From BRational--nice analysis
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Author: BRational
Number: of 29215
Subject: Paint by numbers
Date: 1/25/02 3:02 AM
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The anticipation was high this time; the usual period of pre-earnings silence seemed quieter than usual. I had
been wondering what might be up this time. What surprise will they spring on us? What nasty ghost could be
lurking? I was particularly concerned that one of the following might happen:
1. Chipset shipments/revenues would be considerably lower than expected
2. Licensing revenues and royalties would be considerably lower than usual
3. Margins might have eroded
4. The new segment reporting might reveal some major investment loss/write-off that would now be swept
under the pro-forma rug, which I knew the media would have picked up on mercilessly (in the wake of the
Enron fiasco).
To my relief, none of the above occurred, and pleasant surprises were there instead. As has become my
practice, I looked at the numbers, by segment, and compared them to previous quarters. Fortunately, QCOM
had recently made the restated quarterly segment numbers available on their website, as discussed in a recent
post (http://boards.fool.com/Message.asp?mid=16512297).
I recommend to every investor in QCOM to go read the earnings release, and particularly the earnings by
segment table, found on page 6 of the report, found as usual at the company's website:
qualcomm.com
The first thing I continue to check anytime Qualcomm releases its financial reports is the health of the
technology licensing business, reported under the QTL segment (this is the segment that sees the license fees
and the royalties from the sale of CDMA subscriber units-- handsets and modem cards). We did not have many
reports of new licenses over the reporting period, and I worried that the revenue stream might be lower. I
thought management might chalk off any weakness there to new reporting rules. However, the latter actually
should help steady the license stream, since the company is now supposed to recognize one time license fees
over a seven year period instead of reporting all of it in the quarter received.
I was very pleasantly surprised that the stream is healthy, and growing, and still posting these eye-popping
profit margins! Below is the time series for the past 9 quarters (using the restated numbers for the past two
years, at qualcomm.com, along with the newly released
earnings).
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
Compared to the same quarter last year, QTL revenues increased a very respectable 13%, while corresponding
earnings increased by about 9%. This is a quarter-on-quarter increase of 11% in revenues and 10% in earnings.
In the kind of market we've had this past year, with rather drastic scaling back of handset sales numbers, this
kind of growth is reassuring. Still, the promise of CDMA and 3G lies ahead, not behind, and getting about 10%
year on year growth in a recession year is not bad while the 3G transition and build up is taking shape. But the
reassurance I look for in these reports, and this one is no exception, is for those incredible margins to hold. At
90%, the story is intact, and the efficiency of converting the growing royalty stream to the bottom line is
remarkable, and remarkably consistent.
To smooth out quarter to quarter variation, below is the 4-quarter moving average of the QTL revenues (i.e. the
average of the current quarter with the last three preceding ones):
Q400 166978
Q101 167723
Q201 184835
Q301 189542
Q401 195485
Q102 201480
A nice positive trend continues, evident if you plot the numbers (can't paste that here).
Having established that the QTL stream and margins still provide a very comfortable cushion, it is the chipset
side that had me worried. With such dire earnings released by most chipmakers (witness Broadcom just
yesterday), and with continuing pressure on margins in that side of the business (steadily declining to 20% in
the previous quarter), I was relieved by the good news in the latest quarter numbers. The chipset segment,
reported under QCT, booked nearly $360 Million in revenues, with an operating margin back up to 24%,
undoubtedly reflecting the growing percentage of high-end 1X chipsets.
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
Below is the 4-quarter moving average of the QCT revenues, continuing the rising trend, both sequentially and
relative to the same quarter last year.
Q400 309676
Q101 304235
Q201 325453
Q301 324199
Q401 341172
Q102 348300
An important statistic in the new report is the 6 Million CDMA 1X MSM chipsets shipped in Q1 '02, a 50%
increase from the 4 Million shipped in the preceding quarter. Then again we were told as much in last quarter's
guidance.
New Segment Impact
As I noted at the onset, my biggest concern was for some major loss in the QSI side of the ledger, now
conveniently (and justifiably) removed from pro-forma reporting. Still, I knew the company would get nailed
and grilled had there been some hidden skeleton in there. Hence the relief of seeing a near-insignificant net
reported loss of just under $5 Million (given the $ 3 Billion size of the QSI strategic investment portfolio).
Another point of note is that GAAP revenues and earnings were in fact quite comparable to the pro-forma
results (the main difference being a $63 Million amortization of goodwill incurred with the acquisition of
Snaptrack—apparentlt a routine accounting practice).
What about the loss of interest "scare", given the large cash cushion that QCOM can afford to maintain?
