Based on significant surge in demand for the high-end 3G smartphones and tablets, Qualcomm Inc. (QCOM) reported record breaking first-quarter fiscal 2012 financial results. Net income was up 20% year over year and 33% sequentially, reflecting the operating efficiency of Qualcomm. The company’s Snapdragon platform and product diversification strategy make management more confident about fiscal 2012 as the company raised its future financial outlook. As a result of these positives, in the after market trade on NASDAQ, stock price of Qualcomm was up $2.98 (5%) to $62.54.
Major Achievement
Qualcomm has firmly established its leadership position in the high-end smartphone segment. Several analysts have opined that Qualcomm captured market share from its arch rivals, STMicroelectronics N.V. (STM) and Intel Corp. (INTC) in the previous quarter. Intel’s Infineon chipset was a major supplier of Apple Inc. (AAPL) developed legendary iPhone. However, it now appears that Qualcomm’s Snapdragon platform has taken a center stage.
Management is quite confident that the company will be able to maintain its current pace of revenue and earnings growth for at least next five years. There are primarily three reasons for this positive outlook: (1) gradual introduction of 4G LTE enabled mobile handsets in the developed markets of the U.S., Japan, and South Korea (2) massive growth of 3G smartphones in the emerging markets, particularly in China where the company has strong foothold (3) Qualcomm’s growing association with Apple for its iPhones and iPADs.
Revenue
Quarterly total revenue of $4,681 million was up 40% year over year, surpassing the Zacks Consensus Estimate of $4,569 million. Segment wise, Qualcomm CDMA Technologies businesses accounted for $3,085 million of revenue in the first quarter, up 46% over the prior-year quarter and 19% sequentially. Quarterly EBT margin was 24%. Qualcomm Technology Licensing generated $1,440 million, up 36% year over year and 6% sequentially. Quarterly EBT margin was 88%. Qualcomm Wireless & Internet segment generated $152 million, down 12% year over year and 7% sequentially. This division earned quarterly operating income of just $1 million.
EPS
On a GAAP basis, quarterly net income was $1,401 million or 81 cents per share compared with a net income of $1,170 million or 71 cents per share in the year-ago quarter. However, the first quarter of fiscal 2012 adjusted (excluding special items) EPS came in at 85 cents, outpacing the Zacks Consensus Estimate of 81 cents.
Chipset Statistics
During the first quarter of fiscal 2012, Qualcomm shipped approximately 156 million CDMA-based MSM chipsets, up 32% year over year and 23% sequentially. This was also better than the company’s guidance of a mid-point of 150 million. Average selling price (ASP) of mobile handset with an in-build Qualcomm chipset during this quarter was around $212 -$218.
Operating Metrics
Quarterly operating income was $1,551 million compared with an operating income of $1,247 million in the year-ago quarter. Gross margin was 62.5% compared with 68.9% in the year-ago quarter. Quarterly operating margin was 33.1% compared with 37.3% in the prior-year quarter. In the reported quarter, the company returned $362 million (21.5 cents per share) to its shareholders in the form of cash dividend and repurchased 2 shares of its common stock for a total consideration of $99 million.
During the first quarter of fiscal 2012, Qualcomm generated $1,779 million of cash from operations compared with a mere $48 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditures) during the reported quarter was $1,420 million compared with a negative $54 million in the year-ago quarter.
Liquidity
At the end of the first quarter of fiscal 2012, the company had $21,978 million of cash & marketable securities and $928 million of outstanding debt on its balance sheet compared with $20,913 million of cash & marketable securities and $994 million of outstanding debt at the end of fiscal 2011.
Second Quarter Fiscal 2012 Financial Guidance
The second-quarter revenue will be within the range of $4.6 billion – $5 billion. EPS will be within the range of 91 cents – 97 cents. Qualcomm is expected to ship 146 million – 154 million MSM chipsets during the second quarter of fiscal 2012.
Full Fiscal 2012 Financial Guidance
Fiscal 2012 revenue will be within the range of $18.7 billion – $19.7 billion. EPS will be within the range of $3.36 – $3.56. ASP of mobile handset with an in-build Qualcomm chipset during fiscal 2012 will be around $204 -$216.
Recommendation
We continue to believe the robust demand growth for wireless data, emerging 4G LTE networks, and a strong balance sheet will serve as long-term catalysts for Qualcomm. In addition to North America, Japan, and South Korea, the emerging economies of China and India will be the long-term growth drivers for the company. Qualcomm has a strong foothold in these two countries. We maintain our long-term Neutral recommendation on Qualcomm. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.
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