Qualcomm's Apple Accord Will Upstage Everything Else in Earnings

(Bloomberg) -- When Qualcomm Inc. reports earnings on Wednesday afternoon, the details of the chipmaker's settlement with Apple Inc. will be at the top of investors' minds.

Earlier this month, Qualcomm delivered a result its executives had long told investors was coming when Apple finally tapped out of a legal fight and agreed to pay for the company's wireless-phone technology. Now they want to know exactly how much the iPhone maker will fork over and whether Qualcomm was forced to cut a deal.

Qualcomm's stock had languished for years under the backdrop of the Apple conflict. The shares were widely seen as “virtually uninvestable” since 2014, according to Sanford C. Bernstein analyst Stacy Rasgon.

“The removal of that perceived overhang, allowing fundamental investors to be willing to simply look at it again, is hugely freeing,'' Rasgon wrote in a research note. “The fundamentals of Qualcomm's core (which admittedly do not appear super at the moment) are likely to take a back seat to the details of the Apple settlement. Given what we know now the answer could be almost anything.''

Qualcomm and Apple announced last month that they would end the worldwide battle over billions of dollars of technology licensing fees that threatened the chipmaker's most profitable line of business. The deal sent Qualcomm's shares soaring. The stock has gained more than 50 percent since April 15, the day before the settlement, and is trading at the highest in 19 years.

Options prices imply a 6.1 percent move in Qualcomm's shares following the earnings report. Among the contracts expiring this week, calls outweigh puts by 1.4-to-1, which on the surface suggests a bullish sentiment.

Under the terms of the agreement, Apple will make a one-time payment to Qualcomm and pay licensing fees for its technology. The only detail Qualcomm gave was that it expects the agreement to add profit equivalent to $2 a share once the chip shipments ramp up.

Morgan Stanley analysts led by James Faucette estimated that Apple is paying a royalty of roughly $8 per phone with the price eventually rising into the mid-teens range.

On Apple's earnings call on Tuesday, Chief Executive Officer Tim Cook said he was pleased with the settlement but refused to provide any details. The two companies have agreed not to disclose the terms, he said.

Qualcom isn't out of the woods completely with legal entanglements. A judge in California is still considering a case brought by the U.S. Federal Trade Commission accusing Qualcomm of acting like a monopolist. It's also still in a dispute with Huawei Technologies Co. about licensing fees and is only receiving partial payment.

What Bloomberg Intelligence Says
"Qualcomm's new, long-term, direct deal that pays it royalties on all Apple devices for at least six years may remain the key near-term focus. The QCT (chipmaking) segment also got a boost, as Apple's 5G plans run through Qualcomm's modems now, even if Apple wants to make its own chips. Even with this victory, high-end phone weakness amid feature fatigue will weigh on Qualcomm's 2020 and 2021 earnings."
-- Anand Srinivasan, technology analyst

Just the Numbers

2Q adjusted revenue estimate $4.80 billion (range $4.73 billion to $4.85 billion)
2Q adjusted EPS estimate 71c (range 69c to 75c)
3Q revenue estimate $5.26 billion (range $4.65 billion to $5.67 billion)
3Q adjusted EPS estimate $1 (range 63c to $1.24)

Data

18 buys, 9 holds, 1 sell
Avg PT $85.46 (2.6% downside from current price)
Implied 1-day share move following earnings: 6.1%
Shares fell after 7 of prior 12 earnings announcements
Adjusted EPS beat estimates in 12 of past 12 quarters
Shares up 1.1% in past 5 days vs SPX Index up 0.7%
Shares up 72.7% in past year vs SPX Index up 11.1%

Timing

Earnings release expected May 1 after market close
Conference call website

--With assistance from Gregory Calderone.

To contact the reporters on this story: Jeran Wittenstein in San Francisco at jwittenstei1@bloomberg.net;Ian King in San Francisco at ianking@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Richard Richtmyer, Steven Fromm