Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: 4Q14 Earnings Update; Lags Expectations
Prev.Ed.: Sep 10, 2014, 3Q14 Earnings Update (share price and brokers’ material are as ofSep 8, 2014)
Flash News Update [Note: earnings update in progress; final report to follow]
On Nov 5, 2014, announced its fiscal 4Q14 financial results.On a GAAP basis, quarterly net income from continuing operations stood at $1,894 million or $1.11 per share compared with $1,501 million or $0.86 per share in the year-ago quarter. However, Pro forma EPS came in at $1.14, lagging the Zacks Consensus Estimate of $1.20. Pro forma EPSincreased 25.2% year over year.
Quarterly total revenue of $6,692 million was up 3% year over year but lagged the Zacks Consensus Estimate of $7,005 million.Segment wise, Qualcomm CDMA Technologies businesses contributed $4,849 million of revenues in the fourth quarter, up 9% over the prior-year period. Meanwhile, quarterly EBT margin was 22%. Qualcomm Technology Licensing generated $1,795 million in revenues, down 4% year over year. Quarterly EBT margin was 86%.
Chipset Statistics
During the fourth quarter, Qualcomm shipped approximately 236 million CDMA-based MSM chipsets, up a whopping 24% year over year. Average selling price (ASP) of a mobile handset with an in-built Qualcomm chipset was around $220–$226 during the quarter.
Operating Metrics
Adjusted quarterly operating income came in at $2,323, up 20% year over year. Gross margin was 58.8% as against 58.1% in the year-ago quarter. Adjusted quarterly operating margin was 34.7% compared with 29.9% in the prior-year quarter.
Other Financial Aspects
During the fourth quarter, Qualcomm generated $1,619 million of cash from operations compared with $2,523 million in the prior-year period. Free cash flow in the quarter was $1,389 million against $2,323 million a year ago.
At the end of fiscal 2014, Qualcomm had $32 billion of cash and marketable securities and no outstanding debt on its balance sheet compared with $29.4 billion of cash and marketable securities and zero outstanding debt at the end of fiscal 2013.
On Oct 16, QCOM declared a quarterly cash dividend of $0.42 per share payable on Dec 18, 2014 to shareholders of record at the close of business on Dec 1.
Guidance at a Glance
First-quarter fiscal 2015 revenues are expected in the range of $6.6– $7.2 billion. GAAP earnings per share are projected to be $1.00–$1.12. Non-GAAP earnings per share are likely to range between $1.04 and $1.16 including $0.14 per share of stock-based compensation expenses. The Zacks Consensus estimate for the first quarter of fiscal 2015 is currently pegged at $1.28. Also, Qualcomm is expected to ship 250–270 million MSM chipsets in the first quarter.
Fiscal 2015 total revenue guidance is estimate to be in the range of $26.8– $28.8 billion. GAAP earnings per share are projected to be in the range of $4.33 and $4.63. Non-GAAP earnings per share are forecasted in the band of $4.50– $4.80, including 55 cents per share of stock-based compensation expenses. The Zacks Consensus estimate for the fiscal 2015 is currently pegged at $4.92.
MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON QCOM
Portfolio Manager Executive Summary
Qualcomm Inc. (QCOM or the company) designs, develops and suppliessemiconductors and collects royalties on wireless handheld devices and infrastructure based on itsdominance in CDMA and other relatedtechnology patents. In addition, Qualcomm providessystems software to wireless handset vendors andpromotes applications and services that run on high-speed wireless networks.
Key factors for evaluating an investment strategy for Qualcomm are as follows:
- Qualcomm’s leadingCDMA and WCDMA chipsets.
- Qualcomm’s emerging 4G/OFDMA technologies.
- The 4G market offers enormous global growth prospects and Qualcomm maintains a leading position in it.
