn’t need another placeholder.

• SiRF Technology (SIRF): Purchased 15 January 2008 $22.50 call contracts (QIRAX).

SiRF Technology is part of my holiday play. Television ads and newspaper inserts are littered with sales for global positioning systems (GPS), and these are among the hot items shoppers are snapping up for the holidays. They are being sold by companies such as Garmin (GRMN), Magellan (someone forgot to tell them that Ferdinand died during the trip), Navman, TomTom and a host of others. A year ago these items were still fairly expensive, but now prices have dropped sufficiently to enable large-scale adoption by consumers.

So what does all this have to do with SiRF? The company has about 70% of the market share for the silicon used in any type of GPS device.

Over the past three quarters (its fiscal year ends in December), the company has grown its top line 32% while maintaining pro forma gross margins in the mid-50% range and pro forma operating margins in the mid- to high teens. The cash flow from operations is positive, SiRF has no debt and both accounts receivable and inventory are quite lean.

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Issue 296: Wednesday, Dec. 12, 2007

Last quarter, the company blew through Street consensus estimates, which resulted in a 22% move in the stock. It has since given back about half of that gain.

As more midlevel consumers buy GPS systems on a stand-alone basis -- or if they are included as part of a high-end handset -- SiRF Technology should wind up having a very Merry Christmas.

• eBay (EBAY): Purchasing 250 shares.

The rest of my holiday shopping this year involves an addition to the model portfolio’s eBay position. The stock has had a difficult time getting out of its own way since its previous conference call.

As I’ve noted in the past, so much of the negative perception surrounding eBay involves the listing levels at the auction sites. Granted, that is the biggest part of the business and it would be wonderful for those levels to spike up dramatically. But the company needed to eliminate the dead wood. eBay did appear to have stabilized listings during the past quarter, and that is a good thing. With that stabilization comes the opportunity for the non-auction business to provide more upside, because that’s where the real growth is currently.

Looking to the Sun

Energy has been at the forefront of many people’s minds, if for no other reason than the price of gas over the last two or three years or so. No matter where you stand on OPEC, global warming or Al Gore, increased demand for energy has stoked the alternative energy industry.

As much as I may hate that a barrel of oil approaching $100 really hurt my pocketbook at the pump, it also sends engineers and scientists scurrying to their labs, garages and basements to work on a better mousetrap. The concept of “I’ve got a better idea” is essentially what created Silicon Valley and most of our technology and telecommunications industries.

That’s also why when I hear people suggesting that “tech and/or telecom is dead” from an investment perspective, I know they’re taking the opportunity to display their ignorance. Granted, companies and segments do mature, but for those things to be true across the board you would have to repeal the laws of physics and deny the inherent creativity of the human mind. And, despite the arguments I’ve had with my mother on this subject, this is probably the one area where greed is good!

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Issue 296: Wednesday, Dec. 12, 2007

There are no silver bullets in the land of energy alternatives. The hydrogen car sounds like a great idea until you realize it costs a fortune to “make” hydrogen today. Most of the great ideas for producing it cheaply are still largely science experiments yet to be productized. Wind power sounded great until someone tried to put turbines in the waters off Martha’s Vineyard within sight of the aristocracy and landed gentry. Who knew their “greeness” was only skin deep?

Photovoltaics (PV), or solar cells, was something I stumbled across a couple of years ago when I first looked at Cypress Semiconductor (CY) as an investment. Like everything else, this technology has “issues” as well. But at this juncture it has become its own little “industry,” with a few real companies (producing real profits), a developing infrastructure and customers who are willing to buy.

I wanted to take this time to talk a bit about PV, in part because I plan to add some names involved in this industry to the model portfolio at some point. So it’s important to know a few of the basics before making any moves. One of the reasons I am attracted to it is that it’s relatively clean. Also, there are no moving parts and it scales easily for a wide variety of applications, unlike some “solutions.” (Imagine if your neighbor installed his or her own personal nuclear reactor?)

PV has been around for a long time. When NASA first started sending astronauts into space, PV cells were used to generate electricity onboard the vehicles. NASA can do those types of things because for a long time it didn’t really matter to them what something actually cost. But when it comes to lowering your own electric bill or that of the local Wal-Mart, size and cost do matter. Consequently, it’s only been within the last few years that PV has become a viable alternative.

