With such intense attention focused on Qualcomm’s ongoing licensing battles with Nokia, it was psychologically important for the chipmaker to deliver a good quarter that showed the way the company could survive even the most negative outcome of its legal battles. With characteristic confidence, the CDMA leader duly delivered impressive growth and some convincing arguments that, while a severe reduction in Nokia royalties – which would set a precedent for the whole handset business – would be very harmful in the short term, Qualcomm’s own product operations would ensure the blow was nowhere near fatal.
Qualcomm exceeded expectations on the top and bottom line and raised forecasts for the coming quarter, with several analysts raising their ratings in harmony. The “sheer magnitude” of growth was impressive, said one of the company’s closest watchers, Albert Lin of American Technology Research, who reiterated a ‘buy’ rating in a research note, and raised his target price from $45 to $60. Revenue in the second quarter was up 21% to $2.22bn (analyst consensus had predicted $2.19bn) and earnings, excluding option costs and one-off charges, were 50 cents a share. Qualcomm raised its full year earnings outlook to $1.84 to $1.88 per share, from a previous target of $1.72 to $1.77. This has already factored in a possible earnings hit of 4-5 cents in the fourth quarter from lower Nokia payments (the Finnish company, on the expiration of its licensing deal on April 9, has unilaterally decided on a royalty level, which it will pay, but which is significantly lower than that which Qualcomm claims is due. Assuming the dispute has not been settled either way by the fourth quarter, the impact of this lower payment will start to be felt.)
This was a robust display of confidence in the face of the real threats of a damaging Nokia settlement and/or negative judgments in the possible European Commission probe and other legal actions. Qualcomm’s CEO Paul Jacobs has done a fair job in the past six months of shifting the emphasis from controversial licensing practices to the area where Qualcomm can win arguments on more empirical grounds – product quality and time to market. Early uptake of HSDPA products, progress towards highly integrated multi-radio chips such as the Universal Broadcast Modem (UBM) for mobile TV, continuing growth in the much-written off CDMA handset sector – all these are achievements based on core engineering and marketing skills, and the elevation of Sanjay Jha to be second in command after Jacobs was a strong move, putting an engineer, and one who is moderate and persuasive as well as clever, in the front line.
Jacobs’ message has been clear – if the worst happens on the licensing front (savage Nokia royalty cuts, negative EU judgements and so on), Qualcomm will take firm action, even to the extent of spinning of the intellectual property arm, and come back a strong, if changed, company. The quarterly results call continued the theme, steadfastly downplaying the Nokia issue – “nothing new to discuss” was Jacobs’ summary – and focusing on product growth and engineering excellence. Strong forecasts for the year helped make the message palatable to shareholders, though of course the real effect of any Nokia settlement will be fully felt in the next fiscal year.
Among the highlights, Qualcomm generated $1.09bn in free cashflow in Q2, increasing its war chest of cash and marketable securities to a huge $11.3bn, itself a defiant gesture to legal adversaries and a conciliatory move towards shareholders who have been worried by the legal bills of $200m that Qualcomm expects to pay this year – with so much cash at hand, it is easier to accept the chip giant’s argument that the investment in lawyers will be worth it in the medium term because it will safeguard future revenues.
Financial Highlights Q207:
Revenues rose 21% year-on-year and 10% sequentially to $2.22bn.
Net income was up 22% (12% sequentially) to $726m.
Earnings per share were 43 cents, up from 34 cents a year earlier.
Shipments of chipsets rose 24% year-on-year to 61 million.