QCOM: Gauge Analysis (updated March 2, 2021)

I have analyzed Qualcomm's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

Qualcomm makes chips and licenses mobile communications technologies that are used in many advanced wireless devices.  The transition to 5G mobile networks, which is picking up speed (groan), 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.  Antitrust concerns did end up scuttling the company's planned $44 billion acquisition of NXP Semiconductors. 

Qualcomm recorded profits of $7 billion, $5.82 per share, on revenue of $27 billion during the last 12 months.  In the quarter that ended on December 27, 2020, Qualcomm earned $2.12 per share on a GAAP basis, and it gained $2.17 per share after non-GAAP adjustments and exclusions.  See Qualcomm's most recent quarterly report and my review of their results relative to expectations for additional information.

Shares of Qualcomm now trade for about $137 each, giving the company a market value of $158 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, NASDAQ 100, and Russell 1000 stock indices.

Analysis Results:

Qualcomm's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments.

1. The Company's Size is Substantial: GREEN

    Market Value: $158.4 billion (mega-cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 2.1 (>2.0 is conservative)

    Long-term debt/Working Capital = 144% (<150% is conservative)

3. The Company Generates Stable Earnings: RED

    Eighteen positive quarterly earnings reports in last 5 years (not too bad)

    Earnings variability = 159% (very high)

4. The Company Exhibits Earnings Growth: YELLOW

    Owner Earnings growth rate (trailing year) = -7% (poor)

    Owner Earnings growth rate (five-year average) = 17% (good)

    Free Cash Flow growth rate (trailing year) = -10% (poor)

    Free Cash Flow growth rate (five-year average) = 7% (modest)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 36% (excellent)

    Operating Profit/Sales = 28.9% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 5% (fair)

    Dividend = 47% of last year's FCF (sustainable)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 25.7 (high)

    Price/GAAP Earnings (five-year average) = 60.5 (expensive)

    Free Cash Flow/Market Value = 4.0% (low, less than the five-year average of 5.6%)

    Acquirer's Multiple = 21.0 (expensive)

    Price/Book Value = 21.5 (more expensive than the five-year average of 16.2)

    Price/Sales = 5.9 (more expensive than the five-year average of 4.0)

In summary, the analysis assigned Qualcomm three GREEN, two YELLOW, and two RED grades.  The resulting Overall Score is 39 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, Qualcomm does not satisfy the GCFR criteria for investment consideration at this time.

The share price would theoretically have to fall by 45.5 percent, from $137.04 to $74.72, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that Qualcomm's future results will push the score up (or pull it down).  Revisit GCFR2 (https://gcfr2.com) occasionally for updates on Qualcomm's performance and the latest GCFR gauges and scores.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #qualcomm    #qcom    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

QCOM: Earnings Report for the Quarter Ending December 27, 2020

Qualcomm reported after the market closed on February 3, 2021, it earned $2.12 per diluted share in the quarter that ended on December 27, 2020, up 165 percent from earnings of $0.80 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Non-GAAP earnings rose 119 percent to $2.17 per share from $0.99 one year earlier, a not quite as robust change than the GAAP percentage. The principal exclusions contributing to the $0.05 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Strategic initiatives [$0.13 per share], Share-based compensation [($0.20) per share], and Other items [$0.02 per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by Qualcomm to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Qualcomm's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  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. 

The following table is a simplified version of Qualcomm's Income Statement for the quarter that ended in December 2020, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided to facilitate comparisons.

Revenue in the December 2020 quarter totaled $8.2 billion, 62 percent more than last year. The CDMA Technologies business was responsible for 79 percent of overall revenue, and this unit's revenue grew by 80.6 percent compared to the year-earlier result. The Technology Licensing business contributed 20 percent of revenue, and this unit's revenue increased by 18.2 percent.

I was expecting Qualcomm to report revenue of $8.2 billion for the December 2020 quarter.  The actual amount surpassed my estimate by a mere $35.0 million (0.4 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $3.5 billion in the latest quarter, which translates into a Gross Margin of 57.6 percent of revenue. Since it was lower than the 58.4 percent Gross Margin achieved in the year-earlier quarter, it's a sign that Qualcomm sold its products and services at less profitable prices relative to production costs. I was expecting the Gross Margin to be 63.0 percent in the December 2020 quarter, and Qualcomm missed that prediction by 5.4 percent.

Qualcomm spent $1.7 billion on Research and Development in the latest quarter, up from $1.4 billion one year ago. I had estimated that R&D expenses would be $1.7 billion.  R&D was 20.1 percent of Revenue.

Sales, General, and Administrative expenses totaled $567 million in the December 2020 quarter, up 7.4 percent from one year ago.  SG&A expenses decreased from 10.4 percent to 6.9 percent of quarterly revenue, which shows Qualcomm spent less per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 7.5 percent of revenue, and the actual percentage turned out to be lower than the prediction.

