Supported by significant surge in demand for the high-end 3G smartphones and tablets, Qualcomm Inc. (QCOM) reported solid earnings in the fourth quarter of fiscal 2011. Net income was up 22% year over year and 2% sequentially, signifying the operating efficiency of Qualcomm. The company’s Snapdragon platform and product diversification strategy make management more confident about fiscal 2012 and therefore, it significantly raised its future financial outlook. As a result of these positives, in the after market trade on NASDAQ, stock price of Qualcomm was up $4.95 (9.49%) to $57.13.
Revenue
Quarterly total revenue of $4,117 million was up 39.5% year over year, surpassing the Zacks Consensus Estimate of $4,009 million. Segment wise, Qualcomm CDMA Technologies businesses accounted for $2,587 million of revenue in the fourth quarter, up 39% over the prior-year quarter and 18% sequentially. Quarterly EBT margin was 22%. Qualcomm Technology Licensing generated $1,361 million, up 48% year over year and 8% sequentially. Quarterly EBT margin was 88%. Qualcomm Wireless & Internet segment generated $163 million, down 5% year over year and 1% sequentially. This division suffered quarterly operating loss of $5 million.
EPS
On a GAAP basis, quarterly net income was $1,056 million or 62 cents per share compared with a net income of $865 million or 58 cents per share in the year-ago quarter. However, the fourth quarter of fiscal 2011 adjusted (excluding special items) EPS was 68 cents, just a penny shy of the Zacks Consensus Estimate.
Chipset Statistics
During the fourth quarter of fiscal 2011, Qualcomm shipped approximately 127 million CDMA-based MSM chipsets, up 14% year over year and 6% sequentially. This was also better than the company’s guidance of a mid-point of 123 million. Average selling price (ASP) of mobile handset with an in-build Qualcomm chipset during this quarter was around $204 -$210.
We believe higher MSM chipset shipment was primarily due to massive demand for 3G smartphones in the emerging markets and gradual upgrade to 4G LTE enabled mobile handsets in the developed markets. Qualcomm was benefited from huge demand for Apple Inc. (AAPL) developed iPhone 4S. Furthermore, the company is the largest chipset developer for Google Inc. (GOOG) developed high-end Android-based smartphones and Microsoft Corp. (MSFT) developed Windows Phone 7-based smartphones.
Operating Metrics
Quarterly operating income was $1,238 million compared with an operating income of $958 million in the year-ago quarter. Gross margin was 63.6% compared with 68.6% in the year-ago quarter. Quarterly operating margin was 30.1% compared with 32.5% in the prior-year quarter. In the reported quarter, the company returned $1.35 billion (81 cents per share) to its shareholders in the form of cash dividend and repurchased 2.9 shares of its common stock for a total consideration of $142 million.
Cash Flow
During the fourth quarter of fiscal 2011, Qualcomm generated $1,820 million of cash from operation compared with $1,093 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditures) during the reported quarter was $1,626 million compared with $980 million in the year-ago quarter.
Liquidity
At the end of fiscal 2011, the company had $20,913 million of cash & marketable securities and $994 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.
First Quarter of Fiscal 2012 Financial Guidance
The first-quarter revenue will be within the range of $4.35 billion – $4.75 billion. Its mid-point of $4.55 billion is well above the current Zacks Consensus Estimate of $4.278 billion. EPS will be within the range of 75 cents – 81 cents, excluding 11 cents per share of stock-based compensation expenditures. Its mid-point of 78 cents surpassed the current Zacks Consensus Estimate of 77 cents. Qualcomm is expected to ship 146 million – 154 million MSM chipsets during the first quarter of fiscal 2012.
Full Fiscal 2012 Financial Guidance
Fiscal 2012 revenue will be within the range of $18 billion – $19 billion. Its mid-point of $18.5 billion is miles ahead of the current Zacks Consensus Estimate of $17.413 billion. EPS will be within the range of $2.96 – $3.16, excluding 46 cents per share of stock-based compensation expenditures. Its mid-point of $3.06 fell below the current Zacks Consensus Estimate of $3.14.
Recommendation
We continue to believe the robust demand growth 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 on Qualcomm. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.
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