Pacific Crest remains buyers of Qualcomm, Inc. (NASDAQ:QCOM) because of significant EPS accretion and end-market diversification away from mobile from the pending NXP acquisition, and an attractive dividend yield of 4.3%. Revenue of $6.0 billion (flat q/q) was above Pacific Crest’s estimate of $5.9 billion, driven by stronger MSM shipments and better ASP mix. QTL device ASP increased 9% q/q (best since F1Q11), but was offset by a $150 million impact from a new dispute (not Apple-related). Gross margin of 65.3% was above the firm’s estimate of 63.1%, driven by higher QCT margins. EPS of $1.34 was higher than Pacific Crest’s estimate of $1.20 aided by investment gains and a lower tax rate.
FQ3 (June) guidance lower. Revenue was guided to a midpoint of $5.7 billion (-5% q/q), lower than the Street’s $5.9 billion. TRDS was guided lower to a midpoint of $63 billion vs. the Street’s $67 billion, due to a higher FQ2 drag on FQ3, inventory correction in China and potential underpayment from the new dispute as well as Apple Inc. (NASDAQ:AAPL). For QCT, MSM shipments were expected to be up q/ q as Qualcomm expects Chinese inventory to correct within FQ3. Midpoint EPS guidance of $1.03 was lower than the Street’s $1.09, with higher operating expenses from JV consolidation and more litigation.
Apple CMs have withheld ~$1 billion from Qualcomm. Apple withheld the funds from its CMs, and now they have cut payments to Qualcomm by the same amount. However, CMs acknowledge that the underpaid amount is still due, Qualcomm has already received royalty reports for the March quarter (for QTL’s FQ3), and it says Apple has no further basis to withhold payments since the BCPA expired. Nonetheless, the guidance range for FQ3 was wider than usual to account for the uncertainties, with the high end assuming full payment.
Lower QTL guidance (due to payment uncertainty) prompts lower estimates and target. Pacific Crest is lowering its target to $77 from $81, and believe that while underlying business trends are strong, with risk/reward extremely attractive, the stock is likely to remain range-bound until the QTL outlook is completely de-risked, a settlement with AAPL is reached, or the NXPI acquisition closes (by the end of 2017).