After the close last night, Qualcomm (QCOM) reported upside Q2 results, comfortably exceeding both the top and bottom line estimates. As a result, shares are trading higher by about 2% in pre-market trade. As we discuss in more detail below, the solid results were driven by strength across both its core QCT (CDMA technologies) and QTL (technology licensing) businesses. However, what is keeping a lid on shares is its wide guidance range, a result of uncertainty regarding Apple's (AAPL) antitrust case against QCOM and its decision to interfere with license agreements between QCOM and Apple suppliers.
Before delving more deeply into that, here is an overview of how QCOM's quarter played out. EPS grew 29% year/year to $1.34, easily beating the $1.20 Capital IQ consensus with revenue growing 8.1% to $5.99 billion, also ahead of the $5.86 billion consensus. From a broader perspective, the company credited growth in advanced LTE and 5G technologies in the mobile industry, along with its emergence in other areas, such as Internet of Things, security, automotive, and networking.
Breaking it down by business segment, QCT revenue was up 10% to $3.67 billion. MSM chip shipments, however, did fall by 5% to 179 million. QTL revenue increased 5% to $2.25 billion and total reported device sales jumped by 18% to $82.6 billion. While the QCT business represents a larger portion of total revenue, the QCT line accounts for a much larger portion of EBT, thanks to the higher margins. Specifically, for the quarter, QCT represented 13% of revenue while QTL was at 87%.
From a cash flow perspective, QCOM's operations generated $800 million in cash, up 11% year/year. This helped the company to return $1.1 billion to stockholders during the quarter, including via a $0.53/share cash dividend, and through the repurchase of 4.8 million shares of stock.
As previously mentioned, QCOM also provided Q3 guidance that had quite a wide range. Specifically, it guided for EPS of $0.90-$1.15 vs. the $1.10 consensus and for revenue of $5.3-$6.1 billion vs. the $5.92 billion consensus. What is muddying the waters for the company, in terms of its outlook, is the uncertainty regarding AAPL and its litigation against it. For some background, on January 23, it was reported that QCOM had been sued by AAPL in an antitrust suit. AAPL is claiming that it has been overcharged by QCOM and is seeking billions in restitution.
However, it is not just the outcome of the litigation that is causing a potential headwind. AAPL is withholding payments to their suppliers in an amount equal to what it says QCOM owes it. In sum, APPL's suppliers were underpaid $1 billion in royalties. During the conference call last night, management stated that while it does expect the suppliers to pay owed royalties, there is a possibility that AAPL will continue to interfere with license agreements, leading to "further breaches with the company by underpaying some or all of what is owed to them."
To conclude, the quarter itself was impressive, demonstrating that QCOM is a clear leader in mobile 5G technology and that it is poised to capitalize on emerging technologies in networking and IoT. But, it is far from a clean story, thanks to the pending litigation and risk that AAPL will continue to forgo making payments.
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