Qualcomm Earnings Preview: What We’re Watching Wednesday
Qualcomm (NASDAQ:QCOM) is expected to announce its fiscal year Q4 earnings on November 2nd. In the last quarter earnings call, the company had revised its revenue outlook higher for 2011 due to healthy smartphone demand and revenue gains from the Atheros acquisition. However, according to a recent report released by IDC, the overall mobile phone market recorded its second-lowest growth rate in the last two years as smartphone sales softened in key developed markets. [1] Also, declining smartphone prices and increasing competition from Nvidia (NASDAQ:NVDA), Broadcom (NASDAQ:BRCM), Marvell (NASDAQ:MRVL), Infineon (now acquired by Intel (NASDAQ:INTC)) and Texas Instruments (NYSE:TXN) could have a negative impact on the royalty revenues for Qualcomm.
Our $59 price estimate for Qualcomm stock is about 15% above market price.
See our complete analysis for Qualcomm stock here
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Low Smartphone demand in Q3 may impact Qualcomm
Smartphone sales in Q3 have been less than spectacular, especially in the United States and Western Europe, as customers delayed their smartphone purchases either due to the ongoing economic turmoil or in anticipation of fourth quarter or late third quarter product releases. Many waited for products such as Apple’s (NASDAQ:AAPL) iPhone 4S, which was announced after the quarter closed, or Research in Motion’s (NASDAQ:RIMM) BlackBerry 7 phone series, which were released in the final weeks of the quarter.
Over the past several quarters, Qualcomm has benefited from its relationship with Apple, supplying chips for the popular iPhone device. Even the iPhone 4S, which has been selling like hotcakes since its launch, sports a wireless chipset that is supplied by Qualcomm.
The BlackBerry 7 phones were delayed since RIM decided to switch their chipset to the new Qualcomm Snapdragon processor. Although it is good news for Qualcomm that its products are being widely used, the delayed launch means that chipset sales might have been low in the last quarter, affecting its market share.
Gross margin and royalty revenue decline to continue
In one of our earlier articles, we had talked about the emergence of the next big trend of cheap smartphones flooding the market as companies try to increase market share by enticing low and medium-end consumers. We have already seen that happening with low priced Android handsets hitting the market and Apple dropping the prices of the earlier iPhone offerings as it comes out with newer versions. So while smartphone sales may increase, average selling prices of these phones will see a decline impacting Qualcomm’s royalty revenues from smartphone sales.
Also, increasing competition from Qualcomm’s competitors will lower gross margins, a trend we have been observing in the last few quarters. Nvidia has been snapping at Qualcomm’s heels with the Icera acquisition and the launch of the Tegra 2 processor last quarter, which has already gained traction with several mobile devices manufacturers like Motorola Mobility (NYSE:MMI), Acer, LG and Samsung adopting it.
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Notes:- Worldwide Mobile Phone Market Experiences Slower Growth as Smartphone Purchases Soften in the Third Quarter, IDC Press release, October 27th, 2011 [↩]