Qualcomm, Inc. (QCOM) Not Backing Off From Growth Target

Qualcomm, Inc. (QCOM) Not Backing Off From Growth Target
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Evercore Equity Research analysts Mark McKechnie and Zachary Amsel maintain an Overweight rating for Qualcomm, Inc. (NASDAQ:QCOM) as the company beats expectation for December’s earnings.

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We maintain our Overweight rating and $80 price target on Qualcomm, Inc. (NASDAQ:QCOM) following a solid yet managed report in what we view as a challenging environment. Qualcomm’s December adjusted EPS beat was on in-line sales, opex control and higher investment income. March guidance was below the Street as expected, but FY14 EPS guidance was raised a nickel to $5.00-$5.20. We see solid valuation support here in the low-70’s or ~ 13x our FY15 EPS of $5.50, but admittedly look to 2H’14 for meaningful catalysts for a sustained move from here.

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Qualcomm’s earnings analysis

Adjusted EPS of $1.22 net of a $0.04 of various gains on $6.6B in sales beat the street’s $1.18 on $6.7B. The ~ $0.04 beat was driven by lower gross margins, opex control (down 3.5% ex items q/q vs guide for flat q/q), and better investment income ($255M vs. our expected $150M). Net cash grew by $2.2B q/q to $31.6B or $18.02 per share, with $8.7B domestic.

Qualcomm’s revenue metrics in-line; QCT margins beat

QTL revenues of $1.9B were in-line with industry units of 278M beating slightly and offset by ASP of $222 missing slightly for in-line QTL EBT. QCT revenue was in-line at $4.6B with better units (213M vs. estimated 203M) offset by lower ASP ($21.70 vs. our $22.50) which we attribute to a higher mix of thin modems (i.e. Apple Inc. (NASDAQ:AAPL)) and emerging markets, but margins of 19.6% beat our 17.4% forecast.

George Davis a belt tightener?

On the margin, we like Qualcomm’s ability to protect EPS through opex control/ share repurchases. Qualcomm, Inc. (NASDAQ:QCOM) is not backing off its FY14 opex growth target of +5-7% (vs. +20% prior yrs), but we take comfort in knowing the company can cut if necessary to protect earnings. QCT management has pointed to a rationalization (our words) of its chip portfolio as a key area for efficiencies – we suspect that played a part this quarter and could deliver QCT margin upside in the future.

FY14 forecast

Our FY14 forecast includes a steep jump in Q4FY14 earnings – $1.20 March, $1.23 June and $1.36 in September which we think is doable on the back of Samsung’s GS5 launch and China’s TD-LTE acceleration. Our biggest downside concern would be emerging markets – to wit, Qualcomm, Inc. (NASDAQ:QCOM)’s CY14 3G/4G forecast of ~ 1.26B includes 810M or 20% y/y growth from emerging markets (mainly China) and 450M or 6% growth from developed countries.

Upcoming potential catalysts: MWC (late Feb), GS5 launch (June), new iPhones (Fall).

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