Will Lower Revenues Hurt Qualcomm's (QCOM) Earnings In Q2?

QUALCOMM Incorporated (NASDAQ:QCOM) is scheduled to report second-quarter fiscal 2018 results after the closing bell on Apr 25. Both Qualcomm CDMA Technologies (“QCT”) and Qualcomm Technology Licensing (“QTL”) segments are anticipated to generate lower revenues in the quarter on a sequential basis.

Whether this will lead to lower earnings remains to be seen.

Top-Line Woes

The company expects higher-than-normal seasonality to affect its fiscal second-quarter results due to near-term inventory build in the handset market and ongoing impact of non-paying licensees. The fiscal second quarter is typically a seasonally high quarter for QTL revenues and a seasonally low quarter for QCT. Qualcomm expects that the lower QTL margins, due to higher litigation expenses as the impact of Apple (NASDAQ:AAPL) nonpayment, is more pronounced in the fiscal second quarter. Moreover, QTL revenues are also likely to be affected by softer sell through due to lower demand in China. Qualcomm expects QTL revenues to be $1.2 billion to $1.4 billion in the to-be-reported quarter, down approximately 4% sequentially at midpoint, while the Zacks Consensus Estimate is pegged at $1,261 million.

Margin for QCT is anticipated to be lower on a sequential basis on lower MSM (mobile station modem) volume, partially offset by benefits from product cost initiatives. We anticipate that fiscal second quarter’s non-GAAP combined R&D and SG&A expenses will be flat to down approximately 2% sequentially, as increased litigation expenses and the reset of Employee Benefit taxes are more than offset by the absence of the prior bad debt charge. Qualcomm expects QCT revenues of $3.6 billion to $4.2 billion in the quarter, while the Zacks Consensus Estimate is pegged at $3,861 million, down sequentially from $4,651 million.

Stiff competition in the Chinese market has added to the concerns. Moreover, Qualcomm has been facing challenges from low-cost chip manufacturers like MediaTek and Rockchip as well as handset manufacturers’ SoC (System on Chip) projects such as Exynos by Samsung (KS:005930). The company is also facing severe competitive threat from Intel (NASDAQ:INTC), which has been redesigning its chipsets for the mobile computing market. Although the global smartphone market is expected to maintain its momentum in the next four to five years, major part of this growth is likely to come from the low-cost emerging markets, which may exert pressure on Qualcomm’s margins.

Earnings Whispers

Our proven model does not conclusively show that Qualcomm is likely to beat earnings this quarter as it does not possess the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -3.12% as the former is pegged at 67 cents and the latter at 70 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

QUALCOMM Incorporated Price and EPS Surprise

QUALCOMM Incorporated Price and EPS Surprise | QUALCOMM Incorporated Quote

Zacks Rank: Qualcomm has a Zacks Rank #3. While this increases the predictive power of ESP, we need to have a positive ESP to make us reasonably confident of an earnings beat.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Capital One Financial Corporation (NYSE:COF) has an Earnings ESP of +0.79% and carries a Zacks Rank #3. The company is slated to release results on Apr 24.

BOK Financial Corporation (NASDAQ:BOKF) is slated to report first-quarter 2018 results on Apr 25. It has an Earnings ESP of +0.24% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

New York Community Bancorp (NYSE:NYCB) is slated to release results on Apr 25. It has an Earnings ESP of +0.14% and carries a Zacks Rank #3.

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