RealMoney Silver - QCOM: Not Bad Considering Trouble in Handset Space

QCOM: Not Bad Considering Trouble in Handset Space
By Ben Thomas
RealMoney Contributor
1/23/2008 6:32 PM EST

Updated from Jan. 22 with earnings report

For the quarter just ended, Qualcomm (QCOM) posted adjusted EPS of 52 cents on total revenue of $2.44 billion.

The company is guiding the current quarter to EPS in the range of 50 to 52 cents on total revenue of $2.4 billion to $2.5 billion. That compares with the Street estimate of 52 cents on $2.44 billion in sales. The company sees the FY08 EPS in the $2.01-$2.07 range (consensus is for $2.12) on sales of $9.6 billion to $10 billion (street at $9.83 billion). This guidance excludes anything associated with royalties from Nokia (NOK) . Embedded in this guidance is a blended CDMA ASP of $203.

Segment Revenue

QCT revenue of $1.57 billion (28% YOY growth and slightly better than expected). QTL revenue of $650 million (8% YOY growth and toward the low end of expectations). QWI revenue of $210 million (12% YOY growth and also near the low end of expectations).

ASPs for CDMA handsets during the quarter was $213 (higher than expected) The company is assuming some share gain in CDMA chipsets during the upcoming quarter (low end specifically).

Overall, it was a decent report, with the market showing some relief that the numbers did not come down materially in light of all the weakness across the handset space (Motorola (MOT) , Sprint (S) , etc.) As I said in the preview, the valuation seems pretty reasonable, but the story still has a lot of legal issues to work through.

Preview

Qualcomm is slated to report earnings after the close Wednesday with a conference call at 4:45 p.m. EST. Current projections call for the company to produce EPS of 53 cents on total revenue of $2.4 billion. Management guided to a range of 52 cents to 53 cents per share.

Look for the core business, CDMA (also known at QCT), to produce revenue in the $1.5 billion range. Licensing (or QTL) should report revenue in the $650 million to $675 million range, and Wireless Internet (QWI) revenue is expected to come in around the $210 million to $220 million range. The Street is expecting gross margins around 68%, with operating margins in the 38% range. Look for further pressure on overall handset ASPs, with the $200 level being the latest target.

On the call, I'll be listening to management's comments on the overall IT spending environment as well as updates on the overall growth rates of 3G/4G CDMA market share. Also, look for some color around the recent industry lawsuits and injunctions regarding Broadcom (BRCM) and Nokia (NOK) . No doubt, management will put a positive spin on it, but it's looking like Qualcomm is having trouble moving to the next generation of wireless and retaining the dominant royalty rates it once demanded.

At 17 times estimates, it's not a horrible trade, but I suspect you might be able to find a better way to play the same growth in end markets without having to have a law degree to sort through all the industry injunctions.

At the time of publication, Thomas had no positions in the stocks mentioned, although holdings can change at any time without notice.

Ben Thomas, CFA, is the founder and managing principal of Waycross Partners. Waycross Partners is a long/short hedge fund that focuses on the technology and health care sectors. Before Waycross, Ben was a portfolio manager and senior equity analyst at INVESCO, where he was part of a team that managed over $20 billion in assets. While at INVESCO, he was the lead manager for the INVESCO Midcap Growth fund as well as the firm?s senior equity analyst covering technology stocks.

Prior to INVESCO, Ben worked for Banc One Securities and Prudential Securities. He graduated from the University of Kentucky with a bachelor?s degree in finance and went on to earn his MBA from Indiana University. Ben is a member of the CFA Institute and serves on the board of directors for the CFA Society of Louisville.

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