This is an oversimplification, but the three critical elements of the PV world today are solar efficiency (how much solar energy is converted into electricity), the cost per watt and the system cost per watt. All of the competing PV alternatives need to focus on those metrics in order to determine where they stand in the marketplace. Then it will become clear that being the most efficient doesn’t necessarily translate into having the lowest cost.

There are two basic processes for creating solar cells today: crystalline silicon (c-Si) and thin film technology. While the name may sound exotic, c-Si is the same “stuff” that semiconductors are made from and the process is very similar. That’s why Cypress Semiconductor acquired SunPower years ago: It had a very high level of expertise in the process and the materials involved. c-Si companies buy silicon ingots (this is where the silicon is “grown” in form of a cylinder for convenient handling) from the same manufacturers, cut them into wafers and then process the wafers in batches using many of the same steps as a semiconductor company. Rather than cutting the wafers into individual “die” to drive your PC or handset, they are bundled into a solar module or panel.

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Issue 296: Wednesday, Dec. 12, 2007

The other primary method of creating a solar module is using the thin film method. This is also a process used in the semiconductor industry, as companies use equipment from Applied Materials (AMAT), Lam Research (LRCX) and others to deposit thin layers (films) of metals or chemicals onto a wafer’s surface. However, the solar cell manufacturer deposits those films onto another type of substrate (i.e., less expensive), and they can be in the size/form of the solar module.

So which is best? That depends on a lot of things.

The c-Si process creates solar modules that deliver the highest efficiency levels (22% for SunPower), but the cost of the module is high. With the thin film processes, the module cost is low, but the efficiency is generally less than half (approximately 10%) that of c-Si. So the real question becomes: What does it cost to produce 1 watt of electricity?

As you can see in the table below, which is based upon data primarily from the thin film camp, the thin film solutions have an “obvious” advantage over their c-Si competitors on a cost-per-watt basis for both the stand-alone module as well as on a fully installed basis.

Metrics: The Thin Film Perspective Thin Films (cost per watt) c-Si (cost per watt) Module $2.25 $4 Installed $4.50-$5 $6-$8 Source: Company presentations

Now look at information gleaned from SunPower (SPWR) presentations at investment conferences, where the company compared its efficiencies vs. that of the conventional c-Si competitors and the thin films camp. Using examples of a fixed area (i.e., a commercial rooftop) or a fixed output generation facility, SunPower claims to be substantially more efficient in kilowatt output and area required. While there is no mention of cost, I traded some emails with the company and it claims to be comparable from an installed base perspective.

Metrics: The SunPower Perspective Other c-Si Thin Films Fixed Area -35% kW (kilowatts) -68% kW Fixed Output -35% m2 (square meters) -53% m2 Source: Company presentations

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Issue 296: Wednesday, Dec. 12, 2007

But I don’t want to argue these points today, in part because what they are now is not what they will be in three to five years. Both the c-Si and thin films proponents are involved in aggressive campaigns to reduce costs of the cell, module and downstream (i.e. non-module related bill of materials) requirements, as well as increase their solar efficiencies.

There are also two external factors that play into the development of the solar industry. First and foremost is the price of oil. Whether it’s rational or not, stocks are impacted by swings in oil prices.

However, over the longer term, I don’t think any potential customer of solar technology believes that it is a sound financial decision to remain reliant on electricity generated by fossil fuels. If we entered into a recession and oil dropped a precipitous amount, the demand for solar power could slow over the short term -- but I doubt it would come to a halt. Sooner or later all recessions end, and demand would pull the oil price pendulum in the opposite direction once again.

The second critical issue for the solar industry is tax credits. In the U.S., the current energy bill in Congress maintains the existing investment tax credits for solar installations, and that is a part of reducing the cost per watt in the march toward grid parity. If such incentives were to disappear in the U.S. or any of the other countries with aggressive programs (such as Germany and Spain), it could certainly put a crimp in the outlook for solar power. However, my suspicion is that, like oil pricing, this too would be short-lived.

I don’t have any plans -- at least not at the moment -- to run out and add solar names to the model portfolio in the next couple of weeks. These stocks are not for widows and orphans or the weak of heart. These are the types of stocks that need good entry points, particularly when the market gets clobbered -- such as it did after yesterday’s reaction to the Federal Reserve announcement.

