Qualcomm Inc. (QCOM) has reported financial results for its second quarter of fiscal 2010. Although the second quarter results have outperformed, the ongoing third quarter fiscal 2010 estimates barely meet the Zacks consensus estimates. Management has cited increasing competition and a challenging pricing environment as the main reasons for this weak outlook. As a result, in the after market trade in NASDAQ, the stock price of Qualcomm was down $3.53 (8.3%) to $39.10
 
Quarterly revenues of $2.66 billion were up 8.6% year-over-year and also better than the Zacks Consensus Estimate of $2.64 billion. The year-over-year increase in revenues was mainly due to a healthy demand for Qualcomm chipsets driven by strong shipment of 3G mobile handsets throughout the world.
 
On a GAAP basis, quarterly net income was $774 million or 46 cents per share compared to a net loss of $289 million (including $748 million litigation settlement charges) or a loss of 18 cents per share in the year-ago quarter. However, the second quarter fiscal 2010 adjusted (excluding special items) EPS of 53 cents was well above the Zacks Consensus Estimate of 50 cents.
 
Quarterly operating income was $776 million compared to an operating loss of $10 million in the year-ago quarter. This was mainly due to lower R&D and Selling, General, & Administrative expenses. During the second quarter, Qualcomm repurchased 43.9 million shares of its common stock for a total consideration of $1.71 billion.
 
During the reported quarter, the company shipped around 93 million MSM chipsets, up 35% over the prior-year quarter. Average selling price of a mobile handset with a built-in Qualcomm chipset in the quarter was around $182 -$188 ($185 at the mid point) slightly below the company’s expectation of $187.
 
During the second quarter of fiscal 2010, Qualcomm generated nearly $793 million of cash from operations compared to $1.3 billion in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditures) during the same quarter was $685 million compared to $1.03 billion in the year-ago quarter.
 
At the end of the second quarter of fiscal 2010, the company had more than $18.2 billion of cash & marketable securities and no outstanding debt on its balance sheet compared to over $17.74 billion of cash & marketable securities and no outstanding debt at the end of fiscal 2009.
 
Segment wise Results
 
Qualcomm CDMA Technologies business accounted for $1,537 million of revenues in the second quarter, up 17% over the prior-year quarter but down 4% sequentially. Quarterly operating margin was 22%. Qualcomm Technology Licensing generated $974 million, up 2% year-over-year and up also 6% sequentially.

Quarterly operating margin was 84%. Qualcomm Wireless & Internet segment generated $152 million, down 14% year-over-year but up 7% sequentially. Quarterly operating margin was a negative (1%).
 
Third Quarter of Fiscal 2010 Financial Guidance

Third quarter revenue will be within the range of $2.50 billion – $2.70 billion. At its mid point of $2.6 billion, this guidance is below the current Zacks Consensus Estimate of $2.67 billion. Pro Forma EPS will be within the range of 51 cents – 55 cents, excluding 7 cents per share of stock-based compensation expenditures. Including this, the pro-forma EPS mid point of 46 cents is also below the current Zacks Consensus Estimate of 47 cents.

Qualcomm is expected to ship 97 million – 102 million MSM chipsets during the third quarter.
 
Full Fiscal 2010 Financial Guidance

Full fiscal 2010 revenue will be within the range of $10.40 billion – $11.00 billion. Pro Forma EPS will be within the range of $2.21 – $2.32, excluding 27 cents per share of stock-based compensation expenditures.

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