Qualcomm (NASDAQ:QCOM) announced an yet another solid quarter yesterday but shares fell as supply issues forced Qualcomm to reduce its forecast for the June quarter. In its Q2 FY2012 earnings call, Qualcomm said that the revenues for the quarter increased to $4.94 billion, which was at the upper end of its guidance and 28% over the same period last year. Net income also registered an uptick of 21% year over year, bolstered by the sale of 700 MHz of its MediaFLO spectrum to AT&T (NYSE:T).
While Q2 results were solid, the company issued caution that constraints on its 28nm chip supply could limit ‘potential revenue upside this fiscal year’. Further, it guided for an EPS of $0.83-$0.89 for the third quarter, below consensus estimates of $0.90. Consequently, Qualcomm’s shares, which had risen up by almost 25% this year before the earnings call, sank more than 3% in after-hours trading yesterday. However, we maintain our $68.37 price estimate for Qualcomm, about 7% ahead of market price since we see this as only a near-term concern. Let’s look at our reasons why.
1. High demand: The concerns are not the result of weak demand but merely related to supply-chain issues which Qualcomm hopes to overcome by the end of the September quarter. Since the 28nm chipsets enable better processing speeds, conserve space and are more power-efficient, the demand for such chipsets, especially for LTE capabile smartphones, will continue to remain high. (see Qualcomm Leads the LTE Charge In 2012) The emerging markets are seeing increasing demand for 3G-capable smartphones as carriers there try to transition their huge 2G base to 3G. This not only means higher chipset revenues for Qualcomm but also higher royalty revenues from the sale of handsets that support its 3G technology.
2. Near-term hiccup: Qualcomm has lowered guidance only for the June quarter but reaffirmed its full fiscal year guidance. This probably means that while there may be a near-term shortage of 28nm chipsets in the June quarter, the company hopes its initiatives to increase supply to start to show results in the September quarter and help significantly improve supply in the December quarter and beyond. It expects its operating expenses to increase as it tries to facilitate the production of additional 28nm chipsets at fabs not run by TSMC, its current manufacturing partner, to augment supply.
3. High cash balance: Qualcomm’s cash balance increased by more than $3.5 billion this quarter as the sale of its 700MHz MediaFLO spectrum to AT&T fetched it a premium of more than 150% over fair value. The spectrum was listed under ‘assets for sale’ at a value of $746 million last quarter, which was sold for $1.9 billion during the quarter.
All in all, Q2 was a solid quarter with strong revenue growth as well as earnings. While Q3 revenue guidance may have disappointed a few, it is still a growth of 28% over the same period last year, the same as this quarter’s revenue growth. The supply shock is, in all likelihood, a temporary one. With demand being high, once the supply issues are overcome, Qualcomm should be ready to ride the mobile revolution once again.
We are making small adjustments to our model, but these will not impact our price estimate meaningfully.