Will Top-Line Woes Hurt Qualcomm's (QCOM) Earnings in Q3?
Qualcomm Incorporated QCOM is scheduled to report third-quarter fiscal 2018 results after the closing bell on Jul 25. While revenues from Qualcomm CDMA Technologies (“QCT”), which account for the lion’s share of total revenues, is likely to improve year over year, Qualcomm Technology Licensing (“QTL”) segment is anticipated to generate lower revenues in the quarter.
Whether this will weigh on the quarterly results remains to be seen.
Revenue Headwinds
The company expects seasonality and soft industry conditions to affect its fiscal third-quarter results due to near-term inventory build in the handset market and ongoing impact of non-paying licensees. Qualcomm expects lower QTL margin sequentially due to higher litigation expenses. Moreover, QTL revenues are likely to be affected by softer sell through due to lower demand in China. Qualcomm expects QTL revenues to be approximately $950 million at midpoint, down from $1,172 million recorded in the year-earlier quarter while the Zacks Consensus Estimate is pegged at $955 million.
Margin for QCT is anticipated to be lower on a sequential basis due to seasonally weaker product mix. However, revenues are likely to improve on higher anticipated MSM (mobile station modem) shipments of approximately 185 million to 205 million units on increased demand in China. Qualcomm expects QCT revenues in excess of $4,100 million in the quarter at the midpoint, up from $4,052 million recorded in the year-ago quarter, while the Zacks Consensus Estimate is pegged at $4,123 million.
During the quarter, Qualcomm introduced industry’s first 5G NR (New Radio) solution for small cells and remote radio head deployments. The 5G NR solution is highly flexible and is designed to enable original equipment manufacturers to reuse both software and hardware designs across sub-6 GHz and millimeter wave products. This will enable operators to easily switch between low and high frequency spectrum bands. The solution is built on FSM100xx platform, which has a software-defined modem, enabling operators to upgrade it with 5G evolution. Also, the solution will work equally well both outdoors and indoors. This is of significance because the 5G signal on mmWave spectrum is known to have difficulty penetrating buildings. Such innovative and state-of-the-art products are likely to drive higher QCT revenues in the quarter.
Despite this tailwind, softness in global 3G/4G device shipments, particularly in China, has added to the woes. Moreover, Qualcomm has been facing challenges from low-cost chip manufacturers like MediaTek and Rockchip as well as handset manufacturers’ SoC (System on Chip) projects such as Exynos by Samsung. The company is also facing severe competitive threat from Intel, which has been redesigning its chipsets for the mobile computing market. Although the global smartphone market is expected to maintain its momentum in the next four to five years, major part of this growth is likely to come from the low-cost emerging markets, which may exert pressure on Qualcomm’s overall margins.
All these factors are likely to exert pressure on its top-line growth. Qualcomm expects revenues for the fiscal third quarter in the range of $4.8-$5.6 billion. The Zacks Consensus Estimate for revenues is currently pegged at $5,200 million compared with $5,371 million recorded in the year-ago period.
Earnings Whispers
Our proven model does not conclusively show that Qualcomm is likely to beat earnings this quarter as it does not possess the 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 not the case here as you will see below:
Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -1.24% as the former is pegged at 70 cents and the latter at 71 cents. 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. While this increases the predictive power of ESP, we need to have a positive ESP to make 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.
Stocks to Consider
Here are some 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:
AT&T Inc. T is slated to release quarterly numbers on Jul 24. It has an Earnings ESP of +1.09% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Windstream Holdings, Inc. WIN, with an Earnings ESP of +12.15% and a Zacks Rank #3, is slated to report results on Aug 9.
Cisco Systems, Inc. CSCO has an Earnings ESP of +0.85% and a Zacks Rank #3. The company is likely to release earnings on Aug 15.
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