zacks qualcomm inc. 14 02

8/11/2019 Zacks Qualcomm Inc. 14 02

1/7

2014 Zacks Investment Research, All Rights reserved. www.Zacks.com 111 North Canal Street, Chicago IL 60606

Qualcomm Inc. (QCOM-NASDAQ)

SUMMARY

SUMMARY DATA

Risk Level * Low

Type of Stock Large-Blen

Industry Wireless Equipm

Zacks IndustryRank * 42 out of 26

Current Recommendation NEUTRAL

Prior Recommendation Outperform

Date of Last Change 04/09/2013

Current Price (02/18/14) $75.60

Target Price $79.00

Qualcomm reported mixed financial results for thquarter of fiscal 2014. Although net income outpthe Zacks Consensus Estimate, total revenue fell bthe same. Notably, management raised its previgiven financial outlook for full fiscal 2014. We bethat the long-term fundamentals of Qualcomm reintriguing given the steadily growing demand foLTE-enabled mobile handsets in developed counrapid transition from 2G to 3G/4G in China and emerging markets and increasing licensing reveQualcomm has a very healthy cash position. Oother hand, decreasing growth rate of the hig

smartphones, intensifying competition in the lowsmartphone chipset segment and litigation issuChina are near term concerns. We, therefore, maour long term Neutral recommendation on Qualcom

52-Week High $76.75

52-Week Low $59.02

One-Year Return (%) 17.40

Beta 1.05

Average Daily Volume (sh) 10,879,907

Shares Outstanding (mil) 1,689

Market Capitalization ($mil) $127,688

Short Interest Ratio (days) 2.82

Institutional Ownership (%) 23

Insider Ownership (%) 0

Annual Cash Dividend $1.40

Dividend Yield (%) 1.85

5-Yr. Historical Growth Rates

Sales (%) 23.3

Earnings Per Share (%) 24.1

Dividend (%) 17.1

P/E using TTM EPS 18.9

P/E using 2014 Estimate 16.4

P/E using 2015 Estimate 14.7

Zacks Rank*: Short Term1 3 months outlook 3 -Hold

* Definition / Disclosure on last page

ZACKS CONSENSUS ESTIMATES

Revenue Estimates(In millions of $)

Q1 Q2 Q3 Q4 Year

(Dec) (Mar) (Jun) (Sep) (Sep)

2012 4,681 A 4,943 A 4,626 A 4,871 A 19,121 A

2013 6,018 A 6,124 A 6,243 A 6,480 A 24,866 A

2014 6,622 A 6,497 E 6,667 E 7,057 E 26,843 E

2015 7,411 E 29,361 E

Earnings Per Share Estimates(EPS is operating earnings before non-recurring items, but including employe

stock options expenses)

Q1 Q2 Q3 Q4 Year(Dec) (Mar) (Jun) (Sep) (Sep)

2012 $0.85 A $0.90 A $0.73 A $0.76 A $3.25 A2013 $1.14 A $1.05 A $0.92 A $0.91 A $4.01 A2014 $1.13 A $1.09 E $1.14E $1.26 E $4.62E2015 $1.30 E $5.15E

Projected EPS Growth -Next 5 Years % 12

February 19, 2014
http://www.zacks.com/


2/7

Equity Research QCOM | Page 2

OVERVIEW

Qualcomm Inc. (QCOM), designs, manufactures, and markets digital wireless telecom products andservices based on the Code Division Multiple Access (CDMA) technology. The products include CDMA -based integrated circuits (ICs) and system software for wireless voice and data communications as wellas global positioning system (GPS) products. The company also licenses many of its 5,700+ patents andintellectual property to manufacturers of wireless equipment. Qualcomm usually receives one-timelicense fees and ongoing royalties from companies using CDMA technology and associated protocols.

Qualcomm also develops a wide range of wireless solutions, such as MediaFLO for mobile videobroadcast and BREW (Binary Runtime Environment for Wireless); a handset platform intended to drivewireless data applications. Qualcomm s business is organized into three reporting segments as follows:

Qualcomm CDMA Technologies (QCT):This segment reports operating results for sales ofCDMA-based integrated circuit devices (chips) and system software for wireless voice and datacommunications, as well as GPS products. QCT s integrated circuit (IC) products are used mainlin mobile phones, wireless data access cards, and infrastructure equipments. QCT offers a broaportfolio of products, that supportsCDMA2000 1X, 1xEV-DO, EV-DO Revision A, EV-DORevision B and UMB. Qualcomm also develops IC that supports GSM/GPRS, WCDMA, HSDPAand HSUPA technologies. QCT accounted for nearly 67.2% of the total revenue in fiscal 2013.

