Tuesday, November 12, 2013

Qualcomm 4Q13 Earnings: Light Guidance, Looking for Exit Point

Qualcomm Inc. reported 4Q13 and yearly earnings on November 6 and held a corresponding conference call at 4:30 E.S.T.  Yearly revenue came in at $24.87BB which is slightly above our estimate of $24.6BB and street consensus of $24.7BB up 30% versus last year.  Quarterly revenue came in at $6.48BB verse our expectation of $6.21BB and street consensus of $6.34BB up 33% yoy while Non-GAAP EPS was reported at $1.05 up 18% yoy, slightly lower than our $1.08 estimate and street consensus of $1.08 as well.  If not for legal charges stemming from the patent case with Parkervision, Non-GAAP EPS would have been $1.15 up 29% yoy.  Revenue was driven by strength in Qualcomm’s licensing and semiconductor business as well as strong 3G/4G device growth.  Dividends were increased for the 11th consecutive year and approximately $3.9B was returned to stockholders between buybacks and cash dividends during the fourth fiscal quarter. 

Not only did Qualcomm deliver its industry leading third generation 3G/LTE multi-mode modem, but they were successful in growing their share of semiconductor content in multiple devices and expanding their licensing program.  Numerous products based on Qualcomm products were also launched taking advantage of new capabilities including HD video and LTE carrier aggregation.  The growth of tablets has also contributed to Qualcomm’s success.  Popular devices including the Google Nexus 7, Kindle HDX, LG G Pad, and the Sony Xperia Z all contain Qualcomm processors.  In addition to these new devices, new plans forcing people to upgrade to 4G LTE have sparked growth in Qualcomm.  With a monopoly in processors across the largest manufacturers in the phone and tablet market, Qualcomm is poised to continue with great success.

Looking ahead a plethora of new innovations combined with an emerging smartphone/tablet market and focus on cost cutting poise Qualcomm for another successful year.  Qualcomm expects solid growth but at a lower rate based on the exceptionally strong numbers in 2013.  Approximated 225M smartphones were shipped in Q2 of 2013 representing a 47% yoy increase.  It is expected that 1.8B smartphones will be shipped in 2017, representing a substantial growth in the smartphone market.  Another catalyst is the expansion of LTE.  Approximately 100M new LTE connections are expected by the end of calendar year 2013.  Expansion of LTE into China is a huge opportunity that Qualcomm plans to take advantage of in 2014.  Qualcomm anticipates strong growth in low and mid-tiers driven by the launch of LTE in China.  Growth is seen in China across all smartphone tiers, leading to Qualcomm’s Emerging Accounts to exceed $1B in revenue in 2013.  To complement the expansion into flagship smartphones and tablets, Qualcomm is slowing the growth rate of their spending.  They have projects underway to improve product costs within QCT including driving supply-chain efficiencies and designing cost optimized solutions.

While we applaud a solid FY13 and quarter end excluding the Parkervision patent case we are displeased with the light guidance provided juxtaposed against a slight decrease in average selling prices.  Historically the stock has sold at a 5 year average of 24.9x ttm earnings.  Currently the stock is valued 13.3x our FY14 EPS of $5.18 well ahead street consensus at $4.93.  While we remain constructive on the name we are looking for an exit point upon the sale of the North and Latin American operations of Omnitracs scheduled to close in 1Q14.

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