Will Top-Line Woes Impact QUALCOMM's (QCOM) Q4 Earnings?

QUALCOMM Incorporated (NASDAQ:QCOM) is scheduled to report fourth-quarter fiscal 2018 results after the closing bell on Nov 7. Revenues from both Qualcomm CDMA Technologies (“QCT”), which accounts for the lion’s share of total revenues, and Qualcomm Technology Licensing (“QTL”) segment are anticipated to decline year over year.

Whether this will weigh on the quarterly earnings remains to be seen.

Revenue Headwinds

Qualcomm expects seasonality factors and soft industry conditions to affect its fiscal fourth-quarter results due to near-term inventory build in the handset market and ongoing impact of non-paying licensees. The company anticipates lower QTL margin due to higher litigation expenses. During the quarter, Qualcomm reached a settlement with the Taiwan Fair Trade Commission in an anti-trust case for about $93 million to safeguard its patent-licensing business. Moreover, QTL revenues are likely to be affected by softer sell through due to lower demand in China. The Zacks Consensus Estimate for QTL revenues is currently pegged at $1,089 million, down from $1,800 million recorded in the year-earlier quarter.

During the quarter, Qualcomm’s prolonged battle with Apple Inc (NASDAQ:AAPL). took a new turn when the former alleged that the latter has stolen its trade secrets related to chip-making software for the benefit of a third-party service provider. Qualcomm accused Apple of misusing its secret software access to share information about its chips to Intel Corporation (NASDAQ:INTC) engineers. This supposedly helped Intel to develop competitive modem chips for use in several iPhone models, thereby enabling Apple to entirely get rid of Qualcomm products from its portfolio with which it was entangled in a patent dispute. With such classified information, Intel chips were reportedly able to significantly improve performance and replaced Qualcomm's modem chips first in iPhone 7 launched in 2016. The recent launches of iPhone XS, XS Max and XR are believed to be solely based on Intel's XMM 7560 4G modem. The fresh charges against the iPhone maker will likely make the legal battle murkier and further embroil the patent dispute into a long-drawn judicial process, thereby affecting licensing fees and escalating litigation costs.

Revenues for QCT are likely to decline with continued tariff war with China — one of the largest markets for the company. The Zacks Consensus Estimate for this segment’s revenues is pegged at $4,346 million, down from $4,650 million recorded in the year-ago quarter.

Softness in global 3G/4G device shipments, particularly in China, has added to the woes. 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, 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 overall margins.

All these factors are likely to weigh on its top-line growth. Qualcomm expects revenues for the fiscal fourth quarter in the range of $5.1-$5.9 billion. The Zacks Consensus Estimate for total revenues is currently pegged at $5,535 million. It reported revenues of $5,905 million in the year-ago quarter.

Earnings Whispers

Our proven model shows that Qualcomm is likely to beat earnings this quarter as it possesses 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 the case here as you will see below:

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is +0.61% with the latter pegged at 83 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. This increases the predictive power of ESP and makes 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.

Other 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:

Windstream Holdings, Inc. (NASDAQ:WIN) is slated to release quarterly numbers on Nov 8. It has an Earnings ESP of +10.79% and a Zacks Rank #3.

Finisar Corporation (NASDAQ:FNSR) is likely to release results on Dec 6. The company has an Earnings ESP of +2.92% and has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for CenturyLink, Inc. (NYSE:CTL) is +10.29% and it carries a Zacks Rank #2. The company is scheduled to report quarterly numbers on Nov 8.

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