Qualcomm reported earnings yesterday and things there are doing pretty well.?They beat expectations for the December quarter and guided essentially in line with consensus for March. Coming off a really rough 2023, the smartphone industry has recovered. It is not exactly setting the world on fire, but has at least returned to some degree of normalcy.
Beyond the headlines, there were a few stand out items on the call that we think are strong, positive signals.
First and foremost, they announced the signing of a new multi-year agreement with Samsung. The two companies have a complicated relationship that at times verges on dysfunctional but has lately shown signs of improvement. In particular, Samsung has agreed to use Qualcomm’s Snapdragon in its flagship and high end phones, to what sounds like a greater degree than in the past. Samsung has its own application processor, Exynos, and while that has never performed as well as Qualcomm’s Snapdragon, there have been times when Samsung prefers to use their homegrown solution. We doubt Samsung will abandon Exynos, they will always need that leverage with Qualcomm, but for the foreseeable future it looks like Snapdragon will be preferred. This is good news for Qualcomm as it removes a perennial overhang.
Another important takeaway from the call was the degree of confidence the company expressed over its automotive business. Qualcomm has been plugging away at auto chips for several years, as we have noted this is an important diversification step for the smartphone-dependent company, but auto product cycles move slowly. The company has guided that auto will not be a meaningful revenue contributor until this year, So after a few years of waiting the Street is expecting to see results, and on the call the company signaled those results were coming. Auto companies are notoriously fickle in swapping their semis vendors, but Qualcomm’s management has been very cautious in its approach to managing Street expectations. So the fact that they started pounding the drum on autos should be taken as a positive sign. Moreover, even while the rest of the auto semis segment is turning into the downward trough of its inventory cycle, Qualcomm’s auto designs are all coming to new models, meaning they should not be sharing in everyone else’s pain.
In our view, the only down note from yesterday’s call was the company’s commentary around smartphone trends for the year. While the company is confident in its own product cycle the broader industry is still capped by anemic growth. Qualcomm expects the industry to be flat this year to up single digits, which is hard to get excited about.?
And this, of course, speaks to Qualcomm’s central dilemma. They still generate the vast majority of their revenue from smartphone content. Even their nascent automotive business today largely consists of cellular modules for car connectivity. This will shift in automotive this year, but the company’s bid to diversify remains challenging.
All in all, this was a good quarter, after a string of not-so-great ones.
One final note, the one area where we were disappointed by management’s response was something that we spend too much time thinking about – RF. This is an area where the company has the potential for meaningful technical differentiation. During the quarter they launched their Red Cap modem/RF bundle. No one else can make something like this – not Mediatek today and definitely not Apple. But when asked about this on the call management declined to put much weight behind it. Maybe this is something that only matters to us, but we would have liked to hear them demonstrate more enthusiasm for it.
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