Qualcomm's Operating Income was $2.5 billion in the quarter, up 145.2 percent from the year-earlier period.  Operating Income fell short of my $2.9 billion estimate by $325 million.

Interest and other non-operating items summed to a net income of $78 million.  My estimate for non-operating items was $225 million.

The effective income tax rate rose by 3.4 percent to 5.7 percent, which had a negative effect on net income.  I expected the tax rate to be 16.0 percent.

Net income attributable to Qualcomm was $2.5 billion, $2.12 per share in the quarter ending December 2020.  The figures for the year-earlier quarter were $925 million, $0.80/share. My earnings estimate for  the latest quarter was $2.2 billion ($1.92/share), so Qualcomm earned $0.21 per share more than I had predicted.

In conclusion, the following list shows where the reported results differed from my expectations:

      – Better than expected:  SG&A + SG&A/Revenue + Misc non-operating items + Income tax rate 

      – Worse than expected:  Gross Margin + Interest 

      – Near expectations:  Revenue growth + R&D 

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 #QtrlyRpt   #nac_financialanalysis

QCOM: Look Ahead to December 2020 Quarterly Results

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

Qualcomm: Earnings Report for the Quarter Ending September 27, 2020

Qualcomm reported (https://tinyurl.com/y6n2f442) after the market closed on 29 July 2020 it earned $2.58 per diluted share in the quarter that ended on 27 September 2020, up 514% percent from earnings of $0.42 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Qualcomm makes chips and licenses mobile communications technologies that are used in many advanced wireless devices.  Qualcomm is now expecting that 5G mobile networks will lead to another growth spurt for the company. In April 2019, Qualcomm settled all litigation with Apple and Apple's contract manufacturers, which had threatened Qualcomm's licensing business.  Qualcomm lost a case where the Federal Trade Commission claimed Qualcomm violated antitrust laws to extract higher patent royalties from customers. Anti-trust concerns also ended up scuttling the company's planned acquisition of NXP Semiconductors for $44 billion.  More positively, in July 2020 Qualcomm and Huawei settled their disputes and reached a new long-term, global patent-license agreement.

Non-GAAP earnings rose 86% to $1.45 per share from $0.78 one year earlier, a percent change not as robust as seen with the GAAP figures. Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits. However, caution is warranted when analyzing these figures because management has considerable leeway in choosing which GAAP-required items to exclude.

The principal exclusions contributing to the $1.13 per share difference in the latest quarter between GAAP earnings and Non-GAAP earnings were: Strategic initiatives [$0.02 per share], Share-based compensation [$0.22 per share], and Huawei settlement agreement and other items [$1.32 per share].

Because Qualcomm has repurchased a significant quantity of its own shares, the average number of shares outstanding during the last quarter was 5.2% lower than one year ago. The smaller share count boosted earnings per share by $0.14.

Non-GAAP earnings of $1.45 per share in the latest quarter significantly beat the $0.71 average ("consensus") of estimates made by Wall Street analysts. See https://tinyurl.com/y5dpqpvs for Qualcomm's earnings record and forecasts.

Stock market traders reacted positively to Qualcomm exceeding expectations. The price of the company's shares rose 12.0% during after-hours trading following the report.

Looking deeper into the GAAP results, "top-line" revenue in the September 2020 quarter totaled $8.3 billion, 73% more than last year's $4.8 billion. The CDMA Technologies business was responsible for 60% of overall revenue, and this unit's revenue grew by 37.6% compared to the year-earlier result. The Technology Licensing business contributed 18% of revenue, and this unit's revenue grew by 30.1%.

The gross margin strengthened from 56.0% of revenue to 66.9%, a sign that Qualcomm sold its output and services at more profitable prices relative to production costs. Sales, general, and administrative expenses decreased from 11.4% to 6.6% of quarterly revenue, which shows the company spent less per dollar of sales on other operational costs, such as marketing. The effective income tax rate fell by 7.3% to 10.5%, which had a positive effect on net income.

Qualcomm's operating activities generated $1.7 billion in cash during the last quarter, up 41.9% from $1.2 billion in the year-earlier period. The cash flow delta was, therefore, not as robust as the change in earnings. Notable uses for cash included $734 million to pay dividends to shareholders, $26 million for corporate acquisitions,  and $348 million to acquire property, plant and capital equipment. 

Free cash flow over the last 12 months totaled $4.4 billion, or $3.84 per share using the latest share count. At the current market price per share of $145.41, this translates into a modest Free Cash Flow Yield of 2.6%.

The accompanying charts illustrate several trends in Qualcomm's financial results, taken from data in regulatory filings. The text and the charts are intended to provide some limited historical context for readers interested in the company’s finances. No investment advice is provided, and no investment offer of any kind is made or solicited. The accuracy of the information presented is not guaranteed, and readers are encouraged to independently verify all data.

#qualcomm    #qcom    #earnings    #nac_financialanalysis