Pro forma interest income was $25 million for the first quarter of fiscal 2002 compared to $42 million in the
year ago quarter and $26 million in the fourth quarter of fiscal 2001. The decline in interest income was a
result of lower interest rates on cash and marketable securities.
Guidance: Lowering the Bar
This part of the report appears to have generated some controversy. QCOM lowers guidance for Q2 and the
rest of the year—major disaster. Not quite. It was certainly expected, at least for Q2, and factored in several
times over in the current price. The rest of the year is still up for grabs. Jorma chose to load all the growth for
the year in the last quarter for Nokia, leaving enough time to backtrack in due course. QCOM's conservative
guidance is a relief, especially for Q2, especially because it should tide us over through the more meaningful
growth expected with the planned 1X launches almost everywhere. The exact words:
Based on the current business outlook, we expect second fiscal quarter pro forma revenues to decrease by
approximately 3-6 percent compared to the first quarter of fiscal 2002. We expect second fiscal quarter pro
forma earnings per share to be approximately $0.19-$0.21 (excluding QSI). This estimate assumes shipments
of approximately 13-14 million MSM phone chips during the quarter, including approximately 7 million 3G
CDMA2000 1X MSM phone chips. Operating expenses are expected to increase due to seasonal factors such
as employee payroll taxes and public company expenses.
A Comparison
Nokia reported its Oct-Dec quarterly earnings the same day, in the AM. Nokia's performance earned kudos
from the analysts, the media, and the market. For comparison, I thought I'd put some key performance
measures side by side. The source for the Nokia numbers are the earnings release, reported in:
news.moneycentral.msn.com
The table below shows, for this last quarter, the year-on-year (same quarter) change in revenues and earnings,
for Nokia and Qualcomm. Nokia had decreases of about 5% in revenues and 8% in pre-tax earnings
(pro-forma, as actual numbers are worse), compared to QCOM's increases of about 6% and 1.5% respectively.
For the year ending December 2001, the numbers are also shown below.
NOKIA QUALCOMM
For Quarter
year-on year revenues -5.34 5.72
year-on year profits -7.96 1.52
overall margins 18% 41%
For Year
annual revenues 2.68 4.51
annual profits -10.04 -2.77
The numbers require no further commentary. At a minimum, they suggest that whatever kudos Nokia earned
should also apply to Qualcomm. So we'll just let Jorma say it in his own words: "The ability to perform counts
also in difficult times and Nokia performed very well, meeting the challenges head on".
news.moneycentral.msn.com.
He also said "We achieved significant market share gains maintaining excellent profitability in our mobile
phone business and succeeded in substantially reducing the impact of a challenging environment on our
networks business"
Not to take anything away from the Finnish giant, they did very well in a challenging market, and deserve to be
congratulated. But, if 8% decrease year on year is good, about 2% increase for the same period is better. And if
18% profitability in making phones and networks good, 41% in making components and knowledge for same
is better.
But the guidance was different. Jorma stuck by 2002 full-year guidance, but also said the first quarter would be
hit by seasonal factors and the impact of new product launches, leading to a sales fall of six to 10 percent
against the same 2001 quarter . Doesn't sound too different from what Dr. J. predicted for the coming quarter.
As for the full year, for which Nokia projected an optimistic second half, here is what a laudatory analyst said
(from the above Reuters article):
Analysts agreed but said that Nokia would have a tough time in meeting its sales growth targets, which
included reaching sales growth of 25-35 percent by the fourth quarter.
"They have done a fantastic job... We are not surprised that Nokia is keeping their forecasts for the full year,
but we are less optimistic," said analyst Susan Anthony at Credit Lyonnais.
"Given the better-than-expected result at the end of the year, I will go through my forecasts, but Nokia may
have to trim their forecasts as they seem ambitious."
But Qualcomm won't. They may raise theirs upward. But then again 3G 1X is here, and spreading, and GPRS
still sucks, while WCDMA keeps getting delayed.
Three months ago, in closing my quarterly commentary (which this board has kindly allowed me to indulge in),
I said:
This company has delivered in its core businesses, and done so against one of the nastiest economic
environments seen in many years. Qualcomm should have no apologies to make; not only has it maintained
its profit levels (when so many others are declaring huge losses), but it has increased revenues and earnings
in its core businesses when even still profitable companies are reporting major decreases. And those margins,
90% in licensing, and 24% in chipsets, and still 41% overall—would be earning rave reviews under the best of
times, let alone in the current environment.
Ditto for this latest quarter (with updated margins).
BRational (letting the numbers tell the story…) |
