After the close tonight, Qualcomm (QCOM 50.18, +0.78, +1.58%), the world's
largest provider of mobile chips, is set to report its Q1 results. In the
aftermath of Samsung's (SSNLF) guidance cut on January 4 and Apple's (AAPL)
before that on January 2, expectations for QCOM have lightened significantly.
Samsung is QCOM's largest customer, and AAPL has historically been one of its
largest customers as well, but ongoing litigation between the two companies has
taken a sizable bite out of the business between the two.
Rewinding back to its Q4 report, QCOM issued Q1 guidance that was well below expectations. Specifically, it forecasted revenue of $4.5-$5.3 bln vs. the $5.58 bln consensus. The guidance excluded any royalty revenues from AAPL, which should have been baked into analysts' estimates already. So, it would seem that a majority of the downside guidance was due to weakness in smartphones in China, exclusive of AAPL. Indeed, this was all but confirmed when SSNLF slashed its outlook a few weeks ago.
The current consensus sits at EPS of $1.09 and revenue of $4.89 bln.
Plenty of semiconductor-related companies have reported earnings already this quarter, with a majority of them issuing downside guidance. In addition to SSNLF, some notable companies include Intel (INTC), NVIDIA (NVDA), Texas Instruments (TXN), SK Hynix, and KLA Corp (KLAC). Most of these companies have commented, though, that they anticipate conditions improving in the back half of the year as the memory market recovers. This optimistic commentary has been supportive to their stocks, which have been quite resilient during this downturn.
Turing to QCOM, analysts are forecasting Q2 EPS and revenue of $0.69 and $4.8 bln. With about half of its revenue being derived in China, and considering the magnitude of the downside guidance from other semiconductor companies, it would not be surprising if QCOM also came up short of analysts' estimates tonight.
That said, shares of QCOM are already down over 20% since the company last reported earnings. In other words, sentiment is far from bullish on the stock at the moment and QCOM has a low bar to hurdle in terms of expectations.
On that note, if QCOM delivers guidance that is relatively in-line with expectations and provides some bullish commentary regarding its outlook for 2H19, that could satisfy investors.
Litigation Coming to a Head
QCOM has been engaged in seemingly never-ending litigation battles with several companies -- most notably including Apple (AAPL). We're not going to do a play-by-play here for every twist and turn in every case, but there have been some major developments of late. And perhaps the most significant ruling is just around the corner.
First, in regard to its lawsuits with AAPL, QCOM has enjoyed a couple key victories of late. Specifically, on December 10, a court in China granted QCOM an injunction against AAPL, banning the impact and sale of iPhones in China due to a QCOM software patent. Of course, AAPL is still selling iPhones in China at the moment, so the win is hollow one for the time being at least. For its part, QCOM says that AAPL is about $7 bln behind in royalty payments
Then, on December 20, the District Court of Munich ruled that AAPL is infringing on QCOM's intellectual property for power saving in smartphones, granting QCOM's request for a permanent injunction, ordering AAPL to cease the sale and importation of iPhones in Germany.
These rulings, however, are just an under-card of sorts for what's soon to come. To rewind, in January 2017, the FTC accused QCOM of having a monopoly, extracting high royalty fees, and weakening its competitors. More specifically, the FTC claimed that QCOM has forced AAPL and other handset makers to use its chips in exchange for reduced licensing fees. Since QCOM owns patents related to the 3G, 4G, and 5G networking technology, in addition to software used on mobile phones, all handset makers building a device that connects to cellular networks have to pay it a licensing fee -- even if they don't use QCOM's chips.
If the FTC is successful in proving that QCOM has a monopoly that has taken anti-competitive actions, it would have monumental implications not only for QCOM and its rival AAPL but for the global mobile device market overall.
Deliberations in this landmark case began on January 4, and closing arguments were wrapping up yesterday. The ultimate decision will come down to a single judge. While the judge said that she didn't know how long it would take to come to a decision, she commented that she "generally is fairly fast, but, that something of this magnitude will take longer." But with an impending government shutdown looming, it seems possible, if not likely, that a ruling will come sooner than later.
It is worth noting that should an unfavorable judgement come down on QCOM, the company will appeal the decision - perhaps to the highest court in the land. Still, the outcome of this case is bound to have a big impact on the stock, one way or another.
The 5G Transition
The most significant upcoming catalyst for QCOM will be the
roll-out of 5G technology, the 5th generation mobile network. Broadly speaking,
5G is expected to provide enhanced mobile broadband capabilities,
mission-critical communications, and to power Internet of Things (IoT). QCOM
believes 5G will be especially transformative for the auto and electricity
Because 5G will be much more immersive than 4G, it will take some time to be fully rolled out. However, QCOM is anticipating that 5G will be available this year, initially focusing on mobile broadband use cases. Of course, as the most prolific provider of mobile chips and software for the mobile OEM industry, QCOM will be at the heart of this transition.
Key Takeaway: The current climate for QCOM is turbulent, as indicated by the downbeat guidance offered by AAPL on January 2, as well as several semiconductor companies after that. Therefore, investors are anticipating a low-key report from the company tonight along with a subdued outlook. What could move the stock, though, is management's longer-term outlook and whether it sees conditions brightening in the June quarter and thereafter. We wouldn't expect QCOM to offer anything of substance in regard to the FTC case, but tonight's earnings report could ultimately be an afterthought compared to any news surrounding that event.