Is Qualcomm Stock Worth An Investment After Weak Earnings Guidance?

  • Qualcomm has delivered beat on both top and bottom line estimates during its Q1 2016 earnings call.
  • The mobile technology company, however, has issued weak Q2 2016 guidance.
  • Is Qualcomm stock worth an investment at this point?

Mobile technology company Qualcomm (NASDAQ:QCOM) has announced its Q1 fiscal 2016 results. Qualcomm reported revenue of $ 5.77B, a huge 18.7% Y/Y decline but still 80M above analyst estimate. Diluted non-GAAP EPS of $0.97 represented a healthy 28% Y/Y improvement and beat average Wall Street estimates by $0.07. On a GAAP basis, Qualcomm posted diluted EPS of $0.99, or 15% Y/Y change.

Qualcomm’s mobile chip segment, QCT (Qualcomm CDMA Technology) reported revenue of $4,096M, a huge 22% Y/Y drop. The huge decline was partly orchestrated by a 10% Y/Y decline in MSM chip shipments and partly due to a drop in chip ASP.

Qualcomm’s licensing revenue segment, QTL (Qualcomm Technology Licensing) reported revenue of $1,607M, down 12% Y/Y despite an 8% growth in reported 3G/4G device sales to 307M-311M units. Since Qualcomm reported that device ASP fell only 1% Y/Y to $193-$199, we are left to surmise that most of the company’s decline in mobile phone royalties were caused by a decline in the royalty rate that Qualcomm charges its mobile licensees. Qualcomm collected ~ $5.20 for every 3G/4G device sold, which works out to a royalty rate of just 2.65%. That’s considerably lower than the 3%-5% the company has been collecting on device sales in past years.

Qualcomm Issues Weak Q2 Guidance

Qualcomm issued weak Q2 guidance that was below Wall Street estimates. The company said that it expects revenue of $4.9B-$5.7B, a huge 17%-29% Y/Y decline, with the mid-point being 7% lower than consensus estimates of $5.69B. The company also said it expects non-GAAP EPS for the quarter to clock in the range of $0.90-$1.00, the mid-point also being 7% below analyst consensus estimate of $1.02.

Qualcomm said that it expects to ship just 175M-195M MSM chips, a huge 16%-25% Y/Y decline. The company added that it expects reported device sales to clock in the range of $65B-$73B, a 4%-14% Y/Y drop.

Qualcomm said that it’s been making progress in China, its largest market but also one of the causes of its current woes. Mobile OEMs in China have been underreporting 3G/4G device sales by huge margins while others have simply been refusing to pay up, no doubt encouraged by the Chinese government which recently slapped a hefty fine on Qualcomm for what it termed as monopolistic practices in the country. Qualcomm chief executive Steve Mollenkopf had this to say about China:

We delivered a stronger than expected quarter with earnings per share above the high end of our initial estimates, driven by better than expected 3G/4G reported device sales and benefits realized from cost actions across the Company. We signed several new license agreements in China and are on track with our cost reduction initiatives.

Betting on Snapdragon 820

Meanwhile, Qualcomm was upbeat about its new Snapdragon 820 processor:

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.

Much of Qualcomm’s current revenue woes began in early 2015 after Samsung, one of Qualcomm’s biggest customers, declined to use Qualcomm’s Snapdragon 810 in the Galaxy S6 due to overheating problems and instead opted to use its own Exynos processors. Samsung proceeded to use Exynos processors in its subsequent Galaxy S6 Edge and Edge + smartphones. Samsung has increasingly been shifting to its in-house Exynos processors for its Galaxy lineup of smartphones and this has been taking a hit of Qualcomm’s top line.

But Qualcomm has scored a major victory this year after Samsung said it will use Snapdragon 820 processors in its upcoming Samsung Galaxy S7.

But Samsung has only been part of Qualcomm’s troubles. Apple (NASDAQ:AAPL), another large Qualcomm customer, has only been using Qualcomm’s cellular baseband modem chipset in its latest iPhones rather than using fully integrated Snapdragon processors which carry much better margins. This is the main reason why Qualcomm’s chip ASP has been falling quite dramatically. To be sure, there is little chance that Apple will change its strategy and start using Qualcomm’s Snapdragon processors since it’s been making good progress with its own proprietary chips.

Currently, Qualcomm is counting on its Snapdragon 820 processors to win the company more business from other mobile OEMs. Even though Snapdragon 820 is quad-core and not octa-core like Snapdragon 810, it’s manufactured using advanced 14nm FinFET Low Power Plus fabrication technology allowing for faster switching speeds and a smaller footprint than planar transistors. Snapdragon 820 has been demonstrated to deliver double the performance and lower power consumption than Snapdragon 810 despite its lower core count. Qualcomm says Snapdragon 820 is 30% more power efficient than Snapdragon 810 which means a longer battery life. Snapdragon 820 also sports much better connectivity with LTE download speeds of up to 600Mbps and multi-gigabit 802.11ad Wi-Fi.

Those are pretty compelling specs, and hopefully other OEMs will follow Samsung’s lead and bite the bait as well. But the general consensus is that the first half of 2016 will continue to be tough on Qualcomm stock before things finally start looking up. Qualcomm stock fell just 2% despite announcing the huge revenue decline, which indicates the bad news has almost been fully baked into Qualcomm stock. This appears to be a good entry point for contrarian investors who are willing to ride the company’s recovery.

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