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Morningstar | Qualcomm Reports Solid 1Q Results in the Wake of Challenging Smartphone Environment

Qualcomm reported fiscal first-quarter results that fell slightly below our expectations, owing to a challenging smartphone environment. Despite the near-term headwinds plaguing major OEMs due to weak smartphone demand in China, Qualcomm’s forward guidance was quite reasonable thanks to its latest Snapdragon processors set to be featured in upcoming flagship devices. On Jan. 29, the firm concluded its closing arguments in the case with the U.S. FTC concerning Qualcomm’s alleged anticompetitive behavior related to the relationship between its licensing and chip businesses. After reviewing transcripts of the closing arguments and the trial itself, we reiterate our view that we expect Qualcomm to maintain its licensing business model. CEO Steve Mollenkopf also noted that management expects to reach a resolution with Apple through settlement or litigation in 2019 as additional court rulings in the U.S., China, and Germany come to fruition. While shares continue to trade at a discount to our unchanged $72 fair value estimate for narrow-moat Qualcomm, due to the cloud of uncertainty hanging over the licensing business, we’d steer prospective investors to wide-moat Intel.

First-quarter revenue were down 20% year over year and 16% sequentially to $4.8 billion. QCT (the chip business) sales fell 20% both year over year and sequentially to $3.7 billion due to lost share at Apple and weakness particularly in the mid- and low-end of the smartphone market. QTL (the licensing business) revenue fell 20% year over year and 9% sequentially to $1.0 billion, as a $150 million interim payment from Huawei was mostly offset by lower royalty units in the December quarter related to the aforementioned smartphone weakness in China and emerging markets. Both QCT and QTL non-GAAP EBT margins came in above guidance at 16% and 58%, respectively, thanks to stronger gross margins in QCT and lower operating and litigation expenses.

Management expects second-quarter revenue to be at a midpoint of $4.8 billion with QTL revenue ranging from $1.0 billion to $1.1 billion. The QTL revenue range implies a year-over-year decline of 10% to 18% attributed to a less favorable mix and broader smartphone weakness. We note the interim agreement with Huawei is a positive sign for Qualcomm and QTL, as it runs through the third fiscal-quarter of 2019 with Qualcomm receiving $150 million each quarter. Although 2019 will continue to be rocky for the firm amidst a lack of royalty payments from Apple, we continue to view the firm as a leader in 5G with 30 plus commercial 5G mobile design wins based on Qualcomm’s Snapdragon 855 and X50 modem offerings. Per Mollenkopf, nearly all of the 5G-related design wins will use Qualcomm RF front-end solutions, thus illustrating content gains that should stabilize QCT performance going forward.