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Qualcomm Inc. (QCOM - Analyst Report) reported strong financial results for the third quarter of fiscal 2014. Both the top and the bottom line significantly outpaced the respective Zacks Consensus Estimate.  

However, Qualcomm is facing near-term challenges related to its licensing business in China. The country is a major growth driver for the company owing to its large population and increasing adoption of 4G LTE technology. Qualcomm is the largest developer of high-speed Internet capable LTE chipsets.

Management stated that Qualcomm is currently in royalty dispute with a major customer in China. Moreover, some small companies are yet to agree on royalty payment. Some companies are also under-reporting the amount of phones sold, for which they should have paid license fees. All these headwinds resulted in a $3.30 (4.04%) fall in the stock price of Qualcomm to $78.30 in the aftermarket trade on Nasdaq.

Net Income

On a GAAP basis, quarterly net income from continuing operations stood at $2,238 million or $1.31 per share compared with $1,580 million or 91 cents per share in the year-ago quarter. However, adjusted (excluding special items) earnings per share came in at $1.34, breezing past the Zacks Consensus Estimate of $1.08.

Revenue

Quarterly total revenue of $6,806 million was up 9% year over year and easily surpassed the Zacks Consensus Estimate of $6,547 million. Segment wise, Qualcomm CDMA Technologies businesses contributed $4,957 million of revenues in the third quarter, up 17% over the prior-year quarter. Meanwhile, quarterly EBT margin was 23%. Qualcomm Technology Licensing generated $1,803 million in revenues, down 3% year over year. Quarterly EBT margin was 86%.

Chipset Statistics

During the third quarter of fiscal 2014, Qualcomm shipped approximately 225 million CDMA-based MSM chipsets, up by a whopping 31% year over year. This figure was way ahead of the company’s guidance of a mid-point of 205.50. Average selling price (ASP) of a mobile handset with an in-built Qualcomm chipset during the quarter was around $228 - $234.

Operating Metrics

Quarterly operating income came in at $2,075 million compared with $1,677 million in the year-ago quarter. Gross margin was 59.7% as against 60% in the year-ago quarter. Quarterly operating margin was 30.5% compared with 26.9% in the prior-year quarter.

In the reported quarter, the company returned $706 million (42 cents per share) to its shareholders in the form of cash dividends and another $1.35 billion through buyback of 17 million shares of common stock.

Cash Flow

During the third quarter of fiscal 2014, Qualcomm generated $2,673 million of cash from operations compared with $2,077 million in the prior-year quarter. Free cash flow, in the reported quarter, was $2,515 million against $1,763 million in the year-ago quarter.

Liquidity

At the end of the third quarter of fiscal 2014, Qualcomm had $32,716 million of cash and marketable securities and no outstanding debt on its balance sheet compared with $29,406 million of cash and marketable securities and no outstanding debt at the end of fiscal 2013.

Fourth Quarter of Fiscal 2014 Financial Guidance

The fourth-quarter revenues are expected in the range of $6.5 - $7.4 billion. Its mid-point of $6,950 million fell below the current Zacks Consensus Estimate of $7,152 million. GAAP earnings per share are projected to be $1.03 – $1.08.

Non-GAAP earnings per share are likely to range between $1.07 and $1.22 including 13 cents per share of stock-based compensation expenses. Its mid-point of $1.15 is well below the current Zacks Consensus Estimate of $1.27. Also, Qualcomm is expected to ship 230 – 245 million MSM chipsets in the fourth quarter of fiscal 2014.

Fiscal 2014 Financial Guidance

The fiscal 2014 total revenue guidance has been raised to $26.3 - $27.2 billion. GAAP earnings per share have also been uplifted to the band of $4.37 and $4.57. Non-GAAP earnings per share are forecasted in the band of $4.57 - $4.72, including 51 cents per share of stock-based compensation expenses. ASP of a mobile handset with an in-built Qualcomm chipset during fiscal 2014 is projected at around $222 -$228.

Other Stocks to Consider

Qualcomm currently has a Zacks Rank #1 (Strong Buy). Other well performing stocks in the wireless equipment developers industry include Comtech Telecommunications Corp. (CMTL - Snapshot Report), InterDigital Inc. (IDCC - Snapshot Report) and Ericsson (ERIC - Analyst Report). While both Comtech and InterDigital carry a Zacks Rank #1 (Strong Buy) while Ericsson holds a Zacks Rank #2 (Buy).

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