Qualcomm Reports a Strong Q2’15 Marked By A Record Performance in QTL
Leading mobile chipmaker Qualcomm (NASDAQ:QCOM) reported a strong Q2 2015, driven by record performance in its QTL (Qualcomm Technology Licensing) business as the global adoption of the company’s broad set of technologies drove an all-time high 3G/4G device shipments by its licensees. Total reported device sales for Qualcomm’s licensees were a record $75.8 billion, up 14% year over year. In the QCT (Qualcomm CDMA Technologies) segment, MSM shipments stood at 233 million, in-line with company expectation. Total revenue and non-GAAP earnings per share for Q2 2015 came in at $6.9 billion and $1.40, up 8% and 7% on an annual basis. During the quarter, Qualcomm also announced a $15 billion stock buyback authorization and a 14% increase in the dividend payout for this quarter.
Qualcomm is confident that its long-term outlook remains robust and the smartphone opportunity remains a strong positive for the company, as it continues to forecast a healthy global demand in the near-term and over the next several years. Qualcomm also continues to gain traction in adjacent areas, such as, automotive, mobile computing, IoT (Internet of Things), and networking, where its mobile technologies and capabilities can deliver next generation solutions.
Qualcomm was facing a governmental (NRDC) investigation for alleged monopolistic practices in China, which has been concluded and the company expects that its licensing business is now better positioned to participate in China’s broad adoption of 3G/4G technology. The impact of the resolution and the recent agreement with a large licensee in China are starting to positively impact the QTL business.
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Our price estimate of $72 for Qualcomm is at a slight premium (~5%) to the current market price. We are in the process of updating our model for the Q2 2015 earnings release.
See our complete analysis for Qualcomm stock here
The Licensing Business Drives Strong Growth For Qualcomm
Qualcomm’s QTL performance was ahead of expectations, with revenues, earnings before tax, and total reported device sales all setting new records, driven by strong 3G, 4G device shipments, improved compliance in China and a catch-up amount for prior period sales from the licensee with which the company recently resolved its dispute.
Following Qualcomm’s announcement of its resolution with China’s National Development and Reform Commission (NDRC), the company has met with a large number of licensees both in and outside of China to discuss the revised terms, implementing a rectification plan that modifies certain of company’s business practices with respect to the licensing of its 3G and 4G essential Chinese patterns for branded devices sold for use in China. The rate at which licensees are accepting the new terms and signing new license agreements has been accelerating throughout the process. Qualcomm now has 125 licensees in total (including 3-mode devices), with more than 85 in China, including Huawei and ZTE.
Qualcomm saw strength in both developed and emerging regions during 2014 and finished the year with favorable replacement rate trends in developed regions, as well as LTE volume strength, particularly in China. QTL is making good progress on its efforts in China, while experiencing strength in underlying demand where the company continues to see strong global 3G, 4G device sales and stronger global ASP trends.
Reduced Outlook For The QCT Business In The Second Half Of Fiscal 2015
Qualcomm’s QCT business achieved results in-line with expectations in Q2 2015, including shipments of 233 million MSM chipsets, revenues of $4.4 billion and earnings before tax of $1.1 billion. Implied revenue per MSM was approximately $196, down slightly quarter-over-quarter, reflecting a lower mix of premium tier shipments than previously expected.
Though Qualcomm’s performance for the first half of fiscal 2015 came in ahead of its initial expectation, the company has reduced its forecast for the second half of the year due to the following factors:
1. Qualcomm’s Snapdragon 810 processor will not be in the upcoming design cycle of Samsung’s flagship device Galaxy S6, 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 its Snapdragon 810 processor. It expects to see a broad range of devices successfully launch and drive volume with this chip in the future. In the premium tier, the company is very pleased with the design traction on the Snapdragon 810 with over 60 designs having won the key premium design slots.
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.
Fiscal 2015 Outlook
– Revenue in the range of $25 billion to $27 billion, down approximately 2% year-over-year at the midpoint.
– Non-GAAP earnings per share to be in the range of $4.60 to $5., down approximately 9% year-over-year at the midpoint.
– QCT operating margin in the range of 14% to 17%.
– QTL operating margins of 85% to 86%.
– Combined non-GAAP, R&D and SG&A expenses to grow approximately 1% to 3% year over year.
Q2 2015 Guidance
– Revenue in the range of $5.4 billion to $6.2 billion, up approximately 15% year over year and 16% sequentially at the midpoint.
– Non-GAAP earnings per share between $0.85 to $1 per share, down approximately 36% 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 $61 billion to $67 billion, up approximately 10% year over year at the midpoint.
– QCT: total MSM shipments of approximately 210 million to 230 million units, down approximately 6% sequentially and approximately 22% year over year at the midpoint.
– Revenue per MSM to be down 8% to 9% sequentially.
– QCT operating margin of 7% to 10%.
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