Competition: Qualcomm’smain competitors are BRCM, Infenion, and Texas Instruments. Competing standards and technologies, such as WiBro/WiMax, DVB-H, or the China TD-SCDMA, are potential challenges to QCOM’s position.
Analysts’ Opinions:Of the 25analysts in the Digest group, 72% arepositivewhile the remaining 28% areneutral on the stock. Target prices, provided by the analysts, range from a low of $65.00 to a high of $100.00,with the average being $85.82. The expected return over the current share priceis12.77%.
Bullish(Buy or equivalent outlook) –18analysts or 72% –The analysts with a bullish stance believe that Qualcomm is attractively valued with significantfree cash flow and increased dividend yield. The 28 nanometer Snapdragon S4 processors arewell positioned in the marketas it is used in high-end smartphones/tablets.The company isalso ahead of its competitors in the 4GLTE-based smartphone chipset categories. Theseanalysts remain optimistic on the stock based on higher smartphone/tablet demand, increased data usage, an extensive product pipeline, advanced technology, strong fundamentals, huge growth potential especially in the Chinese CDMA markets,and increased rollout of 4GLTE/3G-equipped products in the emerging markets. Moreover, some analysts believe that theintegration of Qualcomm’s Snapdragon-based chipsets in the Windows-8 PCs/Windows RT-based tablets, BlackBerry’s Z10 smartphone, Apple Inc.’s (AAPL) iPhone 5, Samsung’s Galaxy S4and LTE advanced smartphones,will further drive the stock.
Neutral (Hold or equivalent outlook) – 7analysts or 28% – The analysts with a cautious outlook prefer to remain on the sidelines primarily due to stiff competition and a sluggish economy. Moreover, they believe that the company lacks catalysts to boost growth in the future.
Long-Term Outlook:Qualcomm’stechnology leadershipin CDMA and WCDMA, its emerging presence in the 3G market, solid fundamentals, and long-term growth prospects make its sharesattractive. Going forward, management expects to expand its existing chipset customer base and market share, win new customers for chipset and software solutions, and continue to expand its 3G wireless network base. The firms believe that continued strength in the 3G wireless market and the emergence of mobile video solutions, along with superior technology and a strong balance sheet, support Qualcomm’s long-term growth prospects.The average expected long-term growth rate is14.7%.
Sep 10, 2014
Overview
Key investment considerations as identified by the brokerage firms are as follows:
Key Positive Arguments / Key Negative Arguments- Competitive Position: Leading supplier of digital wireless products, intellectual property, chipsets, and network infrastructure components. Dominant position in the CDMA market further consolidates its competitive position.
- Compelling Fundamentals: Well positioned to benefit from accelerated 3G adoption, with unparalleled combination of IPR and chip businesses. Qualcomm Inc. has no debt and continues with its share repurchase program.
- Growth: Strong pickup in developing and emerging markets. Strong growth forecast for the worldwide mobile device market, driven by new subscriber growth and increased shift to W-CDMA. Heavy R&D spending continues to drive the patent portfolio. Moreover, the launch of CDMA-based iPhone 4S and Nokia’s Windows 7-based smartphones will further drive demand for QCOM’s chipsets. Further, Microsoft Corp. (MSFT) will use QCOM’s chipsets in its new Windows 8 operating system. Additionally, the growing popularity of Snapdragon S4 processor will further enable the company to increase its global market share.
- Handset Market Position: Weak wireless handset market with delayed adoption of new technologies, such as W-CDMA, 1xEV-DO, and OFDMA. Increased CDMA handset sales in emerging markets could pressurize ASPs and chipset margins. Low-end pricing and cyclical pressures are added woes.
- Increasing Legal issues: Legal issues are a major concern for the stock. Any legal action taken by the court or regulatory regimes, particularly the European Commission could pose fundamental risks to Qualcomm’s business.
- WiMax may pose competitive threat to Qualcomm: WiMax poses significant threat to Qualcomm’s LTE ramp up and may complicate the latter’s licensing and royalty agreements.
