Qualcomm (QCOM) Up 8.2% Since Last Earnings Report: Can It Continue?
A month has gone by since the last earnings report for Qualcomm (QCOM). Shares have added about 8.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Qualcomm due for a pullback? 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 Beats Q3 Earnings Estimates on 5G Forte
Despite a challenging macroeconomic environment triggered by the coronavirus pandemic, Qualcomm reported solid third-quarter fiscal 2020 results, primarily driven by the ramp-up in 5G-enabled chips. Both top and bottom-line figures beat the Zacks Consensus Estimates, backed by the strength of the business model and the ability to respond pro-actively to the evolving market scenario.
On a GAAP basis, net income for the June quarter was $845 million or 74 cents per share compared with $2,149 million or $1.75 in the prior-year quarter. The decline in GAAP earnings was primarily attributable to an accretive patent settlement agreement with Apple Inc. (AAPL) inked in third-quarter fiscal 2019.
Quarterly non-GAAP net income came in at $982 million or 86 cents per share compared with $982 million or 80 cents in the year-ago quarter. Undeterred by the adverse impact of the virus outbreak, non-GAAP earnings remained steady owing to the diligent execution of operational plans and resilient business culture. The bottom line exceeded management’s guidance and beat the Zacks Consensus Estimate by 14 cents.
On a GAAP basis, total revenues in the fiscal third quarter were $4,893 million compared with $9,635 million in the prior-year quarter. The year-over-year decline was driven by $4.7 billion of revenues generated in third-quarter fiscal 2019 from the patent settlement deal with Apple.
Non-GAAP revenues for the reported quarter were $4,890 million compared with $4,894 million in the year-earlier quarter. The figure surpassed the consensus mark of $4,811 million and was above the midpoint of the company-guided range, driven by 5G strength, high-performing core chipsets and new RF front-end content.
Quarterly GAAP revenues from Qualcomm CDMA Technologies (QCT) improved 7% year over year to $3,807 million on strength across 5G and higher demand in adjacent platforms beyond mobile, partially offset by lower Mobile Station Modem (MSM) chip shipments due to adverse coronavirus impacts. MSM shipments in the quarter were 130 million, down from 156 million a year ago due to reduced demand for 3G/4G/5G handsets stemming from lower orders from China and other global markets. EBT margin increased to 16% from 14% in the year-ago quarter.
Qualcomm Technology Licensing (QTL) revenues totaled $1,044 million, down 19% year over year, driven by lower royalty revenues from Huawei due to the expiration of the interim agreement and lower sales triggered by the coronavirus-induced turmoil. EBT margin was 62% compared with 70% in the year-ago quarter on lower revenues and higher R&D expenses.
Subsequent to the end of the quarter, Qualcomm inked a settlement agreement with Huawei to resolve earlier disputes related to its license agreement that expired on Dec 31, 2019. The company also entered into a new long-term, global patent license agreement, including cross-license rights to certain Huawei’s patents, covering sales beginning Jan 1, 2020. Per the agreement, Qualcomm currently expects to generate revenues of approximately $1.8 billion in fourth-quarter fiscal 2020, with additional payments made in installments in the later quarters.
Cash Flow & Liquidity
Qualcomm generated $1,872 million of net cash from operating activities during the quarter compared with $4,909 million in the year-ago quarter. At quarter-end, the company had $6,120 million in cash and equivalents and $15,425 million of long-term debt.
During the reported quarter, Qualcomm paid out cash dividends totaling $733 million or 65 cents per share and repurchased 1.6 million shares for $110 million. At quarter-end, the company had $4.6 billion available for repurchase under its $30-billion stock buyback program.
For the fourth quarter of fiscal 2020, Qualcomm expects GAAP revenues of $7.3-$8.1 billion and non- GAAP revenues of $5.5-$6.3 billion as the adverse impact of the virus outbreak is likely to result in a 15% reduction in handset shipments compared to prior expectations. Non-GAAP earnings are projected to be $1.05-$1.25 per share, while GAAP earnings are likely to be $2.12-$2.32 per share, buoyed by the Huawei settlement. The quarterly earnings are likely to take a hit to the tune of 25 cents per share due to the coronavirus. Revenues at QTL are expected between $1.2 billion and $1.4 billion. For QCT, the company anticipates revenues between $4.3 billion and $4.9 billion on MSM shipments of 145-165 million units. For calendar year 2020, Qualcomm continues to expect 175-225 million 5G handset unit shipments.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month.
Currently, Qualcomm has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Qualcomm has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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