Why Is Qualcomm (QCOM) Down 0.7% Since Last Earnings Report?

A month has gone by since the last earnings report for Qualcomm (QCOM). Shares have lost about 0.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Qualcomm due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Qualcomm Q2 Earnings Beat Estimates on 5G Strength

Despite a challenging macroeconomic environment triggered by the coronavirus pandemic, Qualcomm reported solid second-quarter fiscal 2020 results, with healthy year-over-year top-line growth, primarily driven by the ramp-up in 5G-enabled chips. In addition, both top and bottom-line figures beat the Zacks Consensus Estimate, backed by the strength of the business model and the ability to respond pro-actively to the evolving market scenario.

Net Income

On a GAAP basis, net income for the March quarter was $468 million or 41 cents per share compared with $663 million or 55 cents in the prior-year quarter. The decline in GAAP earnings was primarily attributable to costs related to the virus outbreak.

Quarterly non-GAAP net income came in at $1,015 million or 88 cents per share compared with $932 million or 77 cents in the year-ago quarter. The significant improvement in non-GAAP earnings was primarily attributable to the diligent execution of operational plans and resilient business culture. The bottom line was at the midpoint of management's guidance and beat the Zacks Consensus Estimate by 9 cents.

Revenues

On a GAAP basis, total revenues in the fiscal second quarter were $5,216 million compared with $4,982 million in the prior-year quarter. The figure surpassed the consensus mark of $5,094 million and was near the midpoint of the company-guided range, driven by 5G strength, high-performing core chipsets and new RF front-end content.

Segment Results

Quarterly GAAP revenues from Qualcomm CDMA Technologies (QCT) improved 10% year over year to $4,100 million on strength across 5G, RF front-end and adjacent platforms, partially offset by lower Mobile Station Modem (MSM) chip shipments due to adverse coronavirus impacts. MSM shipments in the quarter were 129 million, down from 155 million a year ago due to reduced demand for 3G/4G/5G handsets owing to lower orders from China and other global markets. EBT margin increased to 16% from 15% in the year-ago quarter.

Qualcomm Technology Licensing (QTL) revenues were $1,072 million, which declined 4% year over year and was at the midpoint of management's guided range, driven by lower royalty revenues from Huawei due to the expiration of the interim agreement and transition to new 5G multimode licensing agreement. EBT margin was 63% compared with 60% in the year-ago quarter on lower operating expenses and was at the midpoint of the company's guidance. Despite the adversities, Qualcomm signed two new global patent licensing agreements with China-based smartphone manufacturers — OPPO and Vivo — to cover 5G multi-mode mobile devices. The company signed more than 85 5G license agreements, up from 80 license agreements in the previous quarter.

Cash Flow & Liquidity

Qualcomm generated $1,083 million of net cash from operating activities during the quarter compared with $794 million in the year-ago quarter. At quarter-end, the company had $8,403 million in cash and equivalents and $13,449 million of long-term debt.

During the reported quarter, Qualcomm paid out cash dividends totaling $705 million or 62 cents per share and repurchased 20 million shares for $1.6 billion. At quarter-end, the company had $4.7 billion available for repurchase under its $30-billion stock buyback program, although it suspended the program for the near term in order to maintain financial liquidity position and flexibility amid the pandemic.

Guidance

For the third quarter of fiscal 2020, Qualcomm expects revenues of $4.4-$5.2 billion as the adverse impact from the virus outbreak is likely to result in a 30% reduction in handset shipments compared to prior expectations. Non-GAAP earnings are projected to be 60-80 cents per share, while GAAP earnings are likely to be 29-49 cents. The quarterly earnings are likely to take a hit to the tune of 30 cents per share from the coronavirus. Revenues at QTL are expected between $750 million and $950 million. For QCT, the company anticipates revenues between $3.6 billion and $4.2 billion on MSM shipments of 125-145 million units.

For calendar 2020, Qualcomm continues to expect 175-225 million 5G handset unit shipments.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month. The consensus estimate has shifted 10.78% due to these changes.

VGM Scores

Currently, Qualcomm has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Qualcomm has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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