On Wednesday evening, after the closing bell, Qualcomm Incorporated (QCOM) released the firm's fiscal second quarter financial results. These results were mixed at best and somewhat disappointing.
As readers will see as we progress through this story, it was the guidance provided by the firm that was truly ugly. Perhaps ugly just is not an adequately strong enough word to describe these numbers. Let us proceed.
For the three month period ended March 26th, Qualcomm posted an adjusted EPS of $2.15 (GAAP EPS: $1.52) on revenue of $9.275B. While the adjusted earnings per share print managed to beat Wall Street by a penny, the revenue print not only fell short of expectations, but reflected a 16.9% year over year contraction from the year ago comparison.
Cost of revenues decreased 10.7% to $4.153B, as total costs and expenses decreased 1.7% to $7.185B. This left the firm with operating income of $2.09B, which was a 45.8% haircut from FQ2 2022. After accounting for interest and taxes, net income dropped 41.9% to $1.704B.
Segment Performance
- Qualcomm CMDA Technologies (QCT) generated revenue of $7.942B (-16.8%), which beat expectations, producing EBT (earnings before taxes) of $2.107B (-36.9%). This brought EBT margin to 26.5% down from 35% for the year ago period.
- Handsets drove sales of $6.105B (-16.9%), beating expectations.
- Internet of Things (IoT) drove sales of $1.39B (-24%), missing expectations.
- Automotive "drove" sales of $447M (+20.5%), missing expectations.
- Qualcomm Technology Licensing (QTL) generated revenue of $1.29B (-18.4%), which fell short of expectations, producing EBT (earnings before taxes) of $871M (-24.5%). This brought EBT margin to 67.5% down from 73% for the year ago period.
Guidance
For the current quarter, Qualcomm sees total revenue of $8.1B to $8.9B. This places the mid-point of $8.5B and even the high end of the range well below the $9.14B that Wall Street was looking for. As far as sectors are concerned, the firm sees QCT revenue of $6.9B to $7.5B, and QTL revenue of $1.15B to $1.35B. The firm is estimating a larger than normal sequential decrease in sales of global handset units due the timing of purchases by a modem-only handset customer. Apple (AAPL) , is that you? Qualcomm does not say. Apple reports tonight.
The firm is also projecting current quarter adjusted EPS of $1.70 to $1.90, and GAAP EPS of $1.24 to $1.44. Wall Street was looking for as much as $2.16 for the adjusted print.
These are numbers. I want you to read this quote made by CFO Akash Palkhiwala during the earnings call last night. Palkhiwala said...
"Financial headwinds have increased meaningfully relative to our initial expectations going into the fiscal year. With a combination of an uncertain macroeconomic outlook, persistent inflation and a slower recovery in China, which continued to impact demand globally. We now expect global 3G, 4G, 5G handset units in calendar '23 to be down at least a high single-digit percentage relative to calendar '22, which is lower than our prior expectation. Given the weaker handset forecast, until demand normalizes and visibility improves, we anticipate that customers will remain cautious with purchases and reduce channel inventory risk further."
That kind of says all that needs to be said.
Fundamentals
For the period reported, operating cash flow came to $4.552B. Out of that CapEx amounted to $851M, leaving free cash flow of $3.701B, so the firm is still a free cash flow beast. However, out of that number the firm repurchased $2.173B in common stock, while paying out $1.676B in dividends to shareholders. The firm still returned more capital to shareholders for the quarter than was created through free cash flow.
Turning to the balance sheet, Qualcomm ended the quarter with a cash position of $6.676B and inventories valued at $6.858B. That inventory number remains a problem and is actually still larger than it was six months earlier. This puts current assets at $19.073B. Current liabilities add up to $7.866B, including $499M in short-term debt. The firm ended the quarter with a current ratio of 2.42, which is more than healthy.
Even sans the inventories that have probably become difficult to value in this environment, the firm's quick ratio now stands at 1.55. That's a ratio most companies would envy, not to mention those with a noted inventory glut.
Total assets amount to $48.362B, including $12.306B in goodwill and other intangibles. At 25% of total assets, this number does not appear to be a problem. Total liabilities less equity comes to $28.664B. This includes long-term debt of $15.486B. Of course I would like to see the debt-load drawn closer to the firm's cash levels, but make no mistake... this is a strong balance sheet.
Wall Street
Since last night, I have come across nine sell-side analysts who are rated at a minimum of four stars by TipRanks and have also opined on QCOM. Among those nine analysts, there are seven "buy" or buy-equivalent ratings and two "hold" or hold-equivalent ratings.
After allowing for changes, the average target price across the nine is $133.89, with a high of $145 twice (Kevin Cassidy of Rosenblatt Securities and John Vinh of KeyBanc) and a low of $120 twice (Timothy Acuri of UBS and CJ Muse of Evercore ISI). After omitting one of the highs and one of the lows as potential outliers, the average target across the other seven rises to $134.29.
My Thoughts
There's not enough here to buy the dip. Yet. The quarter was not very good. Current quarter guidance was terrible. Free cash flow is strong, and is being used up by the firm at more than capacity. That should probably be pulled in a little. The balance sheet is solid. There is that, and the firm may need to use that strong balance sheet.
Inventories are still too high. What kind of discounting will be required to right-size that problem? In addition, how does one discount inventories when the firm's own outlook for handset sales is not very encouraging. The stock closed at just 12 times forward looking earnings on Wednesday. For good reason.
If looked at from October on, the investor might see an ascending channel. If that investor goes back to last July, this pattern looks more like a symmetrical triangle. Those usually end in violence. Regardless of what you see here, that lower trendline will break this morning. Then readers will be looking at a descending channel that starts in early February.
Do you really want to buy the dip in a stock that appears to be forming a bearish trend? All three significant moving averages have been north of the last sale since early April. There will be a price for this name, that is for sure. That said, I would expect a retest of that holiday season low for sure, and a retest of last autumn's low would not surprise.
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