Earnings Preview: Qualcomm Inc.

Qualcomm Inc. ( QCOM - Analyst Report ) is slated to release its third quarter 2012 results on Wednesday, July 18, after the closing bell. The current Zacks Consensus Estimate for the second quarter is pegged at 77 cents per share, representing annualized growth of 21.77%.

With respect to earnings surprises, Qualcomm has outperformed the Zacks Consensus Estimate in three of the last four quarters. The average earnings surprise was a positive 3.10%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude in three out of last four quarters.

Second Quarter Highlights

On April 18, 2012, Qualcomm reported its second quarter 2012 financial results. On a GAAP basis, quarterly net income was $1,438 million or 84 cents per share compared with a net income of $1,264 million or 71 cents per share in the year-ago quarter.

However, adjusted EPS (excluding special items) came in at 90 cents for the second quarter of fiscal 2012, outpacing the Zacks Consensus Estimate of 86 cents. Such outstanding performance was mainly driven by higher demand for 3G smartphones and tablet chipsets.

Quarterly total revenue of $4,943 million was up 27.7% year over year, surpassing the Zacks Consensus Estimate of $4,859 million.

Agreement of Estimate Revisions

In the last 30 days, of the seven analysts covering the stock, two increased the EPS estimates while two decreased the same for the third quarter of 2012. Similarly, for the fourth quarter of fiscal 2012, out of the seven analysts covering the stock, none of the analysts raised EPS estimates, while five moved in the opposite direction.

For fiscal 2012, over the last 30 days, of the seven analysts covering the stock, none of the analyst raised EPS estimates while six slashed theirs. Likewise, for fiscal 2013, in the last 30 days, out of the seven analysts, only one analyst raised the EPS estimate while five decreased it.

Analysts are bearish owing to the supply constraints of the 28mm products, which might impact its top line. They also remain skeptical about the estimated chipset supply to Apple Inc. ( AAPL - Analyst Report ) as the company’s iPhone is in the transition phase. Additionally, they believe that overall macroeconomic concerns are also impacting wireless subscriber growth rates, which can reduce its third quarter earnings.

Magnitude of Estimate Revisions

During the last 30 days, the current Zacks Consensus Estimate was in line with the previous estimate of 77 cents for the third quarter of 2012 and 3 cents below the earlier estimate of 82 cents for the fourth quarter of 2012.

Similarly, for fiscal 2012, during the last 30 days, the current Zacks Consensus Estimate was 3 cents below the earlier estimate of $3.33. Likewise, for fiscal 2013, the current Zacks Consensus Estimate was 8 cents below the earlier estimate of $3.86.

Earnings Surprises

The current Zacks Consensus Estimates for the ongoing quarter reflects a downside of 1.30% (essentially a proxy for future earnings surprises), while the current Zacks Consensus Estimates for the fourth quarter remains flat at 0.00%. For fiscal 2012, the current Zacks Consensus Estimates reflect a downside of 0.30% while fiscal 2013 estimates contain growth potentials of 0.27%.

Our Recommendation

We believe that the gradual adaptation of 4G Long Term Evolution (LTE) handsets in the developed markets of the U.S., Japan, and South Korea coupled with the massive demand of smartphones and tablets in the emerging economies will drive the stock upward.

Moreover, the company’s record-high earnings, strong balance sheet and solid management outlook for the current fiscal year will act as positive catalysts in the long run.

However, stiff competition from formidable rivals like Broadcom Corporation ( BRCM - Analyst Report ) and Texas Instruments Inc. ( TXN - Analyst Report ) as well as lower average selling price (ASP) of smartphones will negatively impact Qualcomm’s royalty business, going forward.

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