Qualcomm Tops Expectations but Sees Tougher Times Ahead

By Dan CaplingerFool.com

Image source: Qualcomm.

Mobile chip giant Qualcomm hasn't been itself lately, with investors growing impatient for the company to make progress in turning itself around and returning to its former dominance of the mobile industry.

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Even though it developed a positive reputation for beating rival Intel in establishing a solid foothold in the mobile chip market when it first became relevant, Qualcomm has had to retrench, and coming into Wednesday's fiscal fourth-quarter financial report, Qualcomm investors expected substantial declines in sales and earnings from the company. Qualcomm's backward-looking results were actually fairly good, but the guidance it gave for the coming quarter called into question some of the hopes that investors had for its long-term future.

Let's look more closely at how Qualcomm did and why investors aren't pleased with the results.

What happened with Qualcomm this quarter?Qualcomm's fiscal fourth-quarter results showed just how far the company has fallen back. Revenue fell 18% to $5.46 billion, which was considerably better than the 22% plunge in sales that most investors were expecting to see. Similarly, adjusted net income of $1.43 billion was down by a third from the year-ago quarter, but the corresponding adjusted earnings of $0.91 per share was a nickel better than the consensus forecast among investors.

Taking a closer look at Qualcomm's numbers, MSM chip shipments dropped 14% to 203 million, representing a 10% drop just since the end of June. Total reported 3G and 4G device sales for the quarter rose 2% to $58.3 billion, with an 8% rise in shipments to 276 million to 280 million more than offsetting the roughly 6% drop in average selling prices for mobile devices.

Qualcomm's segment results once again reflected the uneven nature of the chip giant's business. The QCT semiconductor business continued to deal with the same adverse conditions that Intel and other companies have seen, with sales falling by 25% and producing a nearly 75% drop in pre-tax income. Yet the QTL licensing business held up relatively well, with revenue falling just 1% and pre-tax income coming in at $1.49 billion, down 3% from year-ago levels.

CEO Steve Mollenkopf talked about the mixed factors affecting Qualcomm's results. "Our fiscal fourth quarter revenues and EPS were at the high end of our expectations," Mollenkopf said, "with stronger-than-expected MSM chipset shipments offsetting slower-than-expected progress concluding new license agreements in China." Overall, he sees things looking up for Qualcomm in the coming year.

Can Qualcomm get moving again?Mollenkopf also believes that the fiscal 2016 year will be a good chance for Qualcomm to demonstrate its ability to bounce back. "We are encouraged by customer reaction to our flagship Snapdragon 820, are on track to deliver on our fiscal 2016 cost reduction targets, and expect to exit fiscal 2016 on an improving financial trajectory," the CEO said.

Yet before Qualcomm can start to see marked improvement in its fundamental performance, it could have to endure more pain. The chipmaker's guidance for the fiscal first quarter includes further contraction in its key metrics, with projections for revenue to fall 15% to 27% to a range of $5.2 billion to $6 billion. Adjusted earnings of $0.80 to $0.90 per share would represent a drop of 33% to 40%. The earnings figures in particular are far weaker than investors were expecting, coloring future views of Qualcomm's ability to bounce back in timely fashion. Indeed, the figures are reminiscent of some of the declines that Intel suffered as it tried to make a transition away from its traditional PC chip business. Over time, Intel has figured out how to at least stabilize its revenue, but Qualcomm could faces the same challenges Intel did in stemming the bleeding on the top line.

Part of the problem involves the challenges that Qualcomm still faces in China. Much of the tech giant's value comes from its intellectual property portfolio, and agreements with major Chinese customers to address allegations of improper withholding of royalties on that intellectual property have taken longer than expected. Until that issue is resolved, it will weigh on Qualcomm's results.

Qualcomm investors reacted negatively, quickly sending the stock down 5% in after-market trading following the announcement. With shareholders having waited so long for improvement, the last thing they were prepared to deal with was poor future guidance. Qualcomm will need to reverse its downward course in a hurry in order to satisfy hard-hit investors.

The article Qualcomm Tops Expectations but Sees Tougher Times Ahead originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Qualcomm. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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