Qualcomm Reports A Strong Q1’15 But Lowers Guidance For Fiscal 2015

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Leading mobile chipmaker Qualcomm (NASDAQ:QCOM) reported a strong Q1 2015, achieving record revenues and non-GAAP operating income in the quarter. At $7.1 billion and $1.34, revenue and non-GAAP earnings per share for the quarter were up 7% and 6% year on year, respectively. QCT (Qualcomm CDMA Technologies) accounted for approximately half of the upside on account of strong MSM demand and lower operating expenses, with the balance coming from improved total reported device sales, lower operating expenses in QTL (Qualcomm Technology Licensing), and other businesses, as well as the restatement of the R&D tax credit.

Qualcomm’s QCT segment shipped a record number of its MSM (Mobile Satellite Modem)  chipsets and delivered its highest ever revenue and earnings before tax. The QTL business, which is facing challenges in China, came in ahead of expectations and the company resolved a previously disclosed dispute with a large Chinese licensee. The company is facing a governmental (NRDC) investigation for alleged monopolistic practices in China, in addition to ongoing regulatory investigations in the U.S. and Europe. It believes that the NDRC investigation is progressing towards a resolution, and remains focused on resolving the remaining challenges in China, though the timing of any agreement is uncertain.

Despite the strong performance in Q1 2015, Qualcomm’s stock price declined by approximately 10% yesterday as the company announced that its Snapdragon 810 processor was dropped from the upcoming design cycle of a large customer’s flagship device (widely thought to be Samsung’s S phone upgrade). Qualcomm has consequently lowered its fiscal 2015 revenue target (mentioned below).

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Nevertheless, Qualcomm is confident that its long term outlook remains strong, both in smartphones and adjacent areas where its mobile technologies and capabilities can bring next generation solutions, areas such as automotive communications, the Internet of Things, mobile computing, networking, small cells and datacenter solutions.

Our price estimate of $72 for Qualcomm is in line with the current market price. We are in the process of updating our model for the Q1 2015 earnings release.

See our complete analysis for Qualcomm stock here

Reduced Outlook For The QCT Business In The Second Half Of Fiscal 2015

Qualcomm’s QCT business achieved a number of records in Q1 2015, including shipments of 270 million MSM chipsets, revenues of $5.2 billion and earnings before tax of $1.1 billion. Revenue in MSM chip shipments were up 14% year on year as Qualcomm saw broad strength across multiple OEMs, driven by demand in emerging regions and strong device replacement in the U.S.

Though Qualcomm’s outlook for the first half of fiscal 2015 is ahead of its initial expectation, the company has reduced its forecast for the second half of the year due to the following factors:

1. Due to technical issues, Qualcomm’s Snapdragon 810 processor will not be in the upcoming design cycle of a large customer’s flagship device (as we noted above, Samsung’s pending upgrade), impacting the company’s outlook for both volume and content in that device.

2. The company claims to be seeing a shift in share among OEMs at the premium tier, which has lowered the near term addressable opportunity for Qualcomm’s Snapdragon processors and has skewed the product mix towards more modem chipsets in this tier.

3. Although Qualcomm had a very strong competitive position exiting fiscal 2014, it has admitted to seeing heightened competition in China at the mid and high tiers. The company continues to gain share with OEMs based in China, but not at the pace previously expected. This is in part due to some product challenges with one of its chips in meeting some of the more demanding design points of mid and high tier segment. This has provided an opening to competitors who are being very aggressive in order to establish a position in the marketplace, resulting in more pricing pressure than previously expected.

Qualcomm claims to have already addressed many of the initial product challenges in order to support early customer device launches in these tiers and continues to further enhance the performance of this chip. It expects to see a broad range of devices successfully launch and drive volume with this chip in the future.

Though the company expects the above factors to impact its QCT revenue growth and operating margins in the near-term product cycle, its view of the long-term strategic environment and QCT’s leadership position remains strong. The design momentum for the Snapdragon 810 processor remains robust, with more than 60 products in the pipeline, including the recently announced LG G Flex2 and the Xiaomi Mi Pro Note.

The Licensing Business Benefited From The Resolution Of Dispute With A Major OEM; Though There Are Still Are Some Licensees Under-Reporting Sales

Qualcomm’s licensing business in China has been suffering since the last few quarters because of a dispute with Qualcomm licensees, under reporting by certain licensees, and sales of certain unlicensed devices in the region. However, the QTL business delivered a strong Q1 2015, with revenue and earnings ahead of expectations. Total reported device sales of $56.4 billion was slightly above the midpoint of the company’s prior guidance, with average selling price of $197 and reported shipments of 286 million 3G/4G based devices at the mid-point.

In addition to a major Chinese licensee agreeing to report and pay royalties on past unreported sales, the resolution includes an expansion of the existing license agreement to include royalty bearing licenses for 4G only products, including 3-mode LTE smartphones sold for use in China. Qualcomm still believes that some other Chinese licensees are not reporting all of their sales of licensed products. The company has increased the number of audits that it is conducting of these licensees and is attempting to resolve the instances of under reporting.

Qualcomm now has greater confidence that it will be able to collect royalties over time on substantially all LTE device shipments, including 3-mode devices in China and other currently unlicensed products. OEMs supplying a meaningful portion of 3-mode devices and lower Tier 3G connected tablets remained unlicensed. The company is undergoing discussions with many of these OEMs and claims to be making positive progress, though it will take some time to conclude all of the negotiations.

Fiscal 2015 Outlook

– Revenue in the range of $26 billion to $28 billion, up approximately 2% year-over-year at the midpoint. The revised guidance in lower than Qualcomm’s previous guidance midpoint by $800 million.

– Non-GAAP earnings per share to be in the range of $4.75 to $5.05, down approximately 7% year-over-year at the midpoint and down 6% from Qualcomm’s previous full year guidance midpoint.

– QCT operating margin in the range of 16% to 18%.

– QTL operating margins of 85% to 86%.

– Combined non-GAAP, R&D and SG&A expenses to grow approximately 3% to 5% year over year.

Q2 2015 Guidance

– Revenue in the range of $6.5 billion to $7.1 billion, up approximately 7% year over year at the midpoint.

– Non-GAAP earnings per share between $1.28 to $1.40 per share, up approximately 2% year over year at the midpoint.

– Non-GAAP combined R&D and SG&A expenses to be up 6% to 8% sequentially.

– QTL: total reported device sales of $69.5 billion to $75.5 billion, up approximately 9% year over year at the midpoint.

– OCT: total MSM shipments of approximately 220 million to 240 million units, down approximately 15% at the midpoint sequentially and up approximately 22% year over year at the midpoint.

– Revenue per MSM to be relatively flat sequentially.

– QCT operating margin of 16% to 17%.

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