Qualcomm Earnings: A Slow and Steady Recovery in Smartphone Demand

Narrow-moat Qualcomm QCOM reported solid fiscal fourth-quarter results and provided investors with a decent outlook for the December quarter, as the company foresees an ongoing recovery in Android-based smartphone demand, especially among Chinese device makers. Further, we surmise that demand for chips going into Apple’s latest iPhones seems to be holding up well. We maintain our $140 fair value estimate and continue to view shares as undervalued.

Revenue in the September quarter was $8.63 billion, down 24% year over year but up 2% sequentially and ahead of the midpoint of guidance of $8.50 billion. Chip revenue (QCT segment) outperformed management’s expectations at $7.37 billion, down 26% year over year but up 3% sequentially and ahead of the midpoint of guidance of $7.20 billion. Royalty revenue (QTL segment) was $1.26 billion, down 12% year over year but up 3% sequentially and in line with guidance. Adjusted gross margins were flattish at 55.6% while we calculate that adjusted EBIT margin rose 60 basis points sequentially to 30.5%.

In the December quarter, Qualcomm expects revenue of $9.1 billion-$9.9 billion, which, at the midpoint, would represent flattish revenue year over year and 9% sequential growth. QCT revenue of $8.0 billion at the midpoint would represent growth of 2% year over year and 9% sequentially. Qualcomm expects 10% plus sequential growth in handset revenue, including 35% plus growth from Chinese smartphone makers. Auto and Internet of Things revenue should both be down seasonally. Meanwhile, QTL revenue of $1.4 billion at the midpoint would represent an 8% sequential decline but would be up 12% year over year. We think that Adjusted EPS guidance of $2.35 at the midpoint implies a strong rebound in adjusted operating margin to the mid-30% range.