SAN DIEGO, CALIF. (TheStreet) -- Shares of Qualcomm (QCOM) were knocked down by more than 11% to $68.45 by Thursday afternoon after the semiconductor company reported fiscal year fourth quarter sales and profit that fell short of Wall Street's expectations, drawing further attention to its legal woes in China.
Qualcomm closed its fiscal year with revenue of $6.69 billion for the September quarter, up 3% year-over-year, but 5% less than the market consensus of $7.04 billion. The San Diego firm posted adjusted net income of $2.14 billion, which translated to non-GAAP earnings per share of $1.26, or 4% less than anticipated.
More troubling than the miss, however, was Qualcomm's disconcerting statements around unresolved troubles in China where its technology licensing business (QTL) is under investigation by the National Development and Reform Commission (NDRC). The legal trouble is hampering the company's ability to collect royalty payments in the country, and could lead to expensive fines and reduced royalties going forward.
"We now have signed more than 75 single mode LTE licenses with Chinese OEMs. Having said that, OEMs supplying a meaningful percentage of three-mode devices remain unlicensed," Qualcomm CEO Steven Mollenkopf cautioned during a conference call with analysts. "We remain in discussions with many of these OEMs, but the negotiations are being delayed, at least in part by the pending NDRC investigation."
As a result, the company lowered its fiscal 2015 guidance and freaked out Wall Street in the process. The low end, full year guidance of $240 billion in device sales and $26.8 billion in revenue, which respectively would represent a 1% decline and 1% improvement year over year, reflects the "status quo" in China, President Derek Aberle said. So, if there's a silver lining, it's that management is already factoring its China challenges into 2015 guidance, meaning hopefully no more earnings misses in the fiscal year ahead.
On the plus side, Qualcomm reported record MSM chip shipments of 236 million, up 24% over the year ago quarter, and forecasted MSM chip shipments for the December quarter of 250 million to 270 million. The company is also anticipated to benefit from the global shift to LTE. So despite the China woes, Qualcomm's otherwise fundamentally sound business seems to have most analysts optimistic about the company's long-term potential to route around this obstacle and return value to investors.
Here's what Wall Street analysts made of Qualcomm's complicated fiscal fourth quarter report:
Canaccord Genuity analyst T. Michael Walkley (But, $90 PT)
"While we realize the increased uncertainty on collecting the full amount of royalties from Chinese OEMs could remain an overhang for several quarters or at least until the NDRC reaches a conclusion and Qualcomm has a better handle on the four issues resulting in its lower 3G/4G device estimates it anticipates collecting licensing revenue, we believe underlying industry fundamentals remain healthy. ... Longer-term, we believe new market opportunities such as the Internet of Things and other areas through Qualcomm's strong R&D investments can help Qualcomm achieve solid long-term earnings growth. In the near-term, we anticipate Qualcomm will increase cash return levels to shareholders potentially supporting the share price at the current pre-market valuation of 10x ex-cash the mid-point of Qualcomm's F2015 guidance."
JMP Securities analyst Alex Gauna (Outperform, $85 PT)
"We recommend investors look through this near-term uncertainty and use it as an opportunity to buy the stock because: 1) Qualcomm continues to remain relatively unrivaled in 4G-LTE and multi-mode capabilities where growth is strong; 2) it has negotiating leverage over the licensees in dispute that need Qualcomm's technology to be competitive in global markets; and 3) the company has deep experience with these types of disputes in the past and a solid track record of favorable resolutions."
William Blair analyst Anil Doralda (Outperform, No PT)
"In a nutshell, Qualcomm's September quarter results and fiscal 2015 guidance were unimpressive and amplified by multiple headwinds. We believe the company was adversely affected on two key fronts: 1) headwinds in China related to the ongoing NDRC litigation and Chinese handset vendors continued unwillingness to pay Qualcomm royalties, and 2) the continuing mix shift toward low-end smartphones ... we believe there are several reasons to remain positive in the long run. For starters, the adoption of 4G devices remains a multiyear secular trend where Qualcomm continues to have a significant competitive advantage. In addition, with nearly $19 per share in net cash and investments as well as $4.6 billion remaining on the company's share repurchase program, management is in a position to accelerate investor-friendly capital deployments moving forward. Furthermore, we view the company's November 19 analyst day as a catalyst for the stock, as management plans to discuss the company's long-term outlook and growth drivers in more detail during the event."
Credit Suisse analyst Kulbinder Garcha (Outperform, $85 PT)
"While it appears that end market fundamentals appear solid, and QCT strength shines through, issues with China continue to cloud the story, as we had previewed. We tweak down our EPS for FY15 by 3.5%, to $5.23, and introduce a FY 16 estimate at $5.60. Near term the stock will continue to be range-bound. We believe the shift towards LTE globally remains a significant driver, and we retain our Outperform rating."
Oppenheimer analyst Ittai Kidron (Outperform, $84 PT)
"Qualcomm's results and complicated guide disappointed and could weigh on the shares NT, but once the shares reset, we believe further downside risk is balanced by the financial ammunition in potential further buyback activity and dividend increases. LT, we remain positive on Qualcomm's tech positioning."
Bank of America Merrill Lynch analyst Tal Liani (Neutral, $85 PT)
"This week we met with carriers, equipment vendors and regulators in Beijing, discussing the Chinese 4G market, demand for smartphones, and the sensitive issue of royalty disputes with Qualcomm. In short, the Chinese cellular market is booming, licenses are awarded, carriers are committed to 4G deployments, and 2014/2015 are expected to be the golden years for base station deployments and customer migration. However, we note that China's regulator and the local vendors are also reluctant to pay Qualcomm its standard royalty fee and see it as an inhibitor to growth. All participants commented on the anti-monopoly investigation, leading us to believe that royalty discounts are not a question of if, but only a question of when and how much. We reiterate our Neutral rating."