Qualcomm Earnings Falter with Slowdown in Demand for Smartphones and IoT Devices

Qualcomm earnings suffered from a rapid slowdown in demand for smartphones and IoT devices which continued to weigh on QCOM in fiscal 1Q23 (December quarter). We saw this reflected in their revenue miss, but they gave an optimistic outlook for 2H23. The company, like many chip makers has an elevated inventory of OEMs due to sluggish consumer demand and the easing of supply chain disruptions. Apple, which uses QCOM’s modem chips reported a disappointing 1Q23 earnings report that was driven by an iPhone sales miss.

The results were not a surprise given last quarter QCOM issued a very bleak outlook for Q1 that badly missed EPS and revenue estimates. The deteriorating handset market prompted QCOM to lower its 2022 3G/4G/5G handset volume projection to a low double-digit decline from its prior outlook of a mid-single-digit decline.

Qualcomm Fiscal Q1 2023 Earnings

Highlights

  • On a GAAP basis, net income declined to $2,235 million or $1.98 per share from $3,399 million or $2.98 per share in the prior-year quarter. The decrease in GAAP earnings was primarily attributable to top-line contraction.
  • Adjusted earnings of $2,684 million or $2.37 per share compared with $3,686 million or $3.23 per share in the year-ago quarter. Beat analyst consensus of $2.34 per share, according to Refinitiv data.
  • Non-GAAP basis, total revenues were $9,463 million compared with $10,705 million in the prior-year quarter. 
  • Quarterly revenues from Qualcomm CDMA Technologies (QCT) declined 11% year over year to $7,892 million, as strength in adjacent platforms beyond mobile (automotive and IoT) was more than offset by lower demand in handsets.
  • QCOM is witnessing healthy traction in EDGE networking that helps transform connectivity in cars, business enterprises, homes, smart factories, next-generation PCs, wearables and tablets.
  • Automotive revenue jumped by 58%, matching last quarter’s growth to $456 million
  • IoT revenues rose 7%, respectively, to $1,682 million,
  • Handset revenues were down 18% to $5,754 million.
  • EBT margin decreased to 28% from 35%.
  • Qualcomm Technology Licensing (QTL) revenues totaled $1,524 million, down 16% year over year due to lower licensing revenues. EBT margin declined to 73% from 77%.

“The handset industry continues to experience reduced demand, and we are now expecting elevated channel inventory levels to persist at least through the first half of calendar 2023,” Cristiano Amon, Qualcomm CEO told investors.

Cash Flow & Liquidity

Qualcomm generated $3,095 million of net cash from operating activities in the fiscal first quarter compared with $2,057 million a year ago. At quarter-end, the company had $4,808 million in cash and cash equivalents and $15,431 million of long-term debt. The company repurchased 11 million shares for $1.3 billion during the quarter.

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Outlook

QCOM expects adjusted earnings per share to be between $2.05 and $2.25, compared to analysts expectations of $2.26 per share.

  • For the second quarter of fiscal 2023, Qualcomm expects GAAP revenues of $8.7-$9.5 billion due to rapid deterioration in demand and high channel inventory.
  • Non-GAAP earnings are projected to be $2.05-$2.25 per share, while GAAP earnings are likely to be $1.53-$1.73 per share.
  • Revenues from QTL are expected to be between $1.25 billion and $1.45 billion.
  • For QCT, the company anticipates revenues between $7.4 billion and $8 billion.

A number of end markets within the IoT space are experiencing weaker-than-expected demand, worsening the channel inventory situation. QCOM’s near term outlook hasn’t improved much as we can see with the company’s Q2 EPS and revenue guidance below expectations at the midpoint of their respective ranges. For perspective Q2 revenue at the high end of the $8.7-$9.5 bln estimated range, would equate to a yr/yr decline of 14%. This would be QCOM’s worst decline since 4Q19.

  • Sequential decline in IoT revenue for Q2, following growth of 7% in Q1. During the earnings call, CEO Cristiano Amon commented that he’s optimistic that demand and channel inventory will normalize in 2H23.
  • QCOM stepping up its cost-cutting initiatives. Further spending reductions and streamlining of operations will reduce operating expenses by about 5% compared to the run rate exiting FY22.
  • QCOM’s dependence on the smartphone market is lessening and the company is having some success in that endeavor. QCOM’s entrance into the automotive market with its Snapdragon digital chassis is becoming a potential game-changer. In Q1, automotive revenue jumped by 58%, matching last quarter’s growth. With a design win pipeline of over $30 bln, QCOM is just scratching the surface of this opportunity.
  • Qualcomm doesn’t expect its current licenses to export 4G, Wi-Fi and other chips to Chinese telecom giant Huawei (HWT.UL) to be impacted by reports that the U.S. Commerce Department has stopped granting export licenses to Huawei.
  • “Those licenses were issued because Congress reached the determination that they don’t affect national security issues. Those will continue for some number of years,” Alex Rogers, president of Qualcomm Technology Licensing and Global Affairs said on the call with investors.

Source: QCOM

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