Under Reporting by Chinese OEMs Forces Qualcomm (QCOM) to Guide Lower - FBR

QUALCOMM (NASDAQ: QCOM) reported better-than-expected C3Q15 top-line results but the revenue mix continues to shift to lower margin business as Chinese OEMs increasingly under-report royalty bearing handset shipments. The QTL segment has a mid-80% operating margin but relies on third party report for its royalties. To offset the mix shift, management is implementing a cost cutting program that the street is modeling to double operating margins in the coming year.

For C3Q15, Qualcomm reported revenue of $5.45B (–7% QOQ, –19% YOY), better than the Street’s estimate of $5.21B. For QCT, revenue was ~$3.6B, better than the Street’s estimate of $3.2B, as the company saw incremental demand strength for low-tier devices, particularly at a large customer. QTL revenue was ~$1.8B (down 7% QOQ), worse than the Street’s prior ~$1.96B estimate, primarily as the company believes some Chinese licensees under-reported device shipments.

Gross margins of 60.5%, disappointeded as QCT represented a higher proportion of total revenues in the quarter. Overall, Qualcomm reported pro forma EPS of $0.91, $0.05 better than the Street’s estimate primarily owing to the large revenue beat.

Management guided revenues to $5.2B–$6.0B, midpoint of $5.6B, slightly worse than the Street’s $5.76B. For QTL, management guided total device revenue to a midpoint of $54B, worse than the Street’s $69B estimate as under-reported are expected to drive the delta. MSM shipments were forecasted to grow to 225M–245M units, significantly better than the Street’s prior estimate of 205M. Operating expenses were guided up +2-4% QOQ. Net, management guided EPS to $0.85 at the midpoint, significantly worse than the Street’s $1.08.

FBR Capital analyst, Christopher Rolland, expects increasing pressure as innovation has slowed and OEMs try to build their own apps processors and baseband modems. No change to the Market Perform rating but the price target was reduced to $66 from $68 on lower earnings estimates with a consistent multiple.

For an analyst ratings summary and ratings history on Qualcomm click here. For more ratings news on Qualcomm click here.

Shares of Qualcomm closed at $60.26 yesterday.

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