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Qualcomm (QCOM) Q1 Earnings Beat Estimates, Revenues Miss

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Qualcomm Incorporated (QCOM - Free Report) reported mixed first-quarter fiscal 2019 results, wherein the bottom line beat the Zacks Consensus Estimate but the top line missed the same. The chip maker’s financial performance was driven by strength in its semiconductor business owing to strong product leadership and operating expense management.

Net Income

On a GAAP basis, net income for the fiscal first quarter was $1,068 million or 87 cents per share against loss of $5,983 million or loss of $4.05 per share in the prior-year quarter. The year-over-year improvement was primarily due to lower operating expenses and income tax benefit.

Quarterly non-GAAP net income came in at $1,464 million or $1.20 per share compared with $1,438 million or 96 cents per share in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 12 cents.

QUALCOMM Incorporated Price, Consensus and EPS Surprise

Revenues

Fiscal first-quarter GAAP revenues were $4,842 million (in line with the company’s guidance) compared with $6,035 million in the prior-year quarter. The fall was due to lower equipment and services, and licensing revenues.

Quarterly non-GAAP revenues came in at $4,815 million compared with $6,005 million in the year-ago quarter, missing the Zacks Consensus Estimate of $4,885 million.

Notably, Qualcomm’s GAAP and non-GAAP results for the reported quarter were adversely impacted by its ongoing legal dispute with Apple Inc. (AAPL - Free Report) and the latter’s contract manufacturers, who are Qualcomm’s licensees.

Segmental Performance

Qualcomm CDMA Technologies (QCT) revenues decreased 19.6% year over year to $3,739 million, mainly due to headwinds related to Apple. Mobile Station Modem (MSM) chip shipments were 186 million, down from 237 million. EBT margin was 16% compared with 21% in the prior-year quarter.

Qualcomm Technology Licensing (QTL) revenues were $1,018 million, down 19.6% year over year. This includes $150 million from successful negotiation of the Huawei interim agreement which was signed in the fiscal first quarter and will run through the fiscal third quarter. Revenues did not include royalties due on sales of Apple or other products by the iPhone maker’s contract manufacturers. EBT margin was 58% compared with 67% in the prior-year quarter.

Cash Flow and Liquidity

During the fiscal first quarter, Qualcomm generated $356 million of cash from operating activities compared with $1,762 million a year ago. As of Dec 30, 2018, the company had $10,066 million of cash and cash equivalents with $15,388 million of long-term debt.

Stockholders’ Wealth

During the reported quarter, Qualcomm returned $1.8 billion to stockholders. This includes $750 million (62 cents per share) of dividends and $1 billion through repurchases of 17 million shares. On Jan 14, 2019, the company declared a quarterly cash dividend of 62 cents per share, payable Mar 28 to stockholders of record as on Mar 7.

Second-Quarter Fiscal 2019 Outlook

For the second quarter of fiscal 2019, Qualcomm expects revenues in the range of $4.4-$5.2 billion. Non-GAAP earnings are projected in the 65-75 cents per share range. Revenues at QTL are expected to be between $1 billion and $1.1 billion, including $150 million under the interim agreement. This excludes QTL revenues for royalties due on sales of Apple and other products by Apple’s contract manufacturers. EBT margin at QTL is expected to be between 54% and 58%. For QCT, the company anticipates around $150 million to $170 million MSM chip shipments, reflecting typical volume seasonality, market weakness particularly in the low and mid tiers, timing of OEM product launches and overall competitive dynamics. EBT margin at QCT is expected to be between 13% and 15%.

Moving Forward

Qualcomm expects the softness in the handset market and weaker overall mix of devices to continue in the near future.  Despite the negatives, the company anticipates improving conditions for its chip business in the second half of fiscal 2019 on the back of new product launches including devices with 5G chipsets and growth in its adjacent businesses.

The company continues to execute its strategic objectives, including driving the global transition to 5G, protecting the value of its technology and expanding into new industries and product categories for future growth. Qualcomm’s Snapdragon 855 is gaining significant momentum with more than 100 design wins in development. It also introduced the custom-built Snapdragon 8cx Compute Platform, which represents the largest generational performance increase ever for Snapdragon product. Qualcomm remains on track to deliver $1 billion in operating cost savings from its $7.4 billion baseline and expects additional savings post licensing resolution as litigation costs come down.

Zacks Rank and Stocks to Consider

Qualcomm currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Comtech Telecommunications Corp. (CMTL - Free Report) and Harris Corporation (HRS - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Comtech has a long-term earnings growth expectation of 5%.

Harris currently has a forward P/E (F1) of 19.8x.

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