RealMoney Silver - Qualcomm Preview: Legal Issues Remain

Qualcomm Preview: Legal Issues Remain
By Bob Faulkner
RealMoney Contributor
11/7/2007 4:33 PM EST

Qualcomm (QCOM) is scheduled to announce results for its fourth quarter 2007 tomorrow after the close, with a conference call to take place at 4:45 p.m. EST. Current consensus is for revenue of $2.26 billion (+13% year over year; -3% quarter over quarter) and pro forma earnings per share of 52 cents.

In the prior quarter, revenue was $2.33 billion (+19% year over year; +5% quarter over quarter) and pro forma EPS were 55 cents (GAAP equaled 47 cents). The pro forma gross margin was 72.4%, up 50 basis points from the year-ago period and essentially flat sequentially, suggesting little leverage on an additional $100 million in revenue. The pro forma operating margin was 42.6%, down 180 basis points year over year and up 50 basis points quarter over quarter. A $100 million increase in SG&A lead to the year-over-year decline. Cash from operations was a very solid $990 million, an increase from last year of about $170 million. The cash account increased about $760 million after the repurchase of 3.1 million shares. Accounts receivable increased $50 million, adding one day to days sales outstanding (30 days). Inventory increased $50 million as well, increasing days of inventory to 52 days. That's a three-day increase sequentially but 10 days from last year.

Qualcomm CDMA Technologies (chip business) was $1.37 billion, +21% year over year and +9% quarter over quarter. The operating margin in this segment was 32.1%, an increase of 60 basis points year over year and 190 basis points vs. second quarter. Chip shipments were 65 million units, with the ASPs up 2% on a year-over-year and quarter-over-quarter basis. Qualcomm Technology Licensing (royalties) enjoyed another solid quarter. Revenue was $766 million, up 20% year over year and 1% quarter over quarter. Royalty units were 88 million vs. 66 million a year ago. (Note: Royalties are recognized one quarter in arrears, so these represent March quarter sales.) The operating margin for the group was 87.2%, down 280 basis points from last year but up 340 basis points from the prior quarter. ASPs were $217 vs. only $213 last year.

As has become management's tradition, it "upgrades" guidance during the final month of the quarter, and there was no exception this quarter. On Sept. 25, 2007, the company raised its outlook for the fourth quarter. Revenue is expected to come in at or above the high end of the prior range of $2.15 billion to $2.25 billion. Chip shipments should be in the 67 million to 68 million range vs. original guidance of 65 million to 68 million. Royalty units are at the midpoint of prior guidance of 90 million to 94 million units, and ASP is expected to be $218 vs. the prior estimate of $222. Pro forma EPS are anticipated to be 52 cents to 53 cents vs. the prior estimate of 48 cents to 50 cents. Taking only the midpoint of prior guidance, however, investors had little trouble coming out with a 50 cents earnings figure.

The issues surrounding Qualcomm at this juncture have little to do with fundamentals, although investors are expecting a better-than-consensus September number and a guide up for December. The stock has underperformed the Nasdaq for most of the last three months since a series of legal setbacks hit the company relative to Broadcom (BRCM) . With a number of other legal issues coming to the forefront, most notably Nokia (NOK) , many investors have been hoping for the company to put these issues in the rear-view mirror. Given the positions management has taken publicly, that doesn't appear likely to happen any time soon.