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How Broadcom Is Leveraging Qualcomm’s Weak Revenue Guidance

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Feb. 9 2018, Updated 7:31 a.m. ET

Qualcomm’s and Broadcom’s earnings

Qualcomm (QCOM) has been trying to woo its shareholders away from voting for Broadcom’s (AVGO) nominated board directors, but QCOM’s recent earnings aren’t helping. Qualcomm claims it can double its EPS (earnings per share) in two years, but it started fiscal 2018 with an 18% YoY (year-over-year) decline in EPS.

On January 31, 2018, Qualcomm reported its fiscal 1Q18 earnings, which beat the analyst estimate, but its guidance was below the analyst estimate, creating ambiguity around the future growth potential of the company. Broadcom grabbed this opportunity and upped its fiscal 1Q18 earnings estimate to the higher end of its guidance, assuring Qualcomm stockholders of its growth potential.

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Fiscal 1Q18 revenue

Qualcomm’s revenues rose 1% both sequentially and YoY to $6.07 billion in fiscal 1Q18, beating the analysts’ estimate of $5.92 billion. Fiscal 4Q and fiscal1Q are seasonally strong quarters for revenues because the company sees strong demand for its Snapdragon processors and baseband modems. The company witnessed a strong double-digit sequential growth of 13.2% in fiscal 4Q17 due to rich product mix and a higher ASP (average selling price) of Snapdragon 835.

However, its 1Q18 revenue growth was impacted by a weak outlook for smartphones sales in China (FXI) and the non-payment of a licensing fee by Apple (AAPL) due to their ongoing dispute. According to data by Counterpoint, China’s smartphone shipments fell 5% YoY (year-over-year), while Apple’s and Samsung’s (SSNLF) smartphone shipments fell 1% and 5%, respectively, in calendar 4Q17. Qualcomm earns more than 65% of its revenues from China, and Apple and Samsung are its biggest customers.

On the other hand, Broadcom expects to report a 10% sequential revenue growth in fiscal 1Q18 with weakness in its wireless business more than offset by strength in its wired and enterprise storage business.

Despite reporting better-than-expected revenues, Qualcomm’s stock fell 2.1% as it reported weaker outlook.

Fiscal 2Q18 revenue guidance

For fiscal 2Q18, Qualcomm expects its revenues to fall 13.3% YoY to $5.2 billion at the midpoint, falling behind the analysts’ estimate of $5.6 billion. This YoY decline comes as Apple halts its licensing fee to Qualcomm. The chip supplier stated that the legal headwinds are temporary, and so it’s looking to resolve the Apple dispute by convincing the handset maker to pay a fair and reasonable royalty.

At the same time, Broadcom reported better-than-expected revenue guidance for fiscal 2Q18. It expects its revenues to grow 19% YoY to $5 billion—nearly 11% above analyst estimate. This guidance could have a negative impact on Qualcomm’s efforts to win investor confidence.

The next earnings results that could adversely impact Qualcomm will come from NXP Semiconductors (NXPI), due on February 7, 2018. If NXP reports better-than-expected earnings, Qualcomm could have difficulty completing its acquisition of the company.

In the next part, we’ll look at Qualcomm’s profitability.

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