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Will Lower Revenues Hurt QUALCOMM's (QCOM) Q1 Earnings?

Zacks Equity Research

QUALCOMM Incorporated QCOM is scheduled to report first-quarter fiscal 2019 financial results after the closing bell on Jan 30. In the last reported quarter, the company delivered a positive earnings surprise of 8.4%. Notably, Qualcomm surpassed the Zacks Consensus Estimate in each of the last four quarters, the average beat being 18.5%.

Headwinds related to Apple are likely to affect the chip maker’s revenues in the to-be-reported quarter. Revenues from Qualcomm CDMA Technologies (QCT), which accounts for the lion’s share of total revenues, and Qualcomm Technology Licensing (QTL) segments are estimated to decline year over year. Whether this will weigh on the quarterly earnings remains to be seen.

Factors at Play

During the fiscal first quarter, Qualcomm alongside Nokia achieved over-the-air (OTA) 5G NR data calls in the mmWave and sub-6 GHz spectrum bands. Notably, it was in compliance with the global 3GPP 5G NR Release 15 specification in Non-Standalone mode. The successful OTA testing marked an important step for the probable commercial deployment of 5G services in 2019.

In addition, Qualcomm unveiled its new processor — Snapdragon 855. This latest generation of mobile phone processor chips is expected to power 5G smartphones in the United States in 2019. The company expects the chip to appear in the first wave of 5G phones as this new platform supports “multi-gigabit” download speeds on 5G networks. The key feature of Snapdragon 855 chip is a modem for phones to connect to 5G wireless data networks with mobile data speeds of up to 50 or 100 times faster than current 4G networks. Being the largest supplier of mobile phone chips, Qualcomm maintains a distinctive position in the mobile space, particularly in the United States. This should help it achieve its target of introducing Snapdragon 855 in most major flagship smartphones in 2019.

During the quarter, a court in China ruled that Apple-manufactured iPhones have infringed on two patents of Qualcomm. The judge issued an embargo on sales of some iPhone models in China. The Fuzhou Intermediate People's Court in China held Apple guilty of twin patent infringement and ordered an immediate ban on sales of older iPhone models, from the 6S through the X in the country.

Furthermore, Apple was held guilty of patent infringement in a German court. The District Court of Munich ordered a permanent injunction to the sale of some iPhone models in the country as these were found to infringe upon Qualcomm’s intellectual property right for power savings in smartphones.

Top-Line Contraction

Qualcomm expects growth, both on volume and improving mix of devices from its China business in fiscal 2019, particularly in the second half. However, the company’s fiscal first-quarter results are likely to be affected as Apple asked its contract manufacturers to stop paying royalty payments and decided to use Qualcomm’s rival Intel’s modem for its latest device. Qualcomm is expected to have shipped 185 million MSM chipsets during the quarter.

Qualcomm believes that more than 50% of the expected fiscal 2019 headwind related to Apple will be reflected in its fiscal first-quarter results, while impacting its QCT business. As the year progresses, this will become less impactful to quarterly results. The Zacks Consensus Estimate for revenues from the QCT is currently pegged at $3,806 million. It reported $4,651 million in first-quarter fiscal 2018. The segment’s income before taxes is expected to decline to $534 million from $955 million reported a year ago.

Revenues from the QTL are expected to decline to $1,051 million from $1,299 million, primarily due to continuity of nonpayment of royalties by Apple and the other licensee. The impact of these nonpayment has largely eliminated the seasonal effects in QTL business. For fiscal first quarter, the company considers the change in its share in Apple from approximately 50% modem share in first-quarter fiscal 2018 to zero in the flagship launches in the to-be-reported quarter. The segment’s income before taxes is expected to decline to $582 million from $887 million.

Consequently, total revenues for the quarter are likely to fall to $4,885 million from $6,068 million reported in the year-earlier quarter. Adjusted earnings per share are pegged at $1.08. The company reported earnings of 98 cents a year ago.

What Our Model Says

Despite the impediments, our proven model shows that Qualcomm is likely to beat earnings this quarter as it possesses both the two key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is exactly the case here as you will see below:

Earnings ESP: Qualcomm’s Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is +1.33% as the former is pegged at $1.09 and the latter at $1.08. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

QUALCOMM Incorporated Price and EPS Surprise

QUALCOMM Incorporated Price and EPS Surprise | QUALCOMM Incorporated Quote

Zacks Rank: Qualcomm currently has a Zacks Rank #3. This increases the predictive power of ESP and makes us reasonably confident of an earnings beat.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Sprint Corporation S has an Earnings ESP of +13.33% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Columbus McKinnon Corporation CMCO has an Earnings ESP of +6.90% and a Zacks Rank #2.  

ABIOMED, Inc. ABMD has an Earnings ESP of +2.60% and a Zacks Rank #2.

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