This "look-ahead" post discusses how I came up with an estimate for Qualcomm's earnings for fiscal 2021's first quarter, which ended on December 27, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.
Once the company’s official results become available, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative. Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.
But, before getting into the details, let's take a step back and start with background information about Qualcomm.
Qualcomm makes chips and licenses mobile communications technologies that are used in many advanced wireless devices. The transition to 5G mobile networks, which is just beginning, should benefit Qualcomm as the technology will motivate consumers to upgrade (again!) to newer, more capable phones. Qualcomm's licensing business has been criticized on anti-trust grounds by government regulators in multiple countries and also by phone manufacturers. This threat eased significantly when Qualcomm settled all litigation in April 2019 with Apple and Apple's contract manufacturers. More progress was made in 2020 when Qualcomm and Huawei settled their disputes and reached a new long-term, global patent-license agreement. Anti-trust concerns did end up scuttling the company's planned acquisition of NXP Semiconductors for $44 billion.
Shares of Qualcomm now trade for about $162 each, giving the company a market value of $185 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.
Qualcomm recorded profits of $5 billion on revenue of $24 billion during the last year. In the quarter that ended on September 27, 2020, Qualcomm earned $1.45 per share (excluding certain items), which significantly beat the $0.71 Wall Street consensus forecast.
Revenue in the September 2020 quarter totaled $8.3 billion, 73 percent more than last year. The CDMA Technologies business was responsible for 60 percent of overall revenue, and this unit's revenue grew by 37.6 percent compared to the year-earlier result. The Technology Licensing business contributed 18 percent of revenue, and this unit's revenue increased by 30.1 percent.
My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts. It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling. I also look for other information about the company in the news, and I take advantage of trends in the company's historical results. While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP). Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.
Qualcomm provided guidance for the December 2020 quarter, which is the first quarter of fiscal year 2021, when the company last reported quarterly results. An excerpt is shown below.
Additional information was discussed during the conference call that took place after the quarterly results were published.
I'm using the midpoint of the Revenue guidance range, i.e., $8.2 billion, for my estimates. This figure is an impressive 61.5 percent more than revenue in the December 2019 quarter, as Qualcomm benefits from the recent resolution of antitrust litigation.
While the Gross Margin was 58.4 percent in the year-earlier quarter, the additional revenue in the latest quarter will almost certainly have a significant positive effect on the Gross Margin. I wouldn't be surprised to see the Gross Margin at, say, 65 percent, but I'm setting the target a little lower, at 63 percent.
Research and Development expenses were about $1.6 billion in September 2020 quarter. I'm expecting the figure to increase to $1.7 billion as Qualcomm spends more to engineer a new generation of products.
The ratio of Sales, General, and Administrative costs to Revenue is more variable from quarter to quarter at Qualcomm than at other companies I analyze. It's averaged about 9 percent in the last year, but it should be lower now given the big increase in revenue. 7.5 percent of revenue seems like a reasonable estimate for SG&A in the December quarter.
Interest expenses should run to about $125 million per the company's guidance. Other non-operating gains and losses are tough to forecast. I assumed a $100 million charge.
These assumptions would lead to income before taxes of a little over $2.6 billion.
While the company indicated it expects a non-GAAP income tax rate of 14 percent, I'm upping that to 16 percent because I estimate GAAP earnings. With these assumption, my estimate for Net Income would be $2.2 billion ($1.92 per share). While this EPS is a little above the company's GAAP guidance range, I was so conservative with my assumptions, I wouldn't be comfortable with a lower figure.
The following Income Statement summarizes the estimates made as discussed above.
This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed. Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company. These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).
#qualcomm #qcom #gauges #gcfr #gcfr2 #lookahead #nac_financialanalysis
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