Qualcomm Inc. (NASDAQ:QCOM) reported fiscal 2Q17 non-GAAP EPS that was $0.14 above the midpoint of guidance. Operating results were overshadowed by Apple's contract manufacturing (CM) partners withholding a collective $1 billion in royalty payments, creating uncertainty regarding future revenue. Operating fundamentals remain positive and include margin expansion based on richer Snapdragon mix in QCT and higher ASPs and reportable device sales in QTL. Weakness in the shares has created a deep value opportunity. Argus would be inclined to initiate or add to positions while remaining cognizant of litigation-related risks.
BUY-rated Qualcomm Inc. outperformed earnings expectations for fiscal 2Q17, reporting non-GAAP EPS that was $0.14 above the midpoint of guidance. Operating results for the quarter were overshadowed by the worsening dispute with Apple, which resulted in Apple’s contract manufacturing (CM) partners withholding a collective $1 billion in royalty payments. Qualcomm lost a $974 million arbitration award to Blackberry in the quarter, and is engaged in a separate non-Apple licensing dispute that resulted in an additional $150 million in withheld payments.
For fiscal 2Q17 (calendar 1Q17), Qualcomm reported GAAP revenue of $5.02 billion, which was down 10% annually. The decline reflected just under $1 billion ($974 million) for an arbitration award to Blackberry. GAAP revenue was also impacted by $150 million in revenue withheld by a licensee, not related to Apple, which is disputing the royalty amount owed to Qualcomm. On a non-GAAP basis, revenue of $5.99 billion was up 8% annually and topped the $5.91 billion consensus.
Qualcomm shares are trading at 10.7-times Argus FY17 non-GAAP EPS forecast and at 10.3-times its FY18 projection, compared to an average P/E of 14.0 for FY12-FY16. The shares, which historically traded at a 7% discount to the market P/E, now trade at an average 40% discount for FY17-FY18.