QUALCOMM Misses Estimates, China Issues Loom
Leading global cellphone chipset designer, QUALCOMM, Inc. (NASDAQ: QCOM – $68.48) reported fourth quarter top and bottom-line results that fell short of estimates. Revenues for the company were $6.7 billion while earnings per share of $1.26 vs revenue of $6.48 billion and EPS of $1.05 a year ago. Wall Street expected QCOM to earn $1.32 a share on $7.03 billion in revenue. Chipset shipments rose 24% year-over-year, thanks to broad-based demand for 3G/4G smartphones in emerging markets. Nonetheless, mid-tier modems/processors were weaker than expected. Although the licensing segment reported results that were in-line with expectations, the ongoing investigation by China’s National Development and Reform Commission into whether or not the company has a monopoly in China is putting a damper on expectations for the year ahead. Aggressive choice, QUALCOMM reported that a meaningful percentage of devices remain unlicensed, and a number of licensees are underreporting sales to avoid royalty payments to QCOM. The vendor with the most significant potential impact to QUALCOMM in these matters is China Mobile, the world’s largest telecom company. Negotiations continue to be delayed as these Chinese firms await a decision from the NDRC. The company is keeping its calendar 2014 global chipset volume estimate of 1.3 billion (up 20% year over year) intact, and thinks this level could even prove conservative. The China issue has been exacerbated by probes by the FTC here at home and antitrust concerns in Europe. Fiscal 2015 licensing revenue is expected to range from down 4% to up 10%, with the low-end reflecting no resolution to the China disputes and the high end factoring in more favorable outcomes. Importantly, the uncertainties may result in higher-than-normal swings in quarterly earnings. The company is guiding sales for the chipset business in 2015 to be up about 6%, but well below recent results due to pricing pressure and product mix. This puts the company wide sales guidance at 1% to 9% for next year. Along with higher expenses due to research spending and legal costs surrounding the China and antitrust issues, earnings per share are expected to fall in the range of $5.05 to $5.35. Although I believe the underlying emerging market growth story remains intact for the long-term, the near term uncertainties cannot be dismissed. QUALCOMM shares are down about 11% in today’s trading, but the recent valuation of 13.2 – assuming 2015 earnings at the midpoint of $5.18 – appears to be quite compelling and the dividend, yielding of 2.4%, looks to be safe.