Supported by a significant surge in demand for high-end 3G smartphones and tablets, Qualcomm Inc. (QCOM) reported historic high earnings in the first quarter of fiscal 2011. Net income was up 39% year over year and 35% sequentially, suggesting the strength of operating efficiency at Qualcomm. The company’s state-of-the-art Snapdragon platform and product diversification make management more confident about fiscal 2011, prompting a financial outlook that beats the current Zacks Consensus Estimates.
Revenue
Quarterly total revenue of $3,348 million was up 25% year over year and also better than the Zacks Consensus Estimate of $3,198 million. Segment wise, Qualcomm CDMA Technologies businesses accounted for $2,116 million of revenue in the first quarter, up 32% over the prior-year quarter and up 14% sequentially. Quarterly EBT margin was 30%. Qualcomm Technology Licensing generated $1,057 million, up 15% on both year-over-year and sequential bases. Quarterly EBT margin was 84%. Qualcomm Wireless and Internet segment generated $172 million, up 21% year over year and up 1% sequentially. Quarterly EBT margin was 0%.
Earnings per Share
On a GAAP basis, quarterly net income was $1,170 million or 71 cents per share compared with a net income of $841 million or 50 cents per share in the year-ago quarter. However, the first quarter of fiscal 2011 adjusted EPS was 69 cents, well above the Zacks Consensus Estimate of 63 cents.
Chipset Statistics
During the first quarter of 2011, Qualcomm shipped approximately 118 million CDMA-based MSM chipsets, up 28% year over year and up 6% sequentially. This was also better than the company’s guidance of a mid-point of 117 million. Average selling price of a mobile handset with an in-build Qualcomm chipset during this quarter was around $201 -$207.
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 the CDMA iPhone with Verizon Wireless (VZ), we believe Qualcomm will be a major beneficiary for both chipset and licensing technology that it will provide to CDMA iPhones.
Operating Metrics
Quarterly operating income was $1,110 million compared with an operating income of $879 million in the year-ago quarter. Gross margin was 66.3% compared with 69.4% in the year-ago quarter. However, operating margin was 33.2% compared with 32.9% in the prior-year quarter. In the reported quarter, the company returned $309 million (19 cents per share) to its shareholders in the form of cash dividend.
Cash Flow
During the reported quarter, Qualcomm generated $48 million of cash from operations compared with $1,239 million in the prior-year quarter. This significant decline in operating cash flow is attributable to a $1.5 billion income tax payment related to the 2008 licensing and settlement agreements with Nokia Corp. (NOK). Free cash flow (cash flow from operations less capital expenditures) during the quarter was a negative $54 million compared with $1,151 million in the year-ago quarter.
Liquidity
At the end of the first quarter of fiscal 2011, the company had $19,107 million of cash and marketable securities and $1,089 million of outstanding debt on its balance sheet compared with $18,402 million of cash and marketable securities and $1,086 million of outstanding debt at the end of fiscal 2010.
Second Quarter of Fiscal 2011 Financial Guidance
The second quarter revenue will be within the range of $3.45 billion - $3.75 billion. Its mid-point of $3.60 billion is well above the current Zacks Consensus Estimate of $3.14 billion. Pro Forma EPS will be within the range of 68 cents - 72 cents, excluding 9 cents per share of stock-based compensation expenditures. Its mid-point of 70 cents is significantly above the current Zacks Consensus Estimate of 62 cents. Qualcomm is expected to ship 113 million – 117 million MSM chipsets during the second quarter of fiscal 2011.
Full Fiscal 2011 Financial Guidance
Fiscal 2011 revenue will be within the range of $13.6 billion - $14.2 billion. Guided revenue is well above the current Zacks Consensus Estimate of around $12.8 billion. Pro Forma EPS will be within the range of $2.58 - $2.72, excluding 33 cents per share of stock-based compensation expenditures. Its mid-point of $2.65 is significantly above the current Zacks Consensus Estimate of $2.46.
Recommendation
We continue to believe the robust growth of demand for wireless data, emerging 4G LTE networks, and a very 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 has a short-term Zacks #3 Rank (Hold) on the stock.
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