How To Play Qualcomm Inc. Ahead Of Q2 2016 Earnings

  • Qualcomm is due to report Q2 2016 earnings on Apr. 20, 2016 after market close.
  • Qualcomm is expected to report a huge revenue decline.
  • Qualcomm's business might begin to recover during the second half of the year and provide momentum.

Mobile phone technology company Qualcomm (NASDAQ:QCOM) is slated to report Q2 2016 earnings on Apr. 20, 2016 after market close. The consensus on Wall Street is for revenue of $5.33B, which will be good for a 22.8% Y/Y decline while GAAP EPS of $0.96 will be good for 52.3% Y/Y increase.

Qualcomm issued weak Q2 guidance as follows:

  • Revenue of $4.9B-$5.7B, which is 17%-29% lower compared to the prior year's comparable quarter. Qualcomm's guidance was unusually low considering that the mid-point of its guidance is 7% lower than the consensus.
  • Non-GAAP EPS in the range of $0.90-$1.00, way below the consensus on Wall Street of $1.02.

Further, Qualcomm projected that it will ship 175M-195M MSM chips, 20.5% lower at the midpoint than a year ago. The company said that it expects device sales during the quarter to clock $65B-$73B or a 9% Y/Y decline at the mid-point.

Qualcomm has exceeded earnings estimate during the last four consecutive quarters. During the last earnings call, the company beat revenue by $80M and EPS by $0.07.

Qualcomm Quarterly Earnings Surprise History

Quarter End
Per Share
EPS* Forecast
Dec2015 01/27/2016 0.85 0.78 8.97
Sep2015 11/04/2015 0.79 0.71 11.27
Jun2015 07/22/2015 0.86 0.78 10.26
Mar2015 04/22/2015 1.28 1.2 6.67

Source: NASDAQ

Qualcomm is well-known to issue weak guidance which it then easily beats. But merely beating top and bottom line might not be enough to fire a rally in Qualcomm stock. Qualcomm shares have rallied about 22% from their February low. But that rally was in tandem with the broader market when most stocks bounced from their lows after market sentiment improved and fears of a recession/bear market cooled off.

The guidance that Qualcomm provided clearly says that this company is far from being out of the woods. It's going to be very hard for investors to celebrate a Qualcomm earnings beat if the company reports a 20%+ revenue decline as is widely expected. During its last earnings call, Qualcomm reported 18.7% revenue decline and 28% EPS growth, yet its shares tanked and lost more than 10% after the report. It's hard to see things panning out any differently this time round.

At the same time, Qualcomm stock might not have a lot of downside at this point. Bernstein's Ragson went on record saying that this might be a good enough reason to buy the shares:

"In the current environment, with uncertainty abounding in semis, it may be time to rotate into something that has been suffering under such headwinds for some time, and as a result may provide a shelter for limited downside, and with very low expectations providing an outlet for upside,"

But I suspect the market might be right about being worried by Qualcomm's royalty rate declines. During the last quarter, Qualcomm's royalty rate hit a low of 2.65% after declining throughout the year. If we assume the large decline was caused by the company's deferral of $100M in revenue from LG due to an ongoing royalty dispute, the rate comes to 2.81% which is still much lower than the 2015 average. So maybe Qualcomm is increasingly lowering its rates in a bid to get more smartphone OEMs onboard, particularly in China where the company's progress has been slow.

That said, there is a better reason why Qualcomm stock offers a good risk/reward ratio.

Snapdragon 820 Could Turn Out To Be A Success

Much of Qualcomm's current woes can be traced back to the Samsung Electronics (OTC:SSNLF) contract that it lost in early 2015 after numerous customer complaints about their Galaxy S6 smartphones overheating. Qualcomm's Snapdragon 810 chips were singled out as the culprit and Samsung discontinued their use.

Qualcomm went back to the drawing board and came up with Snapdragon 820. Although the new chips are quad-core instead of octa-core like the 810, they are manufactured using advanced 14nm FinFET Low Power Plus technology that allows them to have faster switching speeds and a much lower footprint than Snapdragon 810. In fact, tests have established that Snapdragon 820 is 30% more power-efficient than Snapdragon 810, and sports faster LTE download speeds of up to 600Mbps.

Samsung has fitted Snapdragon 820 chips into the Samsung Galaxy S7. The new smartphone has been receiving good reviews and early indications are that it's selling much better than Samsung Galaxy S6.

Design traction for our new Snapdragon 820 processor continues to be strong, and we expect improving trends in our chipset business in the second half of fiscal 2016.

Part of the gains that Qualcomm will make with Snapdragon 820 will be negated by the deal that Apple (NASDAQ:AAPL) struck with Intel (NASDAQ:INTC) to supply 30%-40% of iPhone 7 baseband modems. Qualcomm's saving grace is that analysts estimate that the loss will be limited to not more than 4% of the company's 2016 revenue, so Galaxy S7 might more than make-up for the shortfall.

Meanwhile, Qualcomm has been making progress with Chinese OEMs as far as paying 3G/4G royalties go. Qualcomm has struck deals with five of the largest Chinese smartphone OEMs including Xiaomi, Huawei, Lenovo, ZTE, and TLC. It will, however, take several quarters before Qualcomm's royalty business fully recovers from its big slump.

Investor Takeaway

The upcoming earnings call is unlikely to provide any cheer for Qualcomm investors due to the expected huge revenue declines. But Qualcomm stock has been badly depressed over the last 12 months and a lot of the bad news appears to be baked in, thus limiting the downside. Luckily, the second half of the year might provide some relief to the company and Qualcomm stock. Nevertheless, if Qualcomm's upcoming report beats estimates and the company does not provide a guide-down, the stock could still make modest gains over the short-term.

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