But I did want to lay out my thinking, discuss some of the issues and identify some of the areas where additional work needs to be done. As always, I would love to get your feedback as well.

Issue 296: Wednesday, Dec. 12, 2007

Date Cost Basis No. of Amount Current % IXTC at IXTC Company Name Initiated per Share Shares Invested Price Gain/Loss Buy Date Return Apple Computer 02/15/2006 $ 100.56 300 $ 30,168.00 $ 190.86 89.80% 203.35 28.99% AAPL Alvarion ALVR 02/22/2007 $ 8.95 2500 $ 22,380.00 $ 8.94 -0.13% 249.10 5.30% Clearwire CLWR 08/06/2007 $ 19.84 1000 $ 19,840.00 $ 12.98 -34.58% 263.56 -0.47% Cisco Systems CSCO 02/07/2005 $ 18.08 600 $ 10,845.00 $ 28.80 59.34% 184.29 42.34% Cypress CY 09/14/2006 $ 21.36 1500 $ 32,045.00 $ 35.32 65.33% 202.16 29.75% eBay EBAY 11/25/2005 $ 40.25 1000 $ 40,247.00 $ 34.41 -14.50% 189.11 38.71% Google GOOG 02/09/2006 $ 454.68 45 $ 20,460.60 $ 699.35 53.81% 203.51 28.89% Sun Microsystems JAVA 10/02/2003 $ 18.24 675 $ 12,312.00 $ 19.05 4.44% 159.65 64.30% Level 3 LVLT 02/22/2007 $ 5.68 3000 $ 17,030.00 $ 3.28 -42.22% 249.10 5.30% Motorola MOT 06/17/2004 $ 21.66 2000 $ 43,310.00 $ 16.19 -25.24% 179.63 46.03% Marvell MRVL 01/23/2007 $ 18.30 1500 $ 27,450.00 $ 14.71 -19.62% 232.33 12.90% Microsoft MSFT 09/26/2002 $ 23.82 900 $ 21,432.00 $ 34.47 44.74% 92.19 184.53% NeuStar NSR 11/30/2006 $ 32.45 750 $ 24,337.50 $ 28.49 -12.20% 231.52 13.30% Qualcomm QCOM 12/21/2006 $ 38.31 500 $ 19,155.00 $ 41.01 7.05% 237.13 10.62% SiRF Tech (call options) QIRAX – 15 contracts 12/10/2007 $ 4.30 1500 $ 6,450.00 $ 2.70 -37.21% 260.40 0.73% Research In Motion RIMM 11/19/2007 $ 105.65 75 $ 7,923.75 $ 100.21 -5.15% 267.65 -2.00% Riverbed Technology RVBD 06/14/2007 $ 43.65 450 $ 19,644.00 $ 28.66 -34.35% 250.56 4.69%

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Issue 296: Wednesday, Dec. 12, 2007

Microtune 02/08/2007 $ 5.23 5000 $ 26,150.00 $ 5.60 7.07% 242.65 8.10% TUNE Dell (call options) VPZAD – 20 contracts 12/06/2007 $ 6.80 2000 $ 13,600.00 $ 6.30 -7.35% 256.90 2.11% Verizon VZ 10/19/2005 $ 31.64 250 $ 7,910.00 $ 44.94 42.04% 178.50 46.95%

The Telecom Connection Portfolio – Performance Performance results listed here reflect values of stocks as of the Total Average Return 17.81% 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 2007 YTD Return 14.95% purchase of that stock unless otherwise stated. The 2007 YTD Return figures reflect changes since the beginning of 2007. The Total Average Return figures reflect changes since inception on 8/14/2001.

Nasdaq Telecom Index Performance % Gain/Loss Since 2007 Portfolio Inception Open Level Current Level Portfolio Inception YTD Return Nasdaq Telecom Index (IXTC) 8/14/2001 270.32 262.31 -2.96% 10.87%

At the time of publication, Mr. Faulkner was long AAPL, ALVR, CLWR, CY, GOOG, INTC, LVLT, MRVL and MRVL calls, NSR, RIMM, RVBD, S calls, TUNE.

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

Issue 296: Wednesday, Dec. 12, 2007

Contact Info

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Legal Information

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.