In a landscape bustling with volatility, the stock market in the United States is now experiencing a fervent wave of earnings reportsHeavyweights of the tech sector, including Microsoft, Alphabet (the parent company of Google), Meta (formerly Facebook), Intel, and AMD have unveiled their quarterly financial resultsNotably, titans like Apple and Amazon are also poised to disclose their latest performance figures soon.
On August 3, Qualcomm, a prominent player in the semiconductor industry, reported its fiscal results for the third quarter ending June 25, 2023. The financial disclosures revealed a downturn in both revenue and net profit, with revenue plummeting to $8.451 billion, down 22.7% from $10.936 billion in the same quarter last year
The net profit followed suit, shrinking to $1.803 billion, a staggering 51.7% decrease from the previous $3.730 billion, effectively halving the company's earnings.
Examining the year-to-date figures, Qualcomm's revenue for the first three quarters totaled $27.189 billion compared to $32.805 billion during the same period last yearThe net profit also saw a significant decline, standing at $5.742 billion versus the prior year’s $10.063 billionDuring an earnings call, Qualcomm executives highlighted that they are initiating cost-cutting measures in light of these falling numbers.
The repercussions of the disappointing earnings report were swiftly reflected in the stock market
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On August 2, Qualcomm’s stock price closed down by 2.13%, settling at $129.27 per share, and further declined by over 8% in pre-market trading on August 3.
Smartphone Segment a Major Drag
Qualcomm’s operations are primarily divided into two segments: QCT (Qualcomm CDMA Technologies) and QTL (Qualcomm Technology Licensing). The QCT segment is the core of Qualcomm's revenue, primarily focusing on semiconductor products across three major business areas: mobile terminals, automotive, and Internet of Things (IoT) applicationsIn contrast, the QTL segment is responsible for the licensing of Qualcomm's extensive patent portfolio.
The recent quarter’s performance indicated a downturn in revenue across both segments
QCT contributed $7.174 billion, accounting for a substantial 84.9% of total revenue, down from $9.378 billion in the same quarter a year prior, reflecting a drop of approximately 24%. Conversely, QTL generated $1.230 billion, representing 14.6% of revenue, also down from $1.519 billion, equating to about a 19% decline.
Within the QCT segment itself, the mobile chipset business plays a crucial role; however, it witnessed a revenue decrease to $5.525 billion, down 25.4% year-on-yearThis decline is largely attributed to the broader slump in the global smartphone market.
The smartphone sector has undoubtedly encountered challenges owing to various external economic factors, sluggish consumer purchasing demands, and dwindling innovation within the industry
According to data from third-party research firm Canalys, global smartphone shipments totaled 258.2 million units in the second quarter of 2023, marking a 10% decrease compared to the previous year.
IoT represents Qualcomm’s second-largest revenue contributor after mobile chipsets, encompassing a wide array of applications, including consumer products (such as computing, voice, music, and augmented reality), edge networks (including mobile broadband and wireless access points), and industrial applications (spanning handheld devices, retail, transport, logistics, and utilities). However, this segment also experienced a significant downturn, with revenue declining by 23.7% to $1.485 billion in the most recent quarter.
In stark contrast, the only business unit to achieve revenue growth during this quarter was the automotive segment, which noted an increase of 12.7% with revenues climbing to $434 million
Qualcomm cites rising demand for digital cockpit products as the driving force behind this growth.
With the downturn in the consumer electronics market, industry giants such as Infineon and Texas Instruments are intensifying their focus and capacity planning for automotive chips to capitalize on this growth opportunity.
However, it is essential to note that in the previous two quarters of this fiscal year, Qualcomm reported automotive chip revenues of $456 million and $447 million, representing impressive year-on-year growth rates of 58% and 20%, respectivelyCompared to these figures, automotive revenue this quarter not only showed a quarter-over-quarter decline but also displayed a significant slowdown in annual growth
Moreover, the automotive segment's revenue currently accounts for only about 5% of Qualcomm’s total revenue, which is relatively low in comparison to the billion-dollar levels of mobile and IoT businesses.
Forward Outlook Remains Dim
Regarding short-term prospects, Qualcomm projects fourth-quarter revenues to range between $8.1 billion and $8.9 billion, remaining consistent with the previous outlook for the third quarterAdditionally, adjusted earnings per share are anticipated to be between $1.80 and $2, representing a minor uptick of $0.10 compared to third quarter earnings per share estimates.
For the crucial QCT business, Qualcomm expects fourth-quarter revenues to be in the range of $6.9 billion to $7.5 billion, which mirrors the outlook from the preceding quarter, indicating no significant improvement.
From the insights shared during the earnings call, Qualcomm executives approached the short-term future with a cautious perspective, highlighting the mobile market’s performance as a key determinant
CFO Akash Palkhiwala anticipates a continued decline in global smartphone sales in 2023, projecting a "high single-digit percentage" decrease.
Furthermore, Qualcomm’s inventory levels remain elevated, having peaked at a historic high of $6.341 billion at the end of fiscal 2022, and the latest earnings report reveals that inventory reached $6.628 billion by the end of the second quarter of 2023.
Looking ahead to the upcoming quarters, Qualcomm anticipates that the current challenges stemming from the macroeconomic environment will persist, leading clients to continue reducing their inventoriesThese two factors are expected to adversely impact the company’s revenue, operating performance, and cash flow, potentially resulting in further inventory build-up and inherent uncertainties in forecasting future customer demand.
Despite various industry analysts predicting a potential rebound in the smartphone segment, like Counterpoint’s report on global smartphone market performance for the second quarter, which suggested that smartphone inventories remain healthy without backlogs, and Canalys analysts forecasting a more favorable market environment in the second half of the year, the overall downward trend in the smartphone market for 2023 is challenging to reverse
The days of dramatic growth appear further from reach.
As pointed out by IDC’s Senior Analyst Guo Tianxiang when analyzing the Chinese smartphone market, the current observations regarding new product plans for the second half of the year from both Apple and Android manufacturers reflect a lack of disruptive innovation.
With an eye on maintaining a cautious and conservative posture regarding future markets, Qualcomm's CEO, Cristiano Amon, communicated intentions to actively implement additional cost-cutting measures to ensure shareholder value maximization amidst this uncertain landscape.
This suggests the possibility of continued layoffs at Qualcomm