Qualcomm Technology Licensing (QTL):This segment reports revenuesreceived fromlicenses to the intellectual property portfolio, which includes CDMAOne, CDMA2000 1X EV-DO/1xEV-DV, TD-SCDMA, and WCDMA technology solutions. QTL receives revenues fromlicense fees as well as royalties based on global sales by licensees of products incorporating orusing Qualcomm s intellectual property. QTL generated approximately30.4% of the total revenuein fiscal 2013.

Qualcomm Wireless & Internet (QWI):This segment provides convergence services to thewireless data market using BREW and QChat products, and also hardware and analytical supporto the U.S. government agencies. The Internet division provides technology to support andaccelerate the growth of the wireless data market. The Enterprise division provides equipment,software and services to enable companies to have mobile interconnection. The Government

division provides hardware and analytical expertise involving wireless communicationstechnologies to the government agencies. QWI accounted for the remaining2.4% of the totalrevenue in fiscal 2013.

REASONS TO BUY

Qualcomm benefits from the significant growth of 3G wireless technologies and smartphones in themerging markets, particularly in China. The next-generation super-fast 4G Long Term Evolutio(LTE) technology has also boosted Qualcomm. The growing acceptance of the LTE technology haprompted the mobile handset manufacturers to develop phones that will be compatible with thinetwork. Qualcomm has firmly established its leadership position in the high-end smartphonsegment. The company is the major chipset provider for Apple and Samsung, which togetheconstitute 40% of the smarphone and 50% of the tablet markets globally. In addition, QualcommGobi mobile Internet connectivity solutions will provide 3G/4G LTE connectivity to those devices thawill run on Windows 8 software. Qualcomm is the sole chipset developer for both Windows-basesmartphones and notebooks.

Qualcomm currently has more than 250 royalty bearing licensees worldwide. Additionally, thcompany has over 90 single-mode OFDMA licensees. Qualcomm has introduced its next-generatio


3/7


processors called Snapdragon 600 and 800. These chipsets will provide 40%-75% increaseperformance over the S4 Pro series and are thefirst chips operating on the TSMC 28nm technologySnapdragon 600 will have Quad Core Krait 300 CPU running up to 1.9 GHz and Adreno 320 GPUSnapdragon 800 will includeQuad Core Krait 400 CPUrunning up to 2.3 GHz and Adreno 330 GPUThese LTE-enabled chipsets will also have integrated 802.11 ac Wi-Fi connections. Shipment foSnapdragon 600 and Snapdragon 800 chipsets are expected to ramp up going forward. Qualcommhas launched its innovative RF360 Front End Solutions. This new technology will solve the problemof LTE fragmentation faced by most of the large handset manufacturers.

During the first quarter of fiscal 2014, Qualcomm shipped 213 million MSM chipsets, up 17% yeaover year. This figure was far better than the company s guidance of a mid-point of 202.5 millioAverage selling price (ASP) of mobile handsets with an in-build Qualcomm chipset during thiquarter was around $219-$225. Over1,350 devices are using Snapdragon chipsets and another 50devices are based on its Reference Design solutions. Qualcomm has introduced a 64-bmicroprocessor for mobile handsets called Snapdragon 410. The processor is integrated with 4GLTE (Long-Term Evolution) connectivity technology. Snapdragon 410 is designed for phones priceat $150 or less, particularly targeting the upcoming nationwide LTE network deployment in China.

Acquisition of Atheros Communications has transformed Qualcomm into an integrated chipsedeveloper for the mobile computing market. Qualcomm can play as a single window to any wirelesgadget maker (mobile phone/tablets) for an integrated Snapdragon chipset platform supporting W

Fi. Besides mobile computing, Qualcomm can now diversify in the consumer electronics segmenparticularly in the home networking market. Atheros manufactures Wi-Fi chips for televisions, videgames, printers, and other home devices. Qualcomm has already started working on the referencdesign for set-top boxes and other home connected devices.

