Qualcomm’s Stock Price Surges After A Strong Performance In Q3

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Leading wireless chipset maker  Qualcomm  (NYSE:QCOM) posted strong Q3 2016 results that surpassed consensus estimates and were mostly at the higher end of its guidance range. The stock price has surged by as much as 7% in the after hours. We can attribute Qualcomm’s strong growth to the following reasons:

1) A strong demand for newer chipsets: Unlike Snapdragon 810, which had overheating issues and didn’t go well for Qualcomm, its Snapdragon 820 is seeing strong adoption in the premium smartphone segment. Also, the company is seeing strong demand for its chipsets in the low and mid-tier smartphone segments, which remained above its prior expectation. Furthermore, with the recently announced Snapdragon 821 chipset, Qualcomm is targeting newer markets such as virtual reality headsets, apart from the flagship smartphones.

2) Increased compliance in China: In the past, Qualcomm’s stock has remained under pressure as its licensing revenues got affected by the under-reporting of sales in China. However, the company is quickly closing in on the deals with Chinese OEMs. This was reflected in the data reported by Qualcomm, which showed an increase in the number 0f licensees.

Licensees figure

Source: Qualcomm Executive Presentation

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Further, in an effort to decrease the under-reporting of sales in China, Qualcomm filed a lawsuit against Chinese OEM – Meizeu Technology. Going ahead, this should further increase compliance in the region.

3) Catch-up payments from LG and other companies: As a result of the resolution of a dispute with LG in April, Qualcomm recognized around $200 million of catch-up payments for the prior two quarters in Q3. Furthermore, the company said that it was in constant negotiation with Chinese OEMs to sign licensing deals, and that some of the OEMs had agreed to pay a portion of the licensing fees retroactively. This resulted in additional $200 million in revenues in Q3.

4) Right sizing the cost structure- Qualcomm has been successful in right sizing its cost structure, which was a part of its strategic realignment plan. The company’s R&D and SG&A expense declined by around 2% in Q3 and is expected to further decline by a similar percentage in Q4. Qualcomm assured that it was on track to reduce its expenses by around $1.1 billion, going forward.

In the table below we analyse the key metrics as reported by Qualcomm in Q3:

Q3'16_Earnings

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Qualcomm.