Huge Top Line Decline Dogs Qualcomm Stock Despite Q2 Earnings Beat

  • Qualcomm has reported fiscal second quarter results that exceeded top and bottom line estimates.
  • The company's third quarter guidance suggest that its revenue and earnings declines are likely to moderate.
  • Qualcomm's mid- and long-term outlooks are quite good.

Mobile technology company Qualcomm (NASDAQ:QCOM) has delivered fiscal second quarter 2016 results that beat both top and bottom line expectations. Qualcomm has reported Q2 revenue of $5.54B, a good $200M above the consensus on Wall Street but 20% lower than revenue posted a year ago. Non-GAAP EPS of $1.04 was 26% lower compared to a year ago but $0.08 higher than analysts' consensus. On a GAAP-basis Qualcomm posted EPS of $0.78, up 24% Y/Y.

Key Highlights From The Earnings Report

Other key highlights from Qualcomm's latest earnings report were:

  • MSM chip shipments totaled 189M, down 19% Y/Y but towards the company's high end of its guidance range of 175M-195M. The continued success of Qualcomm's Snapdragon 820 CPUs helped out. Qualcomm announced that the new CPU is now available in a number of leading mobile devices including Samsung Galaxy S7, Xiaomi Mi5, LG G5, as well as devices by Sony, HP, and HTC. Qualcomm reported that it has developed 115 Snapdragon 820 iterations and expects the volume of devices fitted with the CPU to ramp up during the second half of fiscal year (calendar 2nd and 3rd quarters).
  • Reported 3G/4G device sales fell 8% Y/Y on a dollar basis to $70.1B with shipment volumes declining 13% to an estimated 335M-339M. That came in towards the high end of Qualcomm's guidance of device sales of $65B-$73B, or a 9% Y/Y decline at the mid-point. Device ASP climbed 6% to an estimated $205-$211.
  • Chip division (QCT) revenue fell 19% Y/Y to $3.34B with segment operating profit falling 18.5% to $750M.
  • Licensing division (QTL) revenue fell 12% Y/Y to $2.14B with segment operating profit declining 13.9% to $1.86B.

Qualcomm then issued fiscal third quarter guidance as follows:

  • Device sales to fall 1%-14% Y/Y to $52B-$60B.
  • Lowered full-year 2016 3G/4G device shipment forecast from 1.67B-1.77B to 1.625B-1.725B (+5%-11% Y/Y)

Qualcomm announced that it had spent $1.55B to retire 31.7M shares (about 2% of float) during the quarter compared to $2.05B spent on buybacks during the previous quarter.

Qualcomm shares traded sideways making small gains and losses after the report. I had indicated in my Qualcomm earnings preview that the shares were unlikely to make strong gains even after an earnings beat due to the huge top and bottom line declines. Qualcomm routinely manages to exceed its own guidance on most growth metrics in many quarters so investors have probably become used to it.

Perhaps investors also took note of the fact that Qualcomm's earnings beat was largely made possible after the company resolved its licensing dispute with LG. During the last quarter, Qualcomm had deferred $100M in revenue due to the LG dispute which was still ongoing at the time. Two quarters' worth of revenue from LG works out to ~$200M which coincidentally is the margin by which Qualcomm beat Wall Street revenue estimates.

Dramatic Improvement In Reported Device Sales Expected

One notable takeaway from that report is that the company expects full-year device shipments to post positive year-over-year growth of 5%-11%. This implies that the company expects a pretty dramatic ramp in reported device sales during the remaining two quarters in its fiscal year. Perhaps this has something to do with the company's continued success in getting OEMs in China to sign licensing agreements. Qualcomm has managed to sign 3G/4G licensing deals with five of the largest Chinese OEMs and continues making progress in this regard.

The success of Snapdragon 820 is certainly helping the company with its chip sales. Additionally, Qualcomm talked about Snapdragon X16 LTE modem, the first and only commercially-available gigabit-class LTE chipset that it reckons is two generations ahead of the competition. Qualcomm said that it expects QCT gross margin to clock in at 16% in 2016 and exceed 20% over the long-term.

Meanwhile Qualcomm's QTL segment appears to be improving. 3G/4G royalty rate during the quarter improved to 3.05% from 2.81% posted during the previous quarter which is an encouraging trend.

Qualcomm's fiscal third quarter guidance tells you that whereas the near-term weakness in both QCT and QTL is set to continue, the year-on-year declines are likely to moderate as the quarters roll on and might turn into positive territory a few quarters down the line. Qualcomm stock is likely to remain range-bound for maybe another quarter before beginning to make a solid recovery.

Brian Wu Brian Wu   on Amigobulls :
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