Qualcomm Inc. (QCOM) is scheduled to release its first quarter earnings today. We expect the quarter to be in line with guidance and the Street, with sales of $4.5 billion and earnings of $0.89 per share.
QCT sales are expected to come in at $3 billion on 150 million mobile station modems (MSMs), which represents a 27 percent year-over-year increase in unit volumes. Apple's iPhone 4S generated record volumes in Q1 with total iPhone unit volumes coming in at 37 million units. Consumer Intelligence Research Partners believes 89 percent of iPhone volume was generated by iPhone 4S sales. Since Qualcomm has several chips in the 4S, we believe Apple's strength in the quarter will reflect positively. However, this may be largely offset by slower non-Samsung Android sales.
However, because Apple only uses Qualcomm's stand-alone modems (MDM6610), which have a lower ASP than the fully integrated MSMs, Qualcomm's value in each iPhone's bill of materials may be slightly lower than on other smartphone models.
Third Quarter Results & Earnings History
QCOM reported revenues of $4.12 billion, up 39 percent year-over-year and 14 percent sequentially. Operating income came in at $1.24 billion, up 29 percent year-over-year and 11 percent sequentially and net income was $1.06 billion, up 22 percent year-over-year and 2 percent sequentially.
Diluted EPS was $0.62, up 17 percent year-over-year and 2 percent sequentially, with an effective tax rate of 20 percent.
QCOM's operating cash flow stood at $1.82 billion, up 67 percent year-over-year, and 44 percent of revenues.
QCOM reported an EPS of $0.62 in Q4 and $0.73 in Q3 of 2011 on revenues of $4.12 billion and $3.62 billion respectively.
Societe Generale maintains a Hold rating on the company and its DCF-defined $55.5 price target reflects expectations of strong volume advances but also declining ASPs and margins as competition rises and smartphone market mix slips. The DCF model includes a WACC of 9.8 percent and 4 percent annual growth over 2015-22e, and 3 percent per annum thereafter, with a long-term EBIT margin of 32 percent. Downside risks to price target are falling market volume demand, rising competition and erosion in ASP mix. Higher than anticipated design wins are upside.
On a year-over-year basis, new socket wins with RIM in their new BlackBerry 7 line of products and with Nokia in its new Lumia line of Windows Phone 7 devices will certainly help increase market share for the quarter. Offsetting these positive influences is the weakness in HTC smartphone sales versus Samsung's and may have a negative impact on QCT sales as HTC uses Qualcomm chips in their products, whereas Samsung's highly successful Galaxy Nexus and Galaxy SII do not. As HTC continues to lose market share and Samsung continues to gain market share, QCT's sales are negatively impacted.
While Apple is a key driver, it seems like much of Apple's strong 4Q11 upside is already in Qualcomm's positive mid-quarter update. There are concerns over later current-year growth, as the Atheros boost runs out. Also, the company's ability to sustain high market shares against other ARM-based mobile IC suppliers will be tested, with potentially adverse implications on pricing, and this will likely limit the stock's upside.