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Qualcomm’s Strong Q3 Earnings Report Pleases Analysts

Qualcomm Inc. reported better than expected third quarter earnings, spurred in part by Chinese and South Korean customers coming forward to pay the San Diego business for technology used during previous quarters.

“I was surprised how good of a quarter they had,” said Patrick Moorhead, founder and president of Moor Insights & Strategy.

In the media and the blogosphere, those who normally had negative things to say about Qualcomm (Nasdaq: QCOM) had a little less snark after the company made its July 20 earnings call.

It is as if the San Diego-based wireless giant shook off the weight of diminished expectations, skeptical activist investors, layoffs and other aspects of its $1.4 billion cost-cutting effort, customer defections, inroads made by competitors such as Intel Corp., its $975 million payment to Chinese authorities in 2015 to settle antitrust allegations, Chinese partners withholding payments or refusing to sign license agreements, and a lackluster second quarter.

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The business still faces an antitrust probe in South Korea and a possible fine. Recent media reports estimated the fine at $900 million. Company President Derek Aberle told listeners on the conference call that the matter still had to go into a hearing phase and that regulators had not made a decision — no matter what media reports implied.

Qualcomm is a business-to-business company, and its model is twofold. It holds essential patents for wireless communications technology, collecting license fees from companies that use the technology. And it makes microchips for wireless devices.

The corporation reported net income of $1.44 billion on revenue of $6.04 billion in the quarter that ended June 26. Revenue was up 4 percent from the same quarter last year, while net income was up 22 percent.

Qualcomm blew past its analysts’ earnings consensus of 97 cents per share — not to mention its own forecast — reporting earnings of $1.16 per share. The figure is not a GAAP measurement preferred by securities regulators, but analysts find it significant.

The One-Two Punch

Qualcomm experienced “kind of the one-two punch in China,” Moorhead said.

First there was the issue of what analysts call “catch-up payments.” Qualcomm finally received checks from Chinese licensees, who had previously withheld payments required for dipping into Qualcomm’s patent portfolio.

The resolution of a dispute with South Korean cell phone maker LG, as well as the collection of revenue previously withheld by Chinese licensees, brought more than $400 million in revenue to Qualcomm’s technology licensing operation, Aberle reported. Under normal conditions, that revenue would have been booked in previous quarters.

Secondly, Qualcomm is offering the Chinese market a technology called carrier aggregation, which allows people to send and receive data on two different networks at the same time.

“It’s a hot, hot, hot feature in China,” Moorhead said. Qualcomm competitors don’t have it, so Qualcomm is increasing market share.

Qualcomm’s chip business is seeing benefits “from a strong new product ramp across [price] tiers, particularly with fast growing OEMs in China,” Qualcomm said in an investor presentation. OEMs are the manufacturers that build wireless devices around Qualcomm’s chips. The business said it shipped 201 million chipsets in the third quarter. Three months ago, it predicted it would ship 175 million to 195 million.

Also working in Qualcomm’s favor is Samsung, which is back as a big customer, Moorhead said. Samsung’s Galaxy S7, powered by the Snapdragon 820 chip, is selling well.

Looking ahead, Qualcomm said it expected revenue in the current, fourth quarter to range from $5.4 billion to $6.2 billion. In a worst-case scenario, revenue would essentially be flat with the fourth quarter of 2015 (down 1 percent). At its best, revenue would increase 14 percent.

It will take better results than that, however, for Qualcomm to match its 2015 revenue of $25.3 billion. The fiscal year ends Sept. 25.

Qualcomm said it expected fourth quarter earnings per share of $1.05 to $1.15, an increase of 15 percent to 26 percent year-over-year.

Chip shipments during the quarter are expected to be in the range of 195 million to 215 million.

Qualcomm reported having $31 billion in cash and marketable securities. The majority of that sum, $28.6 billion, was held offshore. Qualcomm said it returned $881 million to shareholders during the quarter, largely through cash dividends. Debt was at $11.8 billion, up from $10.9 billion one year ago.

CEO Steve Mollenkopf offered an update on future projects, including the development of fifth-generation (5G) technology with faster data speeds. Next-generation technology will “create a strong foundation for long-term earnings growth,” the business said in a statement.

5G networks may appear sooner than expected: in 2018 or 2019 rather than 2020, Mollenkopf told an analyst.

“We’re trying to drive 5G as quickly as we can,” he said.

In the shorter term, Qualcomm is finalizing its joint venture with TDK to offer radio frequency front-end chips, Mollenkopf reported. Qualcomm plans to close the deal creating the joint venture in 2017.

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