Qualcomm and Arm seem joined at the hip lately, with both companies reporting earnings at the same time yesterday. And as with many other headlines recently, Qualcomm came out looking better than Arm. We do not think