- Integration Risk: The acquisition of ATHR and other companies may lead to integration risks.
Based in San Diego, CA., Qualcomm Inc. (QCOM or the company) is a leading developer and supplier of digital wireless communication products and services, and is the inventor of CDMA (code division multiple access), a technology that has become a world standard for the wireless communication industry. Qualcomm's business areas include CDMA integrated circuits and system software for wireless voice and data communication and global positioning system products for wireless device and infrastructure manufacturers. It grants licenses to its intellectual property portfolio and receives license fees and royalties based on sales of products incorporating its CDMA technologies. Qualcomm Inc. is organized into four segments: Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL), Qualcomm Wireless & Internet (QWI), and Qualcomm Strategic Initiatives (QSI). For more information, please visit its website:
Note: Qualcomm Inc.’s fiscal year ends on Sep 30.
Sep 10, 2014
Long-Term Growth
Some analysts note that QCOM continues to invest significant resources to enhance existing wireless technologies and shape future wireless technology standards. Qualcomm indicated that it remains positive about the sustainability of average selling prices, with high-end phones continuing to offset the increasing demand for low-priced phones. In particular, the company noted the increase in demand for slim-profile phones and 3G phones installed with multimedia, messaging, and data storage facilities.
Most of the analysts believe that the long-term fundamentals of the company will remain healthy, based on the royalty opportunity attached to accelerating growth of WCDMA and continued mobile phone chipset market share gain. Moreover, QCOM’s growth prospects seemvery promising given the iPhonesNokia’s Windows Phone 7-based smartphones and the collaboration with Microsoft Corporation’s (MSFT) next generation Windows Phones, which are powered by QCOM’s chipsets. Currently, there are atleast 420 devices that are powered by QCOM’s chipsets.
December 22, 2010
The analysts believethat the recent deal with Atheros Communications, Inc.will provide QCOM with IP to integrate ATHR's Wi-Fi and Bluetooth solutions. This transaction could enable QCOM to compete better with combo-chip player like BRCM (1-OW/2-Neu) and gain traction with solutions for tablets and notebooks.
Qualcomm benefits from the significant growth of 3G/4GLTE wireless technologies and smartphones in the emerging markets, particularly in China. Moreover, China’s decision to rollout the 4G Long Term Evolution (LTE) technology will further drive Qualcomm’s chip demand. China Mobile, the largest mobile operator in the world in terms of subscriber count, has decided to offer discounts on smartphones that will run on Qualcomm’s superfast 4G LTE (Long-Term Evolution) network. China Mobile is expected to sell about 100 million LTE-enabled phones by the end of 2014. China Mobile has decided to offer five-mode LTE-enabled handsets from Jun 2014. We expect Qualcomm to benefit the most from this decision as the company boasts a strong five-mode LTE chipset portfolio developed on its state-of-the-art baseband technology. The five-mode standard includes LTE, FDD-LTE, TD-SCDMA, WCDMA and GSM. Moreover, China Mobile is hopeful of rolling out more than 500,000 LTE base stations by the end of 2014.
These analysts continue to believe that the industry will witness accelerated demand trends over the next 12 to 24 months driven by smartphones and tablet sales along with the initial sale of Long Term Evolution (LTE) services.They also anticipate that the multi-core Snapdragons and fully integrated 3G/4G chipsets, with the latest application processors will enable the company to win more designs and boost revenue growth over the next few years.Moreover, reduced ASPs will help the company gain market share in the long run as well as help QCOM gain an advantageous position against its peers.Renewal of the licensing agreement with major OEMs for at least another decade will further drive the company’s revenues, going forward.
