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Despite lagging the Zacks Consensus Estimate in the third quarter of 2012 and slashing its outlook for fiscal 2012, Qualcomm Inc’s (QCOM - Analyst Report) share price surged 5.80% ($3.25) to $64.79 in the after market trade on NASDAQ, primarily based on increased deployment of 3G/4G networks across the emerging nations and the company’s optimism to resolve the supply chain issue of MSM 8960 Snapdragon processor by teaming up with Taiwan Semiconductor Manufacturing Company Ltd.(TSM - Snapshot Report) and United Microelectronics Corporation (UMC - Snapshot Report).

Revenue

Quarterly total revenue of $4,626 million increased 28% year over year but was below the Zacks Consensus Estimate of $4,690 million. Segment wise, Qualcomm CDMA Technologies businesses accounted for $2,869 million of the total revenue in the third quarter, up 31% year over year. Quarterly EBT margin was 16%. Qualcomm Technology Licensing generated revenue of $1,593 million, up 27% year over year. Quarterly EBT margin was 88%. Qualcomm Wireless & Internet segment generated $160 million in revenue, down 2% year over year. This division incurred an operating loss of $6 million in the year-ago quarter.

EPS

On a GAAP basis, quarterly net income from continuing operation was $1,207 million or 69 cents per share compared with $1,035 million or 61 cents per share in the year-ago quarter. However, adjusted EPS (excluding special items) came in at 73 cents, missing the Zacks Consensus Estimate of 77 cents.

Chipset Statistics

During the third quarter of fiscal 2012, Qualcomm shipped approximately 141 million CDMA-based MSM chipsets, up 18% year over year. However, this was below the company’s guidance of a mid-point of 148 million. Average selling price of mobile handset with an in-build Qualcomm chipset during this quarter was around $226 -$232.

Operating Metrics

Quarterly operating income was $1,382 million compared with $1,113 million in the year-ago quarter. Gross margin was 64.4% compared with 64.7% in the year-ago quarter. Quarterly operating margin was 30% compared with 31% in the year-ago quarter. In the reported quarter, the company returned $429 million (25 cents per share) to its shareholders in the form of cash dividend.

Cash Flow

During the third quarter of fiscal 2012, Qualcomm generated $922 million of cash from operations compared with $1,264 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditures) during the reported quarter was $523 million compared with $1,045 million in the year-ago quarter.

Liquidity

At the end of third quarter of fiscal 2012, the company had $13,395 million in cash & marketable securities and $968 million of outstanding debt on its balance sheet compared with $11,652 million in cash & marketable securities and $994 million of outstanding debt at the end of fiscal 2011.

Fourth Quarter of Fiscal 2012 Financial Guidance

Total revenue is projected the range of $4.45 billion - $4.85 billion. Its mid-point of $4.65 billion is below the current Zacks Consensus Estimate of $4.903 billion. Non-GAAP EPS (including share-based compensation expenses) is expected in the range of 78 cents - 84 cents. Its mid-point of 81 cents is significantly above the current Zacks Consensus Estimate of 77 cents. Qualcomm is expected to ship 134 million – 142 million MSM chipsets during the quarter.

Full Fiscal 2012 Financial Guidance

Total revenue is forecasted in the range of $18.7 billion - $19.1 billion. Non-GAAP EPS (including share-based compensation expenses) is expected in the range of $3.61 - $3.67. Mobile handset ASP with an in-build Qualcomm chipset during fiscal 2012 will be around $216 -$222.

Recommendation

We reaffirm our long-term Neutral recommendation on Qualcomm. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.

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