Qualcomm’s EPS pledge
In the previous part of this series, we saw that analysts expect Qualcomm’s (QCOM) non-GAAP[1. generally accepted accounting principles] EPS (earnings per share) to fall 21.3% YoY (year-over-year) to $3.37 in fiscal 2018. In January 2018, Qualcomm wrote a letter to investors, assuring them of its ability to improve its EPS, reduce costs, and deliver returns over the long term. The company did this as an attempt to fend off Broadcom’s (AVGO) hostile takeover.
Now that the takeover threat is gone after President Trump blocked the deal in March, Qualcomm’s management is under pressure to deliver what it promised in the letter. In the letter, the company pledged to deliver EPS in the range of $6.75–$7.50 in fiscal 2019.
Qualcomm’s plan to achieve fiscal 2019 EPS target
During the fiscal 2Q18 earnings call, Qualcomm’s chief executive officer, Steven Mollenkopf, reiterated the company’s EPS pledge for fiscal 2019 and detailed its plans to achieve this target. The plan included completion of NXP Semiconductors’ (NXPI) acquisition.
In the event the deal doesn’t take place, it would resort to a large share repurchase program to give returns to shareholders. At the earnings call, Qualcomm’s CFO, George Davis, stated that in either case, it would add $1.50 to its annual EPS.
Davis added that if the company fails to settle its licensing disputes with Apple and Huawei, its fiscal 2019 earnings per share are expected to stand at $5.25. If the disputes are settled, it would add $1.50–$2.25 in annual EPS, resulting in annual EPS of $6.75–$7.50. He also stated that the company has initiated a $1.1 billion annual cost reduction program, which would help the company achieve $5.25 EPS in fiscal 2019.
Analysts EPS estimate for Qualcomm
Wall Street analysts expect Qualcomm to report EPS of $3.74 in fiscal 2019 without factoring in any of the initiatives that its management laid out for the year.
Qualcomm’s $7.00 EPS estimate is subject to the resolution of licensing lawsuits with Apple. In our view, once the issue is resolved, Apple would pay a royalty to Qualcomm—although the timeframe and amount are currently uncertain. As the $7.00 EPS target is subject to the fulfillment of various conditions, analysts seem skeptical that the company could achieve it.
While EPS growth and profit margins are important, Qualcomm’s management is motivated to show is its efficiency in improving profitability. We’ll look at the management’s efficiency in the next article.
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