Thursday, January 30, 2014

Qualcomm 1Q14 Earnings: Great Results, Exiting Position

Qualcomm Inc. reported 1Q14 earnings on January 29 and held a corresponding conference call at 4:45 E.S.T.  Quarterly revenue came in at a record $6.6BB which is substantially lower than our estimate of $7.0BB and slightly lower than street estimates of $6.67BB, up 10.0% YoY.  Non-GAAP EPS was reported at $1.26, substantially lower than our estimate of $1.39 and higher than street estimates of $1.18, representing no growth YoY.  Qualcomm’s impressive EPS includes a $0.25 per share gain related to the sale of Omnitracs and a $0.20 per share impairment in other expenses related to assets in their QMT business.  During the fiscal quarter, Qualcomm returned approximately $1.6BB to stockholders, including $600M in dividends and $1.0BB in stock purchases.

Newly named CEO Steven Mollenkopf was welcomed in 2014 with strength in both emerging and developed regions with increased penetration of smartphones into lower tiers.  Global smartphone adoption continues to be the key driver of royalty revenue growth.  It is believed that emerging regions smartphone shipments are expected to grow at about 30% CAGR through 2017.  Snapdragon-based devices have been integrated into over 1,350 designs with 500 more in the pipeline.  Snapdragon processors have already showed strong volume growth in flagship tablets including the new LG G Pad, the Samsung Galaxy Note Pro, and the Samsung Galaxy Tab Pro.

As previously reported in the monthly report, Apple signed a deal with China Mobile for them to start offering the iPhone.  This big deal, along with the new 4G spectrums licenses that have been issued in China have been driving Qualcomm’s revenue.  Qualcomm also continues to invest heavily in their leading portfolio of patented technologies applicable to 3G and 4G devices.  To compliment this expansion into emerging markets, Qualcomm has taken actions to manage spending, resulting in better operating margins.  Non-GAAP R&D and SG&A were below guidance by 3%.

Looking forward towards fiscal 2014, Qualcomm’s next generation chipset are progressing well and should continue to support their track record of dominance in the industry.  The new Snapdragon processor is expected to ship in devices the first half of 2014 and will take advantage of Ultra HD.  Qualcomm also expects the rollout of their new 9x35 modem delivering their fourth generation of LTE.  Although the aforementioned catalysts imply growth, Qualcomm is conservative with their estimates, expecting Q2 revenue to be about $6.1-6.7BB and non-GAAP EPS approximately $1.15-1.25. 

While we are pleased with Qualcomm crushing the bottom line, we are displeased with the light guidance and the probe that China’s National Development and Reform Commission has launched.  It is believed that Qualcomm has violated an anti-trust law and as a result could face fines up to or exceeding $1BB.  In comparison to our above consensus estimates, light guidance and a potentially crippling fine leave us unconfident in multiple expansion and force us to exit our position.

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