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Qualcomm Keeps Shrinking and Expects Future Challenges

By Dan Caplinger - Jan 27, 2016 at 6:40PM

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The semiconductor company did do better than most had expected, but its guidance once again was downbeat.

Image: Qualcomm.

For years, Qualcomm (QCOM 3.14%) looked like the winner of the mobile revolution, surpassing its rivals in developing valuable semiconductor chips and intellectual property for smartphones and other mobile devices. Recently, though, challenges in key relationships with customers such as Samsung (NASDAQOTH: SSNLF) have raised concerns about Qualcomm's ability to sustain long-term growth, and coming into Wednesday's fiscal first-quarter financial report, Qualcomm investors were bracing for further drops in sales and earnings to add to the troubles it has suffered recently. Qualcomm once again exceeded expectations in its results, but its guidance for the future renewed the nervousness that its shareholders have dealt with for a long time. Let's take a closer look at Qualcomm's most recent quarterly results to find out what the company thinks about its prospects.

How did Qualcomm fare this quarter?
Qualcomm's fiscal first-quarter results again looked ugly on the surface. Revenue fell almost 19% to $5.78 billion, with just about the only positive being that most investors had thought that Qualcomm's sales would decline closer to 20%. Adjusted net income of $1.50 billion was down a more dramatic 24% from year-ago levels, but the resulting adjusted earnings of $0.97 per share was $0.07 better than the consensus forecast among investors.

Looking more closely at Qualcomm's results, MSM chip shipments dropped 10% to 242 million, although that figure represented a significant rebound from the fiscal fourth quarter's 203 million shipment number. Device sales in the 3G and 4G arena rose 7% to $60.6 billion, and rising shipment volumes overcame a slight decrease in the average selling price for the typical device.

Qualcomm's two primary segments departed from their past trends in that both suffered substantial declines in revenue and operating earnings. The QCT semiconductor business was once again the weaker of the two, seeing sales drop 22% and pre-tax income fall by nearly half from the year-ago quarter. Unlike in past quarters, however, the QTL licensing business was also weak, suffering a 12% drop in revenue and a 15% decline in pre-tax income.

CEO Steve Mollenkopf tried to emphasize the fact that Qualcomm didn't do as badly as some had feared. "We delivered a stronger-than-expected quarter, with earnings per share above the high end of our initial estimates," Mollenkopf said, "driven by better-than-expected 3G/4G reported device sales and benefits realized from cost actions across the company." The CEO also said that Qualcomm successfully announced several new licensing agreements that could bolster growth in the near future.

Why Qualcomm sees future pain
Mollenkopf's comments were also positive about the overall business. "Design traction for our new Snapdragon 820 processor continues to be strong," he said, "and we expect improving trends in our chipset business in the second half of fiscal 2016."

However, shareholders will have to deal with further declines in sales and earnings before a Qualcomm turnaround starts to take shape. The company said it expects revenue of between $4.9 billion and $5.7 billion for the fiscal second quarter, down 17% to 29% from year-ago levels. Even worse, Qualcomm's bottom-line performance could shrink 29% to 36% based on its guidance for $0.90 to $1 per share in adjusted earnings.

The big question that lies ahead for Qualcomm is how successful Samsung's Galaxy S7 smartphone will be. The device features the Snapdragon 820, and Qualcomm has high hopes for the chipset. Yet Samsung drove a hard bargain in negotiating for production of the chip for inclusion in its phone, and already, some reviews have suggested that the Samsung device might not have the speed that many had hoped to see. If that gets blamed on the Snapdragon chip, then Qualcomm could have further trouble in marketing its chip lines in the future.

Qualcomm investors took the news in stride, sending shares down only half a percent in after-market trading following the announcement. After having fallen so far, Qualcomm stock will probably rebound only once the company can turn its sales around and start producing growth again. Until then, Qualcomm could face a tough road ahead.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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