Earnings Discussion-- reposted from TMF
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Punching numbers
In all the quarters I have been following this company, this last one had got to stand out as one of the most memorable on record. I will keep it short and sweet this time—the numbers do say it all.
The paragraph below from the earnings report (available, as usual, at qualcomm.com ) provides a very effective capsule of what went right:
First fiscal quarter revenue s grew $333 million sequentially, including a $111 million increase in QUALCOMM Technology Licensing (QTL) segment revenues and a $247 million increase in QCT segment revenues. QTL revenues were greater than anticipated due primarily to greater CDMA phone shipments by our licensees, at higher than expected average selling prices. In the first quarter fiscal 2004 our licensees reported CDMA phone sales for the fourth quarter fiscal 2003 of approximately 31 million units as compared to the Company’s initial expectation of approximately 26 million units. QCT sold approximately 32 million MSM phone chips in the first quarter fiscal 2004, which was greater than our initial expectation of 27-28 million MSM phone chips.
So, what happened? More chipsets, more handsets, that’s all. And now inventory levels of both chipsets and handsets are apparently at record low levels, so this bodes well for sustained strength in demand.
A good summary of the results, and increased guidance, is included in the presentation slides at qualcomm.com.
After updating the QCT (chipsets) and QTL (licensing and royalties) revenues and earning in my spreadsheet, the strength of this quarter becomes evident. First are the quarterly QCT revenues, earnings and margins. Very impressive jump since the last quarter, and a respectable increase over the record revenues booked in last year’s first quarter.
QCT
Revenues Earnings margin (%)
Q100 352395 127690 36
Q200 279186 89977 32
Q300 338132 109573 32
Q400 268989 64281 24
Q101 330632 84180 25
Q201 364059 84866 23
Q301 333115 70582 21
Q401 336881 65917 20
Q102 359144 86941 24
Q202 343815 77724 23
Q302 404253 117524 29
Q402 483617 158334 33
Q103 709681 288282 41
Q203 652873 223520 34
Q303 557240 163114 29
Q403 504500 121808 24
Q104 751818 260661 35
What is particularly sweet is the return of the high margins on chipsets. I had been concerned about the declining margins reported over the previous three quarters, but it looks like economies of scale are kicking back in as a greater fraction of the increasing revenue goes to the bottom line.
As usual, I ran the 3-quarter moving average for the QCT revenues (i.e. the average of the current quarter with the last two preceding ones), to smooth out quarterly fluctuations. The declining blip recording last quarter remains that, a blip in an otherwise growing segment.
Q300 323238
Q400 295436
Q101 312584
Q201 321227
Q301 342602
Q401 344685
Q102 343047
Q202 346613
Q302 369071
Q402 410562
Q103 532517
Q203 615390
Q303 639931
Q403 571538
Q104 604519
The earnings report contains several important milestones in QCT’s positioning strategy to cover high growth segments in WCDMA, EVDO, multimode, and so on. This is the strategy Sanjay Jha had discussed in last quarter’s CC (and in several presentations)—that QCT needs to work in different markets and different vendors to meet operator
THE QUASI-PERPETUAL MONEY MACHINE
The time series of quarterly revenues and earnings for the QTL revenues are shown below:
QTL
Revenues Earnings margin (%)
Q100 183845 168890 92
Q200 157197 139968 89
Q300 161301 139440 86
Q400 165568 147466 89
Q101 186824 174139 93
Q201 225646 206663 92
Q301 180129 152890 85
Q401 189340 172102 91
Q102 210803 188688 90
Q202 193955 171535 88
Q302 198853 174450 88
Q402 243481 221500 91
Q103 255423 229409 90
Q203 260,110 236,192 91
Q303 242,479 218,363 90
Q403 242,184 212,657 88
Q104 353,421 324,673 92
The $111 Million in additional royalty revenues is a 46% increase since the previous quarter, translating into an increase of 52.7% in corresponding earnings, as margins increased from 88% back up to 92%. This is quite significant in that this series does not usually jump around much. Part of the reason lies in the following fact, already noted by Raz, that WCDMA royalties contributed approximately 12 percent of total royalties reported by licensees in the December quarter for shipments in the September quarter.. And we are just in the embryonic stages of the potential WCDMA explosion. ASP’s are still very high in WCDMA, so even a relatively small number of units contributes a hefty portion of the bottom line.
Note also the greater extent of infrastructure (base station) chips and royalties.
Below is the 3-quarter moving average of the QTL earnings series— reflecting a resumption of the upward trend after last quarter’s small decline.
Q300 167448
Q400 161355
Q101 171231
Q201 192679
Q301 197533
Q401 198372
Q102 193424
Q202 198033
Q302 201204
Q402 212096
Q103 232586
Q203 253005
Q303 252671
Q403 248258
Q104 279361
Overall margins for the company for this quarter, combining all segments (still excluding QSI), came in at 50%, the highest level recorded since I started tracking these numbers (Q1’00).
Slide 11 in the CC presentation highlights the upbeat guidance picture for the year, now increased for the second time in less than 2 months (the last guidance update was given in November, following the October earnings). With EPS (excluding QSI) estimated in the $1.56-1.61 range, and GAAP EPS at $1.41-1.46, the annual growth rate in GAAP EPS for FY 04 vs. FY 03 is now estimated at better than 40%.
Did I mention that cash stash went up from $5.4B to $5.9B? Could another increase in dividends be on the horizon?
IN CLOSING
With the boost in EVDO fortunes provided by Verizon’s recent decision to expand the service from the two current test markets, the continuing success with basic 1X service in emerging populous markets, firm evidence of handset replacement towards higher end models (cameras, etc…) in more established markets like the US, and now the reality of WCDMA royalties, this company is converting a growing stream of revenues into profits at a faster rate than ever before. What’s there not to like?
BRational |