Qualcomm has a highly diversified product portfolio. Several original equipment manufacturers aradopting high-speed 3G and 4G technologies for connecting tablets, eReaders, machine-to-machincommunication devices, and gaming devices. Qualcomm s state-of-the-art Snapdragon platform anGobi platform for global wireless connectivity support almost all varieties of mobile broadbanequipment. Recently, Qualcomm unveiled an innovative smartwatch called Toq . This smartwatccan simultaneously receive phone calls, send messages and play music.

In Jan 2014, Qualcomm acquired a portfolio of patents from Hewlett-Packard for an undiscloseamount.The portfolio comprises 1,400 granted and pending patent applications from the U.S. anabout 1,000 granted and pending patent applications from other countries including China, EnglandGermany, Japan and South Korea. The patent portfolio covers a wide range of technologies thainclude fundamental mobile operating system techniques. Acquisition of this patent portfolio wenable Qualcomm to more aggressively expand into the global mobility market.

REASONS TO SELL

Aggressive competition in the mobile phone chipset market may hurt Qualcomm s profit in the future

The company is facing severe competitive threat from its closest rival, Intel, which has beeredesigning its chipsets for the mobile computing market. Intel has started shipment of its first multmode LTE baseband modem. Competition is likely to emanate from formidable rivals like Broadcomand Nvidia. Broadcom already introduced its first LTE baseband chipset in the market and Nvidiintroduced Tegra 4i, its first LTE-integrated application processor. There is also competition fromlow-cost chip suppliers like Mediatek of Taiwan, VIA Technologies of China and SpreadtrumCommunications. Although, the global smartphone market is expected to maintain its momentum ithe next 4-5 years, the major part of this growth is likely to come from the low-cost emerginmarkets, which may pressurize Qualcomm s margins.


4/7


The ongoing global economic volatility may severely impact the telecommunications industry, whicin turn may negatively affect the demand for Qualcomm developed chipsets. Qualcomm s futurgrowth is dependent upon the continuous deployment of CDMA/OFDMA-based networtechnologies. If the emerging markets fail to maintain the current rate of installing high-speed 3Gnext-generation 4G or any hybrid 3G-4G wireless networks, the demand for smartphones wdecline, which will affect Qualcomm s financials.

Qualcomm is facing an anti-monopoly investigation by the National Development and ReformCommission (NDRC), the regulatory authority of China. The company stated that it isn't aware of anactivity that violates the anti-monopoly law in China and will continue to cooperate with NDRC. Thinvestigation is likely to impede Qualcomm s growth in China. There are many such pendinlitigation cases relating to infringement of patent rights against Qualcomm throughout the world. the company loses these pending cases, then it will put pressure on the company s cash flow.

The smartphone market has become intensely competitive resulting in lower ASP, which in turnmay negatively impact Qualcomm s royalty business. Fluctuation in royalty rates and weaker-thanexpected smartphone demand may hurt Qualcomm s top line. Qualcomm generates most of itrevenues from licensing and royalties. However, the terms and duration of the deals are not fulldisclosed. Since Qualcomm is more aggressively entering into mass market and the Asian marketswe believe that margin pressure willremain in the near future. Management stated that the ASP o

mobile handset with an in-built Qualcomm chipset during fiscal 2014 will be around $216 -$230which is $3 less than the prior-year level.

RECENT NEWS

First Quarter of Fiscal 2014 Financial Results Jan 29, 2014

Qualcomm Reported Mixed Results

On a GAAP basis, quarterly net income from continuing operations was $1,444 million or $0.84 per sharecompared with $1,903 million or $1.09 per share in the year-ago quarter. However, adjusted (excludingspecial items) earnings per share came in at $1.13, easily beating the Zacks Consensus Estimate of$1.10. Quarterly total revenue of $6,622 million was up 10% year over year, but fell below the ZacksConsensus Estimate of $6,700 million. Segment wise, Qualcomm CDMA Technologies businessescontributed $4,616 million of revenuesin the firstquarter, up12% over the prior-year quarter. QuarterlyEBT margin was 20%. Qualcomm Technology Licensing generated $1,900 million in revenues, up 8%year over year. Quarterly EBT margin was 88%.

Quarterly operating income was $1,493 million compared with $2,088 million in the year-ago quarter.Gross margin was 59.1% compared with 65.3% in the year-ago quarter. Quarterly operating margin was21.8% compared with 31.6% in the prior-year quarter. In the reported quarter, the company returned$590 million (35 cents per share) to its shareholders in the form of cash dividends and another $1billionthrough buyback of 14.2 million shares of common stock.