May 30, 2014
Target Price/Valuation
Provided below is a summary of target price and rating as compiled by Zacks Research Digest:
Rating DistributionPositive / 72.0%↓
Neutral / 28.0%↓
Negative / 0.0%
Digest High / $100.0
Digest Low / $65.00
Avg. Target Price / $85.82
No. of Analysts Giving Target Price/Total / 22/25
Risks to the price target include but are not limited to:
- Inability to renew, enforce or renegotiate licensing agreements
- Weakness in the overall wireless handset market
- Delay in adoption of new technologies, such as WCDMA, 1xEV-DO, and OFDMA
- Inability to win customers for its new product lines
- Near- to mid-term legal risks
Sep 10, 2014
Recent Events
OnJuly 23, 2014, QCOM announced its fiscal 3Q14financial results. Key highlights are as follows:
- Total revenue was $6,806million versus $6,124million in 3Q13, alsoahead ofthe Zacks Consensus Estimate of $6,547 million.
- Operating margin was 25.2% compared with 28.7% in the year-ago quarter.
- GAAP EPSin the quarter was $1.34against $0.90 in 3Q13,higher thanthe Zacks Consensus Estimateof $1.08.
OnJul 18, QCOM declared a quarterly cash dividend of $0.42 per share payable on Sep24, to shareholders of record at the close of business on Sep 3.
On Jun 25, 2014, QCOM paid a cash dividend of $0.42 per share to shareholders of record at the close of business on Jun 4, 2014 as declared on Apr 8.
Sep 10, 2014
Revenue
Provided below is a summary of revenue as compiled by Zacks Research Digest:
Revenue (in $M) / 3Q13A / 2013A / 2Q14A / 3Q14A / 4Q14E / 2014E / 2015E / 2016EZacks Consensus / $7,035.0 / $26,920.0↑ / $28,868.0↓
Digest High / $6,243.0 / $24,865.2 / $6,367.0 / $6,806.0 / $7,178.0 / $26,973.0↑ / $30,039.0↓ / $32,940.0↑
Digest low / $6,243.0 / $24,865.0 / $6,366.7 / $6,806.0 / $6,926.0 / $26,720.0↑ / $26,798.0↓ / $30,265.0↓
Y/Y Growth / 35.0% / 30.0% / 4.0% / 9.0% / 8.3% / 7.8%↑ / 7.1%↓ / 10.0%↑
Q/Q Growth / 1.9% / -3.9% / 6.9% / 3.1%
*Note: Blank cells indicate the analysts did not provide any numbers
According to the company press release and the Zacks Digest model, total revenue stood at $6,806 millionin 3Q14, up9% year over year (y/y)and6.9% quarter over quarter (q/q). The year-over-year growth was primarily driven by higher demand for smartphones/tablets and increased deployment of 3G/4G networks.
During 3Q14, Qualcomm shipped approximately 225 million CDMA-based MSM chipsets, up by a whopping 31% year over year. This figure was way ahead of the company’s guidance of a mid-point of 205.50. Average selling price (ASP) of a mobile handset with an in-built Qualcomm chipset during the quarter was around $228–$234.
Provided below is a summary of segmental revenues as compiled by Zacks Research Digest:
Revenue (in Million) / 3Q13A / 2013A / 2Q14A / 3Q14A / 4Q14E / 2014E / 2015E / 2016EQualcomm CDMA Technologies(QCT) / $4,222.0 / $16,715.0 / $4,243.0 / $4,957.0 / $5,246.7 / $19,062.7↑ / $20,058.7↑
Qualcomm Technology Licenses(QTL) / $1,867.0 / $7,555.0 / $2,071.0 / $1,803.0 / $1,772.7 / $7,546.7↓ / $8,263.0↓
Other/Reconciling Items / $154.0 / $595.0 / $53.0 / $46.0 / $31.0 / $236.0↑ / $88.0↑
Total Revenue / $6,243.0 / $24,865.0 / $6,367.0 / $6,806.0 / $7,018.0 / $26,812.9↑ / $28,723.0 ↓ / $31,602.5↓
*Note: Blank cells indicate the analysts did not provide any numbers
The graphical representation of revenue segments is given below:
Revenue Breakdown by Segment
1) Qualcomm CDMA Technologies (QCT) (72.8% of 3Q14totalrevenue): QCT is a developer and supplier of CDMA-based integrated circuits and system software for wireless voice and data communications, multimedia functions, and global positioning system products.
QCT revenuesin 3Q14grossed $4,957 million, up 17.4%y/y,and16.8% q/q.
2) Qualcomm Technology Licensing (QTL)(26.5%):QTL grants licenses to use portions of its intellectual property portfolio, which includes certain patent rights useful in the manufacture and sale of some wireless products.QTL receives revenues from license fees, as well as the ongoing royalties based on worldwide sales by licensees of products incorporating or using the company's intellectual property.
In 3Q14,QTL revenues were$1,803million, down3.4% y/y and 12.9% q/q.
3) Other Reconciling Items (0.7%): The segment’s revenues in 3Q14came in at $46 million.
Outlook
For fiscal 2014, total revenue guidance has been raised to $26.3– $27.2 billion. ASP of a mobile handset with an in-built Qualcomm chipset during fiscal 2014 is projected at around $222 -$228.
Management anticipates growth in revenues and chipset sales in the forthcoming quarters mainly attributable to increased 3G/4G LTE deployment across emerging nations, higher proliferation of smartphones and tablets, increased replacement of devices, and launch of new handsets inclusive of LTE advanced smartphones.Furthermore, launch of the Qualcomm RF360 front-end solution, which supports all seven bands of frequencies in one device, will further enhance smartphone performances by improving radio frequency levels.
Qualcomm continues to remain optimistic on its QTL business prospects as itholdsover 240 3G CDMA licensees and 65 single mode OFCDMA licenses. Including Google, Inc.’s (GOOG) Nexus 7 design win, the company has more than 500 designs in its pipeline. The company is also exploring other avenues like automotive, security, healthcare, smart energy and the connected home segments for supplying its innovative chipsets. General Motors Company (GM),BMW and Audi have decided to install 4GLTE technology in most of its new range of cars, thereby bolstering the demand for LTE chipsets. Moreover, the world’s largest telecom operator China Mobile (CHA)has started deploying nearly TD-LTE 200,000 base stations and has already selected 30 ofQualcomm’s new designs for its TDLTE smartphones based on Snapdragon and Gobi processors. Successful launch of the TDLTE service in Chinashould create huge growth opportunity for Qualcomm in the upcoming quarters.
Qualcomm’s collaboration with Apple was extended after the latter decided to use Qualcomm’s DSP chip in iPhone 4S. Qualcomm delivers wireless connectivity technology to Apple. In return,Qualcommreceives royalty onsales of iPhones which are integrated with its DSP chips. This deal extension should further drive the company’s revenues in the upcoming quarters.
The company has implemented the QRD program for low-budget smartphones, mainly targeted toward the emerging nations.So, these analysts remain highly optimistic about the soaring demand for these chipsets as the program started gaining huge momentum in the emerging markets as more 2G handset developers are adopting the 3G handset platform.
The analystscontinue to remain bullish on QCOM primarily based on higher proliferation of smartphones/tablets, increased 3G/4G network deployments, huge LTE-based device pipeline mainly powered with the new Snapdragon S4 processor and improvement in the supply of 28 nanometer Snapdragon S4 processors, which are mainly used in smartphones and tablets. Moreover, the launch of BlackBerry’s Z10 smartphonesand Samsung’s Galaxy S4 based on QCOM’s chipset will further boost QCOM’s chipset business as the company is well placed in the 4GLTE-based smartphone business. Furthermore, other smartphone developers launching 4GLTE-based handsets on China Mobile’s TD-SCDMA network are now using QCOM’s processors, as it runs well on such home grown network, hence, creating huge opportunity for the company in the upcoming quarters.