Supported by significant surge in demand for the high-end 3G smartphones and tablets, Qualcomm Inc. (QCOM) reported solid earnings in the second quarter of fiscal 2011. Net income was up 29% year over year and 15% 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. In synergy with these positive developments, in the after market trade on NASDAQ, stock price of Qualcomm increased $ 2.87 (5.19%) to $ 58.14.
Revenue
Quarterly total revenue of $ 3,875 million was up 46% year over year, better than the Zacks Consensus Estimate of $ 3,639 million. Segment wise, Qualcomm CDMA Technologies businesses accounted for $ 1,962 million of revenue in the second quarter, up 28% over the prior-year quarter but down 7% sequentially. Quarterly EBT margin was 21%. Qualcomm Technology Licensing generated $ 1,746 million, up 79% year over year and up 65% sequentially. Quarterly EBT margin was 90%. Qualcomm Wireless & Internet segment generated $ 157 million, up 3% year over year but down 9% sequentially. This division suffered quarterly operating loss of $ 135 million.
EPS
On a GAAP basis, quarterly net income was $ 999 million or 59 cents per share compared with a net income of $ 774 million or 46 cents per share in the year-ago quarter. However, the second quarter of fiscal 2011 adjusted (excluding special items) EPS was 77 cents, well above the Zacks Consensus Estimate of 72 cents.
Chipset Statistics
During the second quarter of 2011, Qualcomm shipped approximately 118 million CDMA-based MSM chipsets, up 27% year over year and flat sequentially. This was also better than the company’s guidance of a mid-point of 115 million. Average selling price of mobile handset with an in-build Qualcomm chipset during this quarter was around $ 200 -$ 206.
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 provide to CDMA iPhones.
Operating Metrics
Quarterly operating income was $ 1,073 million compared with an operating income of $ 776 million in the year-ago quarter. Gross margin was 64.8% compared with 69.6% in the year-ago quarter. Quarterly operating margin was 27.7% compared with 29.1% in the prior-year quarter. In the reported quarter, the company returned $ 316 million (19 cents per share) to its shareholders in the form of cash dividend.
Cash Flow
During the reported quarter, Qualcomm generated $ 1,768 million of cash from operation compared with $ 793 million in the prior-year quarter. Free cash flow (cash flow from operations less capital expenditures) during the second quarter was $ 1,689 million compared with $ 685 million in the year-ago quarter.
Liquidity
At the end of the second quarter of fiscal 2011, the company had $ 22,106 million of cash & marketable securities and $ 1,100 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.
Third Quarter of Fiscal 2011 Financial Guidance
The third-quarter revenue will be within the range of $ 3.35 billion – $ 3.65 billion. EPS will be within the range of 60 cents – 64 cents, excluding 8 cents per share of stock-based compensation expenditures. Its mid-point of 62 cents is a penny above the current Zacks Consensus Estimate. Qualcomm is expected to ship 115 million – 119 million MSM chipsets during the third quarter of fiscal 2011.
Full Fiscal 2011 Financial Guidance
Fiscal 2011 revenue will be within the range of $ 14.1 billion – $ 14.7 billion. Its mid-point of $ 14.4 billion is well above the current Zacks Consensus Estimate of around $ 14 billion. EPS will be within the range of $ 2.72 – $ 2.80, excluding 33 cents per share of stock-based compensation expenditures. Its mid-point of $ 2.76 is significantly above the current Zacks Consensus Estimate of $ 2.70.
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.
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