Earning Scorecard: Qualcomm Inc.

Qualcomm Inc.(QCOM) reported excellent third quarter 2011 financial results, where both the earnings per share (EPS) and revenues exceeded the Zacks Consensus Estimate. The robust result was primarily attributable to the significant surge in demand for high-end 3G smartphones and tablets.

Third Quarter Highlights

Total revenue in the reported quarter was $3,623 million, up 34.2% year over year, and ahead of the Zacks Consensus Estimate of $3,550 million. On a GAAP basis, quarterly net income was $1,035 million or 62 cents per share compared with $767 million or 47 cents per share in the year-ago quarter. Adjusted (excluding special items) EPS in the third quarter of 2011 was 63 cents, which surpassed the Zacks Consensus Estimate by a penny.

Quarterly operating income was $1,113 million compared with an operating income of $893 million in the year-ago quarter. Gross margin decreased to 64.7% from 68.5% in the year-ago quarter. Quarterly operating margin was 30.7% compared with 33.1% in the prior-year quarter.

During the third quarter of fiscal 2011, Qualcomm shipped approximately 120 million CDMA-based MSM chipsets, up 17% year over year and 2% sequentially.

Agreements of Analysts

Of the 8 analysts covering the stock in last 7 days, 1 analyst upwardly revised the estimate for the fourth quarter of fiscal 2011, while none revised their estimates downward for the same period. Similarly, for the first quarter of fiscal 2012, 1 analyst increased the estimate, while none decreased it.

For fiscal 2011, 1 out of the 9 analysts raised the estimate, while none moved in the opposite direction. For fiscal 2012, none of the analysts increased or decreased their estimates.

Currently, the Zacks Consensus EPS Estimate for the fourth quarter of fiscal 2011 is pegged at 69 cents. The projected annual growth is 29.72%. Similarly, for the first quarter of fiscal 2012, the Zacks Consensus EPS Estimate of 79 cents indicates a gain of 13.87% year over year.

Magnitude of Estimate Revisions

In synergy with the upward revision of estimates, during the last 7 days, the Zacks Consensus Estimate for fourth quarter 2011 was in line with the current estimate of 69 cents. Likewise, for the first quarter of fiscal 2012, the Zacks Consensus Estimate inched down by a penny from 79 cents to 78 cents.

For fiscal 2011 and 2012, the Zacks Consensus Estimates were in line with the current estimates of $2.84 and $3.21, respectively.

Earning Surprises

With respect to earnings surprises, the company’s consistent track record in the last four quarters is expected to persist in the coming quarters. In the last quarter, Qualcomm produced an earnings surprise of 1 cent or 1.61%. There are no surprises expected for the ongoing quarter as well as for the first quarter of fiscal 2012.

Likewise, fiscal 2011 reflect an earning surprise of 0.00%. However, fiscal 2012 contain 1.56% downside potential.

Our Recommendation

We believethe Qualcomm’s record-high earnings,strong balance sheet and solid management outlook for the current fiscal year will act as positive catalysts in the long run. Moreover, the growing popularity of smartphones and tablets coupled with increased deployment of 3G/4G networks will further drive the stock upward.

However, stiff competition from formidable rivals like Broadcom Corporation (BRCM) and Texas Instruments Inc. (TXN) as well as lower ASP of smartphones will negatively impact Qualcomm’s royalty business going forward.

We maintain our long-term Neutral recommendation on Qualcomm. Currently, Qualcomm has a Zacks #3 Rank, implying a short-term Hold rating on the stock.

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