Will Lower Revenues Dent Qualcomm's (QCOM) Q3 Earnings?

Qualcomm Incorporated QCOM is scheduled to report third-quarter fiscal 2020 results, after the closing bell, on Jul 29. In the last reported quarter, the company delivered an earnings surprise of 11.4%, surpassing the Zacks Consensus Estimate by 9 cents. In the fiscal third quarter, consolidated revenues are likely to have declined significantly year over year, despite continued 5G chip designs for innovative 5G system solutions, due to coronavirus-induced headwinds.

Factors at Play

During the fiscal third quarter, Qualcomm set a new benchmark by unveiling a game-changing 5G chipset for low-cost smartphones for the masses. The Snapdragon 690 5G chipset is the first SoC (System-on-Chip) in the 600 series to support 5G services at accessible price points. The chip has an integrated Snapdragon X51 5G modem that supports global 5G standards with multi-SIM functionality and dynamic spectrum sharing. It supports a download speed of up to 2.5Gbps and upload speed of up to 660Mbps. In addition, the chipset has a new AI engine called ARCSOFT that features a Hexagon Tensor Accelerator for enhanced performance in real-time Snapchat filters and smooth transition when switching between ultrawide, wide and telephoto cameras. This is likely to have translated into incremental revenues for the company in the quarter under review.

Qualcomm collaborated with JLC Infrastructure and IGNITE Cities to leverage smart city technology for the development of education and construction industries as part of its Smart Cities Accelerator Program. The company also inked a partnership with technology firm, Infinite Computer Solutions, to deploy the latter’s collective intelligence, analytics and AI expertise in 5G and IoT technologies to accelerate IoT-related smart city projects. Such technology collaborations are likely to have benefited the quarterly performance.

However, geopolitical tensions and a fractured relationship with China, which is one of the most important markets of Qualcomm, are likely to have harmed its supply-chain management and strained margins. The company is anticipated to face continued softness in demand from China, with Huawei gaining prominence in the local market and OEMs pulling back on new 4G device orders and managing their inventory in advance of the transition to 5G. The company expects a significant negative impact on device shipment due to the lengthening of handset replacement rates stemming from the adverse economic impact of the coronavirus pandemic. This, in turn, is likely to have affected unit volumes. In addition, fierce competitive pressure from low-cost chipmakers amid the coronavirus-led worldwide mayhem is likely to have hurt the bottom line.

For the third quarter of fiscal 2020, Qualcomm expects revenues of $4.4-$5.2 billion as the virus outbreak is likely to result in a 30% reduction in handset shipments compared to prior expectations. The Zacks Consensus Estimate for the same is pegged at $4,792 million. The company recorded revenues of $9,635 million in the year-earlier quarter. Management anticipates non-GAAP earnings of 60-80 cents per share. The consensus mark for earnings is currently pegged at 71 cents per share. Qualcomm recorded non-GAAP earnings of 80 cents per share in the prior-year quarter.

Q3 Developments

During the quarter, Qualcomm launched its “Small Business Accelerator Program”, which has been specifically designed to upgrade the networking infrastructure of small-scale businesses and enterprises with innovative software, collaboration tools and services. Markedly, the program supports the mobility and productivity of small businesses with avant-garde tech-enabled solutions from Qualcomm and its partners. This move is intended to enable small business entities to sustain in the challenging macroeconomic environment through transition to mobile, connected and remote businesses.

Earnings Whispers

Our proven model does not conclusively predict an earnings beat for Qualcomm this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. This, however, is not the case here.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is 0.00%, with both pegged 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 price-eps-surprise | QUALCOMM Incorporated Quote

Zacks Rank: Qualcomm currently has a Zacks Rank #3.

Stocks to Consider

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

Watts Water Technologies, Inc. WTS is set to release quarterly numbers on Aug 3. It has an Earnings ESP of +18.38% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for InterDigital, Inc. IDCC is +4.28% and it carries a Zacks Rank of 3. The company is set to report quarterly numbers on Aug 6.

The Earnings ESP for T-Mobile US, Inc. TMUS is +7.90% and it sports a Zacks Rank of 1. The company is scheduled to report quarterly numbers on Aug 6.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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