For a moment, it looked like a bit of good news for Qualcomm, Inc. (NASDAQ:QCOM). QCOM stock jumped in after-hours trading after the company’s fiscal second-quarter report included beats on both the top and bottom lines.
Qualcomm stock was up as much as 3% after initially declining, but it has since given back some of its post-earnings gains. All eyes are on the post-earnings conference call, however, as investors look to get more information on the company’s legal battle with Apple Inc. (NASDAQ:AAPL).
But on the numbers alone? Well, Qualcomm earnings weren’t bad … but they weren’t nearly strong enough to get investor attention shifted elsewhere.
Qualcomm Earnings: The Good News
Qualcomm admittedly reported strong Q2 numbers.
Adjusted earnings of $1.34 per share beat estimates by 14 cents. Meanwhile, non-GAAP revenue of $6 billion, up 8% year-over-year, was a point and a half ahead of the Street’s growth projections.
Qualcomm recorded strength in its QCT (chip) business — the one area in which QCOM has some degree of control. Licensing revenues and profits largely are based on shipments by Qualcomm customers — it’s not as if Qualcomm has much influence over how many smartphones are shipped within a given quarter.
The QCT numbers were good, to be sure. Revenue increased 10% and EBT (earnings before taxes) rose a whopping 179% year-over-year. EBT margins moved from a narrow 5% to a much more healthy 13%. Guidance for Q3 suggests that margin improvement will hold, at least in the near term.
That’s a notable step forward in Qualcomm reducing its reliance on the licensing business — because that is the business that worries investors at the moment.
Qualcomm Earnings: The Bad News
The problem is that even a stronger QCT barely moves the needle for Qualcomm, and QCOM stock, as a whole. The licensing business (QTL) EBT was still more than quadruple that of QCT in Q2.
That QTL business did have a solid quarter, with revenue rising 5% and margins holding flat, as 3G and 4G smartphone shipments rose 20%. But the Apple concerns still weigh.
In its Q2 presentation, Qualcomm said that Q3 guidance was wider than usual — EPS is projected between 90 cents and $1.15 per share — because of uncertainty as to whether AAPL suppliers would withhold royalties due. That’s also somewhat disappointing compared to the consensus of $1.09.
And even that wide range doesn’t include a scenario where all of Apple’s suppliers withhold royalties.
The potential impact of the Apple dispute still isn’t known — and could still rear its head at some point over the next few quarters. That’s not going to do enough for investor confidence to get QCOM stock out of its current rut.
Adding to the worries about the near future, smartphone shipments are expected to be much more moderate over the rest of calendar 2017. Qualcomm is projecting 3%-9% growth year-over-year – which against a 20% figure implies a flat or even contracting market over the next three quarters. In that context, the Q2 beat looks far less impressive. It simply looks as if Qualcomm had some profits move into the quarter and out of fiscal Q3.
And it looks as if the Apple issue still remains potentially damaging for Qualcomm stock.
Stay Away From QCOM Stock
All told, Qualcomm’s fiscal Q2 just wasn’t enough. I’ve considered the company a value trap for some time, and the Q2 numbers don’t change that opinion.
UPDATE: Nor does the Qualcomm earnings call. While analyst questions unsurprisingly focused on the Apple negotiations, management disclosed that another licensee has decided not to pay more than $150 million in royalties.
At a certain point, Qualcomm’s licensing model has to be called into question.
The company has lost antitrust cases in both Korea and the U.S. It recently lost nearly $1 billion in an arbitration case to BlackBerry Ltd (NASDAQ:BBRY). Apple and its suppliers aren’t paying; now another major customer is balking at licensing terms. Qualcomm’s QTL revenues aren’t going to zero; but customer disputes materially change the profit outlook in that business.
And that in turn raises questions about whether Qualcomm can grow earnings from this point, or if it will just play defense against its customers for the next few years.
There’s simply too many risks at this point to consider Qualcomm stock, even at 11x earnings. Customers are suing and/or not paying. The smartphone market, globally, is starting to slow, with ASPs coming down. There are a lot of potential hazards for Qualcomm stock over the next few quarters.
And a modest beat to earnings this quarter isn’t enough to take on the risk in QCOM stock.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.