Qualcomm Slumps as Smartphone Market Weakness Persists

Qualcomm (NASDAQ:QCOM) shares tumbled more than 9% on Thursday after the chipmaker offered a weaker-than-expected forecast for this quarter.

Moreover, the company’s FQ3 results were mixed with sales falling more than expected. The chipmaker generated $8.44 billion in FQ3 revenue, which marks a 23% year-over-year contraction. Analysts were looking for $8.51 billion in the June quarter sales.

“We are pleased with our technology leadership, product roadmap and design-win execution, which position us well for growth and diversification in the long term,” said Cristiano Amon, President and CEO of Qualcomm Incorporated.

On the bottom line, Qualcomm posted a profit per share of $1.87, ahead of the consensus for an FQ3 EPS of $1.81.

Smartphone Weakness Offsets Positives

Qualcomm saw a number of its business segments record a major YoY decline in sales. The largest segment – QCT (Qualcomm CDMA Technologies) – saw its revenue fall 24% to $7.17 billion.

This business unit consists of three smaller business segments – Handsets, Automotive, and Internet of Things (IoT). Sales in the Handsets and IoT segments fell 25% and 24%, respectively, while Automotive experienced revenue growth of 13% YoY to $434 million.

For this quarter, the company sees adjusted EPS of $1.90 (up or down 10 cents) on revenue of $8.5 billion (up or down $400 million). Analysts were looking for FQ4 adjusted EPS of $1.94 on revenue of $8.79 billion. QCT revenue is seen at $7.2 billion, missing the $7.4B expected. Similarly, QTL (Qualcomm Technologies Licensing) revenue is seen at $1.25 billion, missing the expected $1.31 billion. The company added it returned $1.3 billion to stockholders in FQ3, including $893 million via cash dividends. Qualcomm spent $400 million to repurchase 4 million shares of its common stock.

The guidance actually signals that Qualcomm still doesn’t expect the smartphone market to recover, at least in the short term.

“We continue to estimate that calendar 2023 handset units will be down at least a high single-digit percentage relative to calendar 2022, reflecting the macroeconomic environment and a slower recovery in China,” the company said in the earnings commentary.

The IoT business segment is still seeing “elevated” channel inventory due to softer demand, with Qualcomm again blaming the broader macroeconomic conditions.

“Since it remains difficult to predict the timing of a sustained recovery and customers remain cautious with purchases, we continue to operate under the assumption that inventory drawdown dynamics will be a factor through the end of the calendar year,” the company further said.

This led Deutsche Bank analysts to slash their rating on QCOM stock to Hold from the prior Buy.

“QCOM delivered and in-line qtr and guide vs. our estimates, but management’s soft commentary around its Dec qtr and incremental headwinds in 2024 lead us to reduce our CY24 EPS ests by -8% and downgrade the stock,” the analysts said in a client note.

In response to elevated macroeconomic headwinds, Qualcomm said it is making progress on its commitment to slash 5% jobs. Moreover, it is working “proactively” to implement additional cost actions in the first half of fiscal 2024. These investment and job cuts will not affect key, strategic areas.

AI Push Not Yielding Benefits Still

During the quarter, Qualcomm unveiled a series of new products and initiatives aimed at increasing exposure to the booming artificial intelligence (AI) market. According to analysis from financial news publication The Tokenist, AI is expected to boost net margins by over 4% throughout the next decade—and Qualcomm aims to play a factor in this push. Among other things, the company partnered with Microsoft (NASDAQ:MSFT) to enable on-device generative AI productivity applications.

This will allow developers and cloud service providers to make generative AI more affordable, reliable, and private.

“Our best-in-class AI hardware and software empowers developers to make full use of our powerful AI capabilities, delivering incredible new user experiences on laptops, phones and other devices powered by Snapdragon,“ said Ziad Asghar, SVP Product Management at Qualcomm.

Similarly, Qualcomm has partnered with Meta Platforms Inc (NASDAQ:META) to allow on-device AI applications using the social media giant’s LLM (large language model) Llama 2. Two companies hope to have Llama 2-based AI implementations available from 2024 on high-end smartphones and PCs.

Qualcomm also made progress on the hardware side. It recently unveiled the first 4nm platform in the 4-series – Snapdragon 4 Gen 2. The new chip includes the latest AI capabilities, including low-light for crisp and detailed images in dim environments. Moreover, AI is used to enhance the background noise removal feature.

One of the key ideas behind the Snapdragon 4 Gen 2 is to make 5G chips more accessible to mass markets. The chip will still bring high-end performance, but will also come at a lower price to help drive 4G to 5G migration. The chipmaker has already agreed to sell its new chips to Redmi and vivo, while Snapdragon 8 Gen 2 for Galaxy will again power Samsung's (KS:005930) newest flagship device lineup.

Overall, Qualcomm sees itself well-positioned to continue making share gains on the AI-focused front. On the earnings call, CEO Amon said that Qualcomm’s next-generation PC platform remains “on track for commercial readiness.”

“As AI use cases proliferate to the edge, on-device AI has the potential to drive an inflection point across all our products. Qualcomm remains best positioned to lead this transition given the unmatched accelerated computing performance with the power efficiency of our platforms,” Amon added in the earnings press release.

Summary

Qualcomm shares fell sharply on Thursday after the chipmaker reported a set of mixed FQ3 results and gave an FQ4 revenue forecast that trailed analyst expectations. The management mentioned a difficult macroeconomic environment on several occasions which doesn’t come at a great time for the chipmaker given massive investments in accelerating migration to 5G and AI.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.