Supported by significant surge in demand for the high-end 3G smartphones and tablets, Qualcomm Inc. (QCOM) reported solid earnings in the third quarter of fiscal 2011. Net income was up 35% year over year and 4% sequentially, signifying the strength of operating efficiency of Qualcomm. The company’s Snapdragon platform and product diversification strategy make management more confident about the rest of fiscal 2011 and therefore, the company raised its previously announced financial outlook.
Despite all the above mentioned positives, in the after market trade on NASDAQ, stock price of Qualcomm fell $1.40 (2.44%) to $55.90. This may be attributable to Qualcomm’s ensuing fourth-quarter CDMA chipset guidance, which is apparently a solid figure but fell below consensus estimates. Management cited ongoing economic turmoil in Europe is the reason for this modest outlook.
Revenue
Quarterly total revenue of $3,623 million was up 34.2% year over year, better than the Zacks Consensus Estimate of $3,550 million. Segment wise, Qualcomm CDMA Technologies businesses accounted for $2,194 million of revenue in the third quarter, up 30% over the prior-year quarter and 12% sequentially. Quarterly EBT margin was 20%. Qualcomm Technology Licensing generated $1,257 million, up 48% year over year but down 28% sequentially. Quarterly EBT margin was 87%. Qualcomm Wireless & Internet segment generated $164 million, up 1% year over year and 4% sequentially. This division suffered quarterly operating loss of $13 million.
EPS
On a GAAP basis, quarterly net income was $1,035 million or 62 cents per share compared with a net income of $767 million or 47 cents per share in the year-ago quarter. However, the third quarter of fiscal 2011 adjusted (excluding special items) EPS was 63 cents, which surpassed the Zacks Consensus Estimate by a penny.
Chipset Statistics
During the third quarter of fiscal 2011, Qualcomm shipped approximately 120 million CDMA-based MSM chipsets, up 17% year over year and 2% sequentially. This was also better than the company’s guidance of a mid-point of 117 million. Average selling price (ASP) of mobile handset with an in-build Qualcomm chipset during this quarter was around $209 -$215.
We believe higher MSM chipset shipment was primarily due to massive demand for Android-based 3G smartphones. Android operating system was developed by Google Inc. (GOOG) and requires more complex and expensive processors to work properly. Qualcomm’s innovative Snapdragon processors are generally used in Android- powered 3G smartphones. Further, as Apple Inc. (AAPL) started selling CDMA iPhone with Verizon Wireless (VZ), we believe Qualcomm will be a major beneficiary for both chipset and licensing technology that it will be incorporated in CDMA iPhones.
Operating Metrics
Quarterly operating income was $1,113 million compared with an operating income of $893 million in the year-ago quarter. Gross margin was 64.7% compared with 68.5% in the year-ago quarter. Quarterly operating margin was 30.7% compared with 33.1% in the prior-year quarter. In the reported quarter, the company returned $360 million (21.5 cents per share) to its shareholders in the form of cash dividend.
During the third quarter of fiscal 2011, Qualcomm generated $1,264 million of cash from operation compared with $951 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditures) during the reported quarter was $1,045 million compared with $834 million in the year-ago quarter.
Liquidity
At the end of the third quarter of fiscal 2011, the company had $20,221 million of cash & marketable securities and $1,092 million of outstanding debt on its balance sheet compared with $18,402 million of cash & marketable securities and $1,086 million of outstanding debt at the end of fiscal 2010.
Fourth Quarter of Fiscal 2011 Financial Guidance
The fourth-quarter revenue will be within the range of $3.86 billion – $4.16 billion. EPS will be within the range of 68 cents – 73 cents, excluding 8 cents per share of stock-based compensation expenditures net of taxes. Its mid-point of 69.5 cents is well above the current Zacks Consensus Estimate of 68 cents. Qualcomm is expected to ship 120 million – 125 million MSM chipsets during the fourth quarter of fiscal 2011.
Full Fiscal 2011 Financial Guidance
Fiscal 2011 revenue will be within the range of $14.7 billion – $15 billion. Its mid-point of $14.85 billion is above the current Zacks Consensus Estimate of around $14.63 billion. EPS will be within the range of $2.72 – $2.80, excluding 33 cents per share of stock-based compensation expenditures net of taxes. Its mid-point of $2.85 is significantly above the current Zacks Consensus Estimate of $2.77.
Recommendation
We continue to believe the robust growth of demand 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 sound foothold in these two countries. We maintain our long-term Neutral recommendation for Qualcomm. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.
