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Qualcomm Climbs As Growth and Confidence Return


How Qualcomm envisions wireless technology development. Image source: Qualcomm.

Semiconductor giant Qualcomm (NASDAQ: QCOM) has suffered great difficulties recently, having to navigate changes in the industry that have caused its revenue and earnings to fall substantially from their peak levels. Yet many investors have been hoping that the company was getting close to a bottom in terms of its business fundamentals, and coming into Wednesday's fiscal third-quarter financial report, Qualcomm shareholders expected vastly improved numbers from the big declines that it had seen in past quarters. Qualcomm delivered far better results even than most shareholders believed possible, and the confidence that the company now has in its future helped prompt a nice gain in the share price immediately following the announcement. Let's take a closer look at the latest from Qualcomm and why momentum might finally be shifting in its direction.

Qualcomm reverses course and starts climbing again

Qualcomm's fiscal third-quarter results were strong by just about any measure. Revenue climbed 3% to $6.04 billion, and that was more than $450 million more than the consensus forecast among investors following the stock. Adjusted net income climbed by 7% to $1.73 billion, and that produced adjusted earnings of $1.16 per share. That was $0.17 better than most investors were expecting, and more importantly, it represented a 17% jump from year-ago levels thanks to a dramatic drop in share count.

Looking more closely at Qualcomm's numbers, you can see mixed performance but with improvement in certain areas that suggests an upward trajectory for the company as a whole. MSM chip shipments fell once again, dropping 11% to 201 million, but that represented a sequential improvement over shipments from the fiscal second quarter. Total device sales rose 4% in dollar terms, with shipment volume gains of 11% to between 321 million and 325 million offsetting a 7% drop in average selling price for 3G and 4G devices to between $191 and $197.

Qualcomm also saw improvement in both of its main business segments. The QCT semiconductor business posted sales that were in line with year-ago levels, and pre-tax income jumped by more than a quarter compared to the year-ago period. The QTL licensing business had slower pre-tax profit growth of 6%, but its revenue also rose by 6%, helping to drive top-line growth for Qualcomm. Sequentially, both sales and pre-tax profits showed improvement.

CEO Steve Mollenkopf was ecstatic about the guidance-beating results that Qualcomm produced. Mollenkopf ascribed some of the gains to "meaningful progress with licensees in China," but he noted that "our chipset business is also benefiting from a strong new product ramp across tiers, particularly with fast growing [original equipment manufacturers] in China." The CEO pointed to strength in following its strategic priorities as also helping the company.

Can Qualcomm keep climbing?

Qualcomm thinks that the strong quarter could be just the beginning of an uptrend for the business. As Mollenkopf described, "we remain confident that our focused investments in 5G and other advanced technologies will create a strong foundation for long-term earnings growth."

Qualcomm's guidance for the fiscal fourth quarter also looks favorable and could continue to build momentum for the company. The tech giant set a wide range of between $5.4 billion and $6.2 billion for revenue, which would represent anywhere from a 1% decline to a 14% increase on the top line. Adjusted earnings are expected to come in between $1.05 and $1.15 per share, with growth of between 15% and 26%. Both figures are slightly on the high end of consensus coming into the day's report.

The big question will be whether Qualcomm earns stronger success in China. The need to penetrate the huge Chinese mobile market has driven part of Qualcomm's growth strategy for a while, but competition there is extremely difficult. Victories on the licensing front have been helpful, but Qualcomm will still need the device-makers to whom it supplies chips to be successful enough to drive sales without becoming so successful that they start looking to replace Qualcomm with other suppliers.

Qualcomm investors were quite pleased with the report, sending the stock up almost 6% in after-hours trading following the announcement. After such a long slump, Qualcomm could have further to move higher if it can build on its positive momentum and start producing strong results consistently.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.