Qualcomm Reports Sluggish Growth as Lawsuits Loom

By Timothy Green Markets Fool.com

Image source: Qualcomm.

Continue Reading Below

Mobile-chip giant Qualcomm (NASDAQ: QCOM) reported its fiscal first-quarter results after the market closed on Jan. 25. Revenue growth was sluggish because of flat chip sales, but adjusted earnings per share surged higher. Soon after the end of the first quarter, Qualcomm was sued by both the FTC and Apple, with the former alleging anti-competitive behavior and the latter alleging excessive royalties and withheld payments. Qualcomm brushed off these accusations, but the stock's performance following the news shows that investors don't share the same confidence.

Qualcomm results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Revenue

$6.0 billion

$5.8 billion

3.9%

Net income

$682 million

$1.5 billion

(54.5%)

Non-GAAP earnings per share (EPS)

$1.19

$0.97

22.7%

MSM chip shipments

217 million

242 million

(10.3%)

Data source: Qualcomm.

What happened with Qualcomm this quarter?

Continue Reading Below

Double-digit growth in the licensing business made up for flat revenue in the chip business.

  • The Qualcomm CDMA technologies (QCT) segment, which is Qualcomm's semiconductor business, generated $4.1 billion of revenue, flat compared to the prior-year period. Segment operating income jumped 23% year over year to $724 million.
  • The Qualcomm technology licensing (QTL) segment generated $1.81 billion of revenue, up 13% year over year. Segment operating income rose 14% year over year to $1.53 billion.
  • Total reported sales of licensed devices increased by 4% year over year, with an 8% increase in unit shipments offsetting a 4% decline in average selling price.
  • The $38 billion acquisition of NXP Semiconductors announced in October is expected to close by the end of calendar 2017.

Following the end of the first quarter, major legal action was taken against Qualcomm.

  • On Jan. 17, the Federal Trade Commission filed a complaint charging Qualcomm with using anticompetitive tactics to maintain its monopoly in the supply of baseband processors.
  • On Jan. 20, Apple sued Qualcomm, accusing the company of charging excessive royalties and withholding $1 billion in payments as retaliation for cooperation with law enforcement agencies.

Qualcomm provided guidance for the second quarter.

  • Revenue is expected to be in the range of $5.5 billion to $6.3 billion, representing a decrease of 1% to an increase of 13% year over year.
  • GAAP EPS is expected between $0.89 and $0.99, up from $0.78 in the prior-year period.
  • Non-GAAP EPS is expected between $1.15 and $1.25, up from $1.04 during the prior-year period.
  • MSM chip shipments are expected between 165 million and 185 million, a decline of 2% to 13% year over year.
  • Total reported sales of licensed devices expected between $74 billion and $82 billion, an increase of 6% to 17% year over year.

What management had to say

Qualcomm CEO Steve Mollenkopf talked up the company's acquisition of NXP Semiconductors:

We are pleased with the strong start to our fiscal year and the year-over-year earnings growth across both our semiconductor and licensing businesses. Looking ahead, the pending NXP acquisition accelerates our strategic transformation in the high growth areas of automotive, IoT, security and networking. We are very well positioned to lead as the semiconductor engine for the intelligent, connected world.

Mollenkopf also commented on the lawsuits facing the company:

The recent legal and governmental actions against Qualcomm are at their core driven by commercial disputes. As we have done in the past, we will vigorously defend our business model and the value of a portfolio of technologies that has been so instrumental to the success of the mobile communications industry.

Looking forward

Qualcomm's first quarter featured sluggish revenue growth, with flat chip sales weighing down the top line. Non-GAAP earnings surged despite slow revenue growth, and the company expects another increase during the second quarter.

Shares of Qualcomm have plunged year-to-date thanks to the lawsuits from the FTC and Apple. At this point, it's impossible to predict exactly what the result of these legal actions will be. Qualcomm derives the majority of its earnings from its licensing business, so any threat to that business should have investors concerned.

10 stocks we like better than Qualcomm
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Qualcomm wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 4, 2017

Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Qualcomm. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.