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Why Is Qualcomm (QCOM) Down 23.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Qualcomm (QCOM). Shares have lost about 23.6% 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 the most recent earnings report in order to get a better handle on the important drivers.

Qualcomm Q2 Earnings Beat Estimates, Revenues Down

Qualcomm reported solid second-quarter fiscal 2019 results with the top and bottom line beating the respective Zacks Consensus Estimate. The chip maker’s financial performance was driven by strength in both the operating segments owing to strong product leadership and operating expense management.

Net Income

On a GAAP basis, net income for the fiscal second quarter was $663 million or 55 cents per share compared with $330 million or 22 cents per share in the prior-year quarter. The more than two-fold improvement in earnings, despite lower revenues, was primarily due to lower operating expenses.

Quarterly non-GAAP net income came in at $932 million or 77 cents per share compared with $1,154 million or 78 cents per share in the year-ago quarter. Non-GAAP earnings per share for the reported quarter exceeded the guidance of the company and comfortably beat the Zacks Consensus Estimate by 6 cents.

Revenues

Fiscal second-quarter GAAP revenues were $4,982 million (in line with the company’s guidance) compared with $5,220 million in the prior-year quarter. The fall was due to lower equipment and services, and licensing revenues.

Quarterly non-GAAP revenues came in at $4,884 million compared with $5,190 million in the year-ago quarter, surpassing the consensus estimate of $4,805 million.

Notably, Qualcomm’s GAAP and non-GAAP results for the reported quarter were adversely impacted by the erstwhile legal dispute with Apple Inc. and the latter’s contract manufacturers that are Qualcomm’s licensees. However, the former allies turned antagonists decided to call a truce on Apr 16, 2019, with Apple paying an undisclosed amount to Qualcomm. The agreement also includes a six-year license agreement effective Apr 1, 2019 along with a two-year extension option and a multi-year chipset supply agreement. Apple is expected to license the chips directly from Qualcomm instead of relying on OEMs to do it on its behalf. This will likely involve recurring payments to the mobile chip manufacturer.

Segmental Performance

Qualcomm CDMA Technologies (QCT) revenues decreased 4% year over year to $3,722 million, mainly due to headwinds related to Apple. Mobile Station Modem (MSM) chip shipments were 155 million, down from 187 million. EBT margin decreased to 15% from 16% in the prior-year quarter.

Qualcomm Technology Licensing (QTL) revenues were $1,122 million, down 8% year over year. This includes $150 million from successful negotiation of the Huawei interim agreement, which was signed in the fiscal first quarter and will run through the fiscal third quarter. Revenues did not include royalties due on sales of Apple or other products by the iPhone maker’s contract manufacturers. EBT margin was 60% compared with 66% in the prior-year quarter.

Cash Flow and Liquidity

In the fiscal second quarter, Qualcomm generated $794 million of cash from operating activities compared with $516 million a year ago, bringing the tallies for the first half of fiscal 2019 and first-half fiscal 2018 to $1,150 million and $2,278 million, respectively. As of Mar 31, 2019, the company had $10,135 million of cash and cash equivalents with $15,405 million of long-term debt.

During the reported quarter, Qualcomm returned $752 million to shareholders through dividends (62 cents per share). At quarter end, the company had $7.8 billion worth of shares available for repurchase under its stock buyback program.

Third-Quarter Fiscal 2019 Outlook

For the third quarter of fiscal 2019, Qualcomm expects GAAP revenues in the range of $9.2-$10.2 billion. This includes about $4.5 billion to $4.7 billion payments from Apple for settlement of prior patent disputes. Non-GAAP earnings are projected in the 70-80 cents per share range compared with $1.00 reported in the prior-year quarter. The soft earnings guidance, despite Apple windfall, signifies lackluster demand for smartphone chips.

Revenues at QTL are expected to be between $1.2 billion and $1.3 billion. EBT margin at QTL is estimated to be 65-69%. For QCT, the company anticipates around $150 million to $170 million MSM chip shipments, reflecting typical volume seasonality, market weakness particularly in the low and mid tiers, timing of OEM product launches and overall competitive dynamics. EBT margin at QCT is expected to be between 13% and 15%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Qualcomm has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Qualcomm has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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