Revenue Decline Could Keep Qualcomm Stock Down After Q1 FY 16 Earnings

To read post Q1 2016 earnings review of Qualcomm, please click on: Qualcomm Q1 2016 Earnings Review

  • Qualcomm will report QI FY 16 earnings on 27th January 2016 after market close.
  • Qualcomm stands a good chance to beat lowered revenue and earnings estimates.
  • The drastic revenue/earnings declines expected might however keep the shares depressed even in the event of a beat.

Mobile technology giant Qualcomm (NASDAQ:QCOM) will report Q1 FY 16 earnings on 27th January after market close. The consensus on Wall Street is for the company to report revenue of $5.69B, down almost 20% Y/Y and EPS of $0.90, more than 30% lower than for Q1 FY 15. Qualcomm said during its fourth quarter earnings call that it expects Q1 FY 16 revenue to clock in the range of $5.2B-$6.0B (15%-27% Y/Y decline) with EPS in the range of $0.80-$0.90 (33%-40% lower). Qualcomm said that it will no longer be issuing annual earnings guidance, perhaps due to the uncertainty surrounding its business.

Qualcomm has managed to beat lowered earnings estimates for four consecutive quarters now. Qualcomm was upbeat during its last earnings call that its first quarter earnings will be in-line or above its guidance.

Qualcomm Quarterly Earnings Surprise History

Quarter End
Per Share
EPS* Forecast
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
Dec2014 01/28/2015 1.21 1.11 9.01

Source: NASDAQ

Yet Qualcomm stock has continued to languish and is currently trading more than 40% below its 10-year high of $82 achieved in 2014. Even though Qualcomm stock’s 3.8% YTD decline is relatively tame by industry standards, the stock has lost more than a third of its value of over the past 12 months.

Qualcomm 12-Month Share Returns

QCOM stock chart

Qualcomm stock price chart by

Qualcomm has been beset by major worries, with both its mobile chip business and patent royalty business performing poorly in 2015. Qualcomm has been facing intense competitive pressure from Taiwan chip manufacturer Mediatek and a host of other small Chinese manufacturers that have led to the company losing chip market share. Qualcomm’s QCT(Qualcomm CMDA Technology) saw revenue plunge 8% in 2015 with earnings from the segment declining 35%.

Qualcomm troubles appear to have begun in early 2015 after reports emerged that Samsung had decided not to use its Snapdragon 810 chips in the Samsung Galaxy 6 due to overheating problems.

Meanwhile, Qualcomm’s patent division QTL (Qualcomm Technology Licensing), has not been faring better mainly due to rampant under reporting of 3G/4G device sales especially in China and the reluctance of OEMs in the Middle Kingdom to pay up Qualcomm royalties. Reported 3G/4G device sales in 2015 were $250.9B, but Qualcomm estimates that sales were underreported by ~$24B, or nearly 10%. Qualcomm said this during one of its earlier earnings calls:

“We also believe that certain licensees in China currently are not fully complying with their contractual obligations to report their sales of licensed products to us (which includes certain licensees underreporting a portion of their 3G/4G device sales and a dispute with a licensee) and that unlicensed companies may seek to delay execution of new licenses while the NDRC investigation is ongoing.”

Qualcomm collects 3%-5% of sales as royalties for every 3G/4G device manufactured using its proprietary technology.

Qualcomm Making Progress

Qualcomm has lately been making some progress with both its chip business and its royalty business. The company’s Snapdragon 820 chips will feature exclusively in Samsung Galaxy 7. The general consensus, however, is that this deal alone might not be enough to offset the company’s chip weakness.

Meanwhile, Qualcomm recently granted a royalty-bearing patent license to Xiaomi, China’s largest smartphone manufacturer to make 34/4G devices. This move could encourage other smaller manufacturers to come to the deal table.

Qualcomm has been eyeing the lucrative data center chip business that is dominated by Intel (NASDAQ:INTC) and its Xeon processors. Qualcomm recently announced that it has partnered with Guizhou Huaxintong Semiconductor Technology, a Chinese server chip manufacturer, to manufacture ARM server processors for the Chinese market. Qualcomm has a good chance to grab the Chinese server market since Intel has not been dominant there ever since the U.S. government blocked a orders for Xeon processors worth $1B meant for the Chinese market in 2015 due to what it termed as national security issues. ARM had managed to garner 26% of the data center market back in 2006, and Qualcomm might be able to wrestle some share from Intel’s x86 processors.

Investor Takeaway

There is a good chance that Qualcomm might exceed its earnings guidance in its upcoming quarterly report. But given the huge revenue and earnings declines projected, it will be hard to trigger enough enthusiasm in investors to provide a good lift for the battered shares. Nevertheless, Qualcomm stock is a good contrarian bet for long-term investors and investors should buy now when the stock is still on the ropes.

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