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Morningstar | QCOM Updated Forecasts and Estimates from 09 Nov 2018

Qualcomm reported fourth-quarter results above guidance but modestly lower than our expectations, as interim licensing payments and withheld royalties continue to distort its financial performance. Management reiterated its view that the dispute with Apple will be resolved either through settlement or litigation, with multiple patent infringement rulings in China and Germany against Apple set to occur before the end of calendar 2018, which could lead to a resolution sooner rather than later. While we reiterate our long-held view that Qualcomm will successfully defend the viability of its licensing business, or QTL, the uncertainty around the timeline remains murky at best. With the termination of the NXP Semiconductors merger back in July, our positive view on the firm revolves around its opportunity in the upcoming transition to 5G and diversification efforts in RF front-end and automotive chips. Nevertheless, the near-term will continue to be choppy, and while shares of narrow-moat Qualcomm are trading at a discount to our unchanged fair value of $72, we think prospective investors would be better served looking at wide-moat Intel that is trading at a more attractive margin of safety relative to our fair value estimate of $65 for the chip titan.

Fourth-quarter sales were down 2% year over year to $5.8 billion, with flat chip segment, or QCT, sales modestly offset by QTL revenue down 6% year-over-year due to a lack of royalties from Apple and Huawei. QCT benefited from solid demand from Chinese OEMs, which helped mitigate share loss at Apple. For fiscal 2018, revenue rose 2% to $22.7 billion, as non-smartphone adjacencies spurred QCT growth of 5%, while QTL fell 20% for the aforementioned lack of royalties. However, management noted global handset ASPs grew more than 10% year over year in fiscal 2018, while 3G/4G devices shipments are expected to grow 5% in calendar 2018, implying strong QTL growth if Qualcomm resolves its disputes. Gross margins for fiscal 2018 fell to 54.9% from 56.1% last year due to a less favorable product mix skewed to QCT.

Management expects first-quarter revenue to be at a midpoint of $4.9 billion, with QTL revenue between $1.0 and $1.1 billion. This implies substantially lower QCT sales (down 18% year over year), with chip shipments down 22% at the midpoint (185 million units) due to lost Apple modem share and lower demand from China on weaker sell-through following a strong fiscal fourth quarter. Worth noting, however, is that the Apple share loss is expected to be most impactful during the fiscal first quarter, with Apple volumes down 50 million to 55 million units versus the same quarter last year. Although the near-term volume decline will negatively impact QCT earnings before tax margins (guided to 14% during the quarter), we expect Qualcomm’s QCT EBT margins will recover to the high-teens in the second half of fiscal 2019 due to an improved product mix, initial 5G launches, growth in adjacencies, and cost reduction efforts.