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Following the second quarter earnings announcement on April 19, most of the analysts covering Qualcomm Inc. (QCOM - Analyst Report) have remained defensive toward the stock. This is due, primarily, to a weaker chipset sales outlook for fiscal 2012 due to a manufacturing shortage of its key 28 nanometer chipset

Second Quarter Highlights

On a GAAP basis, quarterly net income from continuing operation was $1,438 million or 84 cents per share, compared with $1,264 million or 75 cents in the year-ago quarter. Adjusted EPS came in at 90 cents, easily beating the Zacks Consensus Estimate of 86 cents.

Quarterly total revenue of $4,943 million was up 27.7% year over year, and surpassed the Zacks Consensus Estimate of $4,859 million. During the second quarter of fiscal 2012, Qualcomm shipped approximately 152 million CDMA-based MSM chipsets, up 29% year over year. Gross margin was 63.9%, compared with 72.6% in the year-ago quarter. Quarterly operating margin was 30.6%, compared with 37% in the prior-year quarter.

Agreements of Analysts

Of the six analysts covering the stock in the last 7 days, only one analyst revised the estimate upward for the third and fourth quarter of fiscal 2012.

For fiscal 2012, out of the six analysts covering the stock in the last 7 days, only one analyst raised the estimate while none lowered. Likewise for fiscal 2013, out of the seven analysts covering the stock, only one analyst increased the estimate for the given period.

We believe that the weaker chipset sales outlook provided by the company for fiscal 2012, mainly due to a manufacturing shortage of its key 28 nanometer chipset, have induced the analysts to remain defensive on the stock.

Currently, the Zacks Consensus Estimate for the third quarter of fiscal 2012 is 77 cents. The projected annual growth is 21.96%. For the fourth quarter of fiscal 2012, the Zacks Consensus Estimate of 81 cents indicates an annual gain of 19.61%.

Magnitude of Estimate Revisions

During the last 7 days, the current Zacks Consensus Estimates for the third and fourth quarter of 2012 remained in line with the previous estimates of 77 cents and 81 cents, respectively.

However, for fiscal 2012, the current Zacks Consensus Estimates was just a penny above the prior estimate of $3.32. For fiscal 2013, the current Zacks Consensus Estimates was just a penny above the earlier estimate of $3.87.

Earnings Surprises

With respect to earnings surprises, the company’s consistent track record of beating estimates in the last four quarters is expected to persist in the coming quarters. In the last quarter, Qualcomm outpaced the estimate by 4 cents or 4.65%.

No surprises are expected for the current and fourth quarters of fiscal 2012. EPS growth potential for fiscal 2012 and 2013 are also at breakeven.

Our Recommendation

We believe that Qualcomm’s record-high earnings, strong balance sheet, huge product pipelines and better market segmentation will act as positive catalysts in the long run.

However, weaker outlook, stiff competition from formidable rivals like Broadcom Corporation (BRCM - Analyst Report) and Texas Instruments Inc. (TXN - Analyst Report), coupled with cheaper smartphone sales, will put pressure on smartphone ASPs, thereby affecting the royalty business of Qualcomm going forward.

We maintain our long-term Neutral recommendation on Qualcomm. Currently, Qualcomm has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

About Earnings Estimate Scorecard

As a PhD from MIT, Len Zacks proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

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