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Investors in Qualcomm (QCOM) are pleased with the first quarter earnings report despite a softer outlook for the second quarter. Continued worldwide adoption of smart phones and 3G/4G technology will drive Qualcomm's earnings forward thanks to its extremely valuable QTL licensing portfolio.

I continue to be optimistic.

First Quarter Highlights

Qualcomm reported first quarter revenues of $6.62 billion which was up 10.0% on the year before, and up by 2.2% compared to the final quarter. Revenues did however fell short to consensus estimates at $6.69 billion.

Reported net earnings came in at $2.16 billion which was down by 1.9% compared to a year earlier, but up by 19.0% compared to the final quarter of 2013. Reported earnings of $1.26 per share were unchanged compared to last year, and up from $1.05 per share in the final quarter of 2013.

Consensus estimates for earnings stood at $1.18 per share.

The Details

While revenues are not affected by the usage of GAAP and non-GAAP earnings accounting, reported earnings were aided by one time gains. Qualcomm reported a $665 million gain on the sale of the Omnitrac operations, which was a gain of $430 million, or $0.25 per share after-tax. This was partially offset by a $0.20 per share impairment charge related to the QMT business.

Shipments of MSM chips totaled 213 million units, up 17% on the year before. This drove a 10% increase in revenues to $6.62 billion.

Despite top-line sales growth, operating earnings fell by 24% to $1.85 billion. Qualcomm spend more on research & development, increasing its efforts by 20% to $1.33 billion with these expenses now making up a fifth of total revenues. This was partially offset by selling, general and administrative expense which rose by 6% to $623 million, driven by lower legal and litigation expenses.

Looking Ahead

For the current second quarter, Qualcomm sees revenues of $6.1 to $6.7 billion. This means that revenues are seen roughly flat to plus nine percent on an annual basis. Potential growth is driven by a 4 to 13% increase in MSM shipments to 180-195 million units. Analysts were looking for revenues of $6.72 billion.

Total reported device sales are seen up by 9 to 19% to $66.5-$72.5 billion. Note that these are the sales on which Qualcomm generates its license revenues which are hugely profitable.

GAAP earnings are seen between $0.99 and $1.09 per share, comparing to last year's earnings of $1.06 per share.

While Qualcomm is a little cautious for the second quarter it raised the full year outlook. Revenues are continued to be seen between $26 and $27.5 billion. GAAP earnings are now seen between $4.33 and $4.53 per share, up eight cents compared to the previously issued outlook.

The company's full year non-GAAP earnings guidance of $5.00-$5.20 per share was right in line with consensus estimates at $5.09 per share.

QTL Remain The Golden Eggs

Revenues of Qualcomm Technology Licensing totaled $1.90 billion for the quarter, up 8.1% on the year before. Margins remain insane, with operating margins totaling 87.9% of revenues, implying that every dollar increase in revenues nearly translated one-by-one into operating earnings.

Given the reported device sales of $61.6 billion this shows that average royalty payments totaled about 3% of average selling prices on average. As such these royalties based on past efforts are very substantial with premium smart phones, including Apple's (AAPL) iPhone's, often costing more than $500 per device. Of course average selling prices are much lower.

While emerging markets desire for cheaper phones and continued competition might put pressure on average selling prices, the market is still expecting massive growth with unit shipments outpacing these downwards pressures. Notably the introduction of LTE-networks in China for 2015 could be a huge boost for mobile phone markets like Apple and Samsung. Through the QTL licensing, this is beneficial for Qualcomm as well.


Investors push shares towards $73 in after-hours trading, valuing the business at $124 billion. With almost $32 billion in cash and equivalents available, operating assets are valued at $92 billion. One thing to notice is that Qualcomm holds $22.9 billion of those cash assets abroad, as the firm will incur tax charges when repatriating those funds home.

To please investors somewhat, Qualcomm is planning $3 billion in repurchases this year, at a rate of 2.4%. The $0.35 per share quarterly dividend provides investors with another 2.0% yield. Operating assets are valued at 3.4 times annual revenues and 12-13 times annual earnings.

Back in December, I checked out the prospects for the firm with shares trading at similar levels at the time. Increased adoption of 3G and 4G technology in smart phones continues to drive appeal. Investors were pleased with the results, despite falling short of consensus estimates after Apple's results indicated some weakness earlier this week.

Note that the majority of the valuation is driven not just by the cash position of the firm, but by this portfolio of licenses as well, resulting in very higher earnings and cash flows. The adoption to 3G/4G will be a further push for these cash flows, yet competition will not be sitting still. Intel (INTC), among others has the potential to possibly create competing offerings.

For now the outlook is solid with lots of visibility about medium term growth, accompanied by a solid valuation, especially after backing out the solid financial position of the firm.

I still think there might be better days ahead for the firm.

Source: Qualcomm - 3G/4G Adoption And QTL Cash Machine Drives Appeal