During the first quarter of fiscal 2014, Qualcomm generated $2,781 million of cash from operationscompared with $1,975 million in the prior-year quarter. Free cash flow, in the reported quarter, was$2,571 million against $1,770 million in the year-ago quarter. At the end of the first quarter of fiscal 2014Qualcomm had $31,610 million of cash and marketable securities and no outstanding debt on its balancesheet compared with $29,406 million of cash and marketable securities and no outstanding debt at theend of fiscal 2013.

SecondQuarter of Fiscal 2014Financial Guidance


5/7


The first-quarter revenues are expected in the range of $6.1 billion - $6.7 billion. GAAP earnings peshare are projected to be $0.99 $1.09. Non-GAAP earnings per share are likely to range betwee$1.03 -$1.13 including $0.13 per share of stock-based compensation expense. Qualcomm is expected tship 180 195 million MSM chipsets in the second quarter of fiscal 2014.

Fiscal 2014Financial Guidance

The fiscal 2014 revenues are expected in the $26 billion -$27.5 billion range. GAAP earnings per share

are likely to be between $4.33 and $4.53. Non-GAAP earnings per share are expected in the band of$4.49 -$4.69 including $0.51 per share of stock-based compensation expense. ASP of mobile handsetwith an in-built Qualcomm chipset during fiscal 2014 is projected around $216 -$230.

VALUATION

Qualcomm is at present trading at 16.4x our fiscal 2014 earnings estimate, which is at a massivdiscount to the industry average but a slight premium to the S&P 500. With respect to our forward fisca2015 earnings estimate, the stock is currently trading at 14.7x, this is also at a huge discount to thindustry average but at par with the S&P 500. In our view, the company is in a position to benefit ove

time, as the demand for high-end smartphones and tablets are increasing gradually, supported by rapideployment of 3G and super-fast 4G networks throughout the world. Qualcomm has a diversified producprortfolio, a powerful pipeline full of innovative products and a solid list of clientele. Nevertheless, wbelieve that the stock is currently fairly valued and will not provide above-martket gain anytime soon. Wetherefore, maintain our Neutral recommendation with a target price of $79, based on 17.1x our fisca2014 earnings estimate., a premium over the S&P 500.

Key Indicators

P/EF1

P/EF2

Est. 5-YrEPS Gr%

P/CF(TTM)

P/E(TTM)

P/E5-Yr

High(TTM)

P/E5-Yr

Low(TTM)

QUALCOMM INC (QCOM) 16.4 14.7 14.3 15.9 18.9 29.6 15.8

Industry Average 357.8 26.8 15.1 25.9 137.5 291.7 32.5S&P 500 15.7 14.7 10.7 14.9 18.0 27.7 12.0

NOKIA CP-ADR A (NOK) 24.0 19.7 3.5 22.5 89.2 161.2 4.9ERICSSON LM ADR (ERIC) 16.5 14.2 8.4 9.3 15.1 23.1 4.1ZTE CORP U-ADR (ZTCOY) 16.0 14.9 30.0 30.1 7.3MOTOROLA SOLUTN (MSI) 18.3 16.4 7.0 12.1 15.0 388.0 14.6

TTM is trailing 12 months; F1 is 2014and F2 is 2015, CF is operating cash flow

P/BLast

Qtr.

P/B

5-Yr High

P/B

5-Yr Low

RO E

(TT M )

D/E

Last Qtr.

Div Yield

Last Qtr.

EV/EBITDA

(TTM)QUALCOMM INC(QCOM) 3.4 4.2 2.7 18.3 0.0 1.9 11.9

Industry Average 3.3 3.3 3.3 5.3 0.3 0.5 11.7S&P 500 4.8 9.8 2.9 25.4 2.1


6/7


Earnings Surprise and Estimate Revision History


7/7


DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of QCOM. The EPS and revenue forecasts are the Zacks Consensu

estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personviews as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectrelated to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in threport is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to methe particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as aoffer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for thsecurities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six ttwelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelvmonths. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. Thcurrent distribution of Zacks Ratings is as follows on the 1060companies covered: Outperform - 17.5%, Neutral - 75.5%, Underperform 6.3%Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The mod

assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. ZacRank 5 = Strong Sell. We also provide a Zacks Industry Rankfor each company which provides an idea of the near-term attractiveness ofcompany s industry group. We have 264industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on eacstock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highevalues and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to thsecond, third, and fourth groups of stocks, respectively.

zacks qualcomm inc. 14 02

Documents