Based on significant surge in demand for the high-end 3G smartphones and tablets, Qualcomm Inc. (QCOM) reported solid financial results for the second quarter of fiscal 2012, easily beating the Zacks Consensus Estimates. However, management provided a soft outlook for the rest of fiscal 2012 primarily due to manufacturing shortage of its key 28 nanometer chipset. The chipset is inbuilt in MSM 8960 Snapdragon processor, which is widely used in several high-end smartphones. As a result, in the after market trade on NASDAQ, stock price of Qualcomm was down $2.19 (3.28%) to $64.79.
Revenue
Quarterly total revenue of $4,943 million was up 27.7% year over year, surpassing the Zacks Consensus Estimate of $4,859 million. Segment wise, Qualcomm CDMA Technologies businesses accounted for $3,059 million of revenue in the second quarter, up 56% over the prior-year quarter. Quarterly EBT margin was 20%. Qualcomm Technology Licensing generated $1,723 million, down 1% year over year. Quarterly EBT margin was 89%. Qualcomm Wireless & Internet segment generated $159 million, up 1% year over year. This division incurred $10 million of operating losses in the previous quarter.
EPS
On a GAAP basis, quarterly net income from continuing operation was $1,438 million or 84 cents per share compared with a net income of $1,264 million or 75 cents per share in the year-ago quarter. However, the second quarter of fiscal 2012 adjusted (excluding special items) EPS came in at 90 cents, easily outpacing the Zacks Consensus Estimate of 86 cents.
Chipset Statistics
During the second quarter of fiscal 2012, Qualcomm shipped approximately 152 million CDMA-based MSM chipsets, up 29% year over year. This figure was also better than the company’s guidance of a mid-point of 150 million. Average selling price of mobile handset with an in-build Qualcomm chipset during this quarter was around $211 -$217.
Operating Metrics
Quarterly operating income was $1,514 million compared with an operating income of $1,430 million in the year-ago quarter. Gross margin was 63.9% compared with 72.6% in the year-ago quarter. Quarterly operating margin was 30.6% compared with 37% in the prior-year quarter. In the reported quarter, the company returned $366 million (21.5 cents per share) to its shareholders in the form of cash dividend.
Cash Flow
During the second quarter of fiscal 2012, Qualcomm generated $1,888 million of cash from operations compared with $1,768 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditures) during the reported quarter was $1,612 million compared with $1,689 million in the year-ago quarter.
Liquidity
At the end of the first half of fiscal 2012, the company had $26,568 million of cash & marketable securities and $1,039 million of outstanding debt on its balance sheet compared with $20,913 million of cash & marketable securities and $994 million of outstanding debt at the end of fiscal 2011.
Third Quarter of Fiscal 2012 Financial Guidance
The third-quarter revenue will be within the range of $4.45 billion - $4.85 billion. Its mid-point of $4.65 billion failed to meet the current Zacks Consensus Estimate of $4.813 billion. Non-GAAP EPS (including share-based compensation expenses) will be within the range of 71 cents - 77 cents. Its mid-point of 74 cents is significantly below the current Zacks Consensus Estimate of 83 cents. Qualcomm is expected to ship 144 million – 152 million MSM chipsets during the third quarter of fiscal 2012.
Full Fiscal 2012 Financial Guidance
Fiscal 2012 revenue will be within the range of $18.7 billion - $19.7 billion. Non-GAAP EPS (including share-based compensation expenses) will be within the range of $3.15 - $3.30. ASP of mobile handset with an in-build Qualcomm chipset during fiscal 2012 will be around $207 -$217.
Recommendation
We believe the supply shortages of Qualcomm’s 28 nanometer technology chipset is a temporary phenomenon as management already stated that this problem will be resolved during the first quarter of fiscal 2013. On the other hand, Qualcomm remains confident that it willbe able to retainits current pace of revenue and earnings growth for at least next five years.
There are primarily three reasons for this positive outlook: (1) gradual introduction of 4G LTE enabled mobile handsets in the developed markets of the U.S., Japan, and South Korea (2) massive growth of 3G smartphones in the emerging markets, particularly in China, where the company has strong foothold (3) Qualcomm’s growing association with Apple Inc. (AAPL) for its iPhones and iPADs and the upcoming Windows 8 based-PC operating systems from Microsoft Corp. (MSFT).
We therefore, reaffirm our long-term Outperform recommendation on Qualcomm. Currently, it holds a short-term Zacks #2 Rank (Buy) on the stock.
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