Live by the Sword! Fall on Your Sword!
The phrase can mean a lot of things but is actually akin to your mechanic telling you the car engine doesn’t sound right. It is a nebulous statement that tells you virtually nothing.
Earnings quality issues can come from bloated inventories; changes to allowances for doubtful accounts or bad debts; unusual changes in tax rates; or a disproportionate amount of your "earnings" coming from non-operating sources. The term really alludes to anything that’s out of the ordinary from past practices or industry norms. Moreover, it is all in the eye of the beholder, as there is no standard definition of what are and are not "quality earnings."
The wireless world had one of its top dogs demonstrate the downside of earnings quality issues just the other day. Things are bad enough in the handset business, but when Qualcomm Inc. (Nasdaq: QCOM) reported, it managed to surprise even some of its most ardent supporters.
It’s fair to say that most investors have been expecting bad news from the handset supply chain for most of the last three months. As the economy headed south, nearly all of the major players reduced expectations for December quarter results. For the most part, as those results have been announced in January, they have cast an even darker pall on the state of the industry and its near-term outlook. (See The Cellphone Slide.)
Qualcomm joined that band the other day. While its overall revenue was actually up 3 percent from last year – an anomaly in the current environment but most likely due to the resumption of Nokia Corp. (NYSE: NOK) royalties – its chipset operations were woeful. Chipset revenues fell 15 percent from last year, and unit shipments were down 20 percent year-on-year. Worse still, the group’s operating profits plummeted 63 percent versus last’s year’s level. Tough times at Qualcomm right now! (See Qualcomm Reports Q1.)
Despite the difficulties in operations, it is the non-operating income that provided the biggest shock for investors. To understand that, we have to take a look at some history...
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