Qualcomm outlook disappoints Wall St

Rethink
Qualcomm beat Wall Street estimates in its second fiscal quarter with $6.12 billion (€4.6 billion) in revenue, though the markets were not impressed. Shares in the mobile chip leader dropped slightly on disappointment over its earnings outlook.
 
The company reported earnings of $1.87 billion, or $1.06 per share ($1.17 in non-GAAP terms), on a 27% year-on-year jump in revenue. The latter figure was ahead of analyst forecasts while the EPS result was in line with expectations.
 
The results were driven by a 14% rise in shipments of its key product, the MSM mobile chipset range, which reached 173 million units – though this was down 5% on the December quarter.
 
CEO Paul Jacobs said in a statement: “We delivered another strong quarter as the worldwide adoption of smartphones continues. Looking forward, we are seeing strong traction with our new Qualcomm Snapdragon 600 and 800 processors, and we continue to expect healthy growth in 3G and 3G/4G multimode devices around the world. We are pleased to be raising our calendar 2013 3G/4G device shipment estimates and our revenue and earnings guidance for fiscal 2013.
 
For the fiscal third quarter, Qualcomm is promising a revenue range of $5.8 billion to $6.3 billion with non-GAAP earnings of 97 cents to $1.05 per share.”
 
However, the forecast for fiscal Q313 was at the low end of Wall Street hopes, and the weaker than expected outlook sparked fears that the company's costs are rising just as average selling prices are falling, with the shift of the smartphone market towards high volume, keenly priced models. This puts pressure on Qualcomm and its rivals to step up shipments of chips to premium devices such as tablets.
 
“One of the long term bear cases on the stock is chipset competition hitting pricing and margins,”
 Bernstein analyst Stacy Rasgon told CNet. Qualcomm's 17% margin for its semiconductor unit during the quarter was in line with expectations but far lower than the 26% figure seen in fiscal Q113.
 
Qualcomm reports ASP and shipments a quarter in arrears and said device ASP fell to a range of $214 to $220 in the December period, down from $224 to $230 per unit in the September quarter. The firm expects ASPs to rebound in the second half of this year with the shipment of high end products which include its chips, such as the US version of the Samsung Galaxy S4.
 
The price of devices not only squeezes the amount chip suppliers can charge for their silicon, but also affects the royalties Qualcomm can charge for its patents, a significant revenue stream which is under pressure from the falling prices of 3G products and the decline of CDMA.
 
CDMA-based technologies are the San Diego vendor's greatest IPR stronghold, though it has built up a considerable armory in newer platforms like LTE, and has signed deals, to include 4G, with most handset makers.
 
There are many strong indicators for Qualcomm watchers too. There are some early signs of slowing growth in smartphones, but the company has taken many steps to ensure it is not a victim of this trend. It works hard to get into important new areas ahead of rivals and recently these have included integrated chipsets combining processors and LTE modems, as well as the Windows Phone segment. However, the bet on a strong alliance with Microsoft is proving a slow burner, with Windows Phone handsets and Windows RT tablets both failing to catch fire yet, and LTE competition is intensifying.
 
To stay ahead of such threats, and to shore up its IPR business, Qualcomm invests heavily in R&D. In fiscal Q2, it spent $1.88 billion on R&D plus general expenses, up 21% year-on-year and 11% sequentially, a sign of how many new markets the company is chasing as it looks to move beyond smartphones, and push its Snapdragon platform into “post-PC” devices of all kinds. It also has programs to penetrate the internet of things space. It expects its R&D bill to rise by 2% to 4% sequentially in the current quarter.
 
“It's a bit of an investment period, but we're still producing growth during that investment period,” company president Steve Mollenkopf said on the earnings call.
 
The full year outlook offered by Qualcomm was positive, despite disappointment with the quarterly forecast. It now expects adjusted earnings of $4.40 to $4.55 a share, up from January's forecast of $4.25 to $4.45 a share, on revenue of $24 billion to $25 billion, up from its earlier guidance of $23.4 billion to $24.4 billion. For fiscal 2013, the company has increased its guidance on ASP, a key indicator. It thinks this will be in the range of $216 to $224 for 3G and 4G devices, having previously expected $214 to $226. The 2012 figure was $216 to $222. 

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