Will Lower Revenues Hurt Qualcomm's (QCOM) Q3 Earnings?

Qualcomm Incorporated (NASDAQ:QCOM) is scheduled to report third-quarter fiscal 2019 financial results on Jul 31, after the closing bell. In the last reported quarter, the company delivered a positive earnings surprise of 8.5%. Markedly, Qualcomm surpassed the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average beat being 17.6%.

Qualcomm continues to execute its strategic objectives, including driving the global transition to 5G, protecting the value of its technology and expanding into new industries and product categories for future growth.

The company has redefined the computing and mobile ecosystem across the globe with the launch of QCA6390 Connectivity system-on-a-chip product. This game-changing and arguably the most advanced integrated offering from Qualcomm is likely to deliver path-breaking performance in the 5G era and provide it a competitive advantage against rivals.

However, the chipmaker is likely to report lower year-over-year revenues in the light of fierce competition from low-cost rival chipmakers like MediaTek. Even with multi-year agreements with Apple (NASDAQ:AAPL), the company witnessed soft demand for smartphone chips.

Let’s find out how things are shaping up prior to the announcement.

Factors at Play

During the fiscal third quarter, Qualcomm inked a global license agreement with HMD Global Oy to cover Nokia (HE:NOKIA) branded devices, produced by HMD Global. Qualcomm seeks to offer royalty-bearing patent licenses to HMD Global for developing, producing and marketing branded 3G, 4G and 5G single-mode and multimode devices.

The addition of HMD Global has enabled Qualcomm to strengthen its leadership position in 5G, chipset market and mobile connectivity. The company’s best-in-class security, state of the art processor will aid HMD Global customers in getting regular Android updates quicker than other processors.

Further, Qualcomm, together with Lenovo, introduced the world’s first 5G PC — Project Limitless. The company collaborated with the leader in PCs to bring innovation to the PC ecosystem. It is powered by the Qualcomm Snapdragon 8cx 5G compute platform — the world’s first 7nm platform purpose-built for PCs that offer 5G connectivity.

For the June quarter, management expects GAAP revenues in the range of $9.2-$10.2 billion. Non-GAAP earnings are projected in the 70-80 cents per share range compared with $1.01 reported in the prior-year quarter.

Revenues at Qualcomm Technology Licensing (QTL) are expected between $1.2 billion and $1.3 billion. EBT margin at QTL is estimated to be 65-69%. For Qualcomm CDMA Technologies (QCT), the company anticipates about $150 million to $170 million MSM chip shipments, reflecting typical volume seasonality, market weakness particularly in the low and mid tiers, timing of OEM product launches and overall competitive dynamics. EBT margin at QCT is expected between 13% and 15%.

The Zacks Consensus Estimate for revenues from the QCT segment, which accounts for the lion’s share of total revenues, is currently pegged at $3,801 million. It reported $4,087 million a year ago.

Revenues from QTL are expected to be $1,275 million. It reported $1,465 million in the year-ago quarter. Consequently, for the fiscal third quarter, the Zacks Consensus Estimate for total revenues stands at $5,112 million. It reported $5,599 million in the year-earlier quarter. Adjusted earnings per share are pegged at 76 cents, down from $1.01 reported a year ago.

What Our Model Says

Our proven model does not show that Qualcomm is likely to beat earnings estimates this quarter as it does not possess any of the two 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’ll see below:

Earnings ESP: Qualcomm’s Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is 0.00% as both are pegged at 76 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

Zacks Rank: Qualcomm currently has a Zacks Rank #4 (Sell).

Note that we caution against stocks with a Zacks Rank #4 or #5 (Strong Sell) 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:

Telephone and Data Systems, Inc. (NYSE:TDS) with an Earnings ESP of +12.50% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

TELUS Corp. (NYSE:TU) with an Earnings ESP of +2.61% and a Zacks Rank #2.

Ciena Corp. (NYSE:CIEN) with an Earnings ESP of +5.26% and a Zacks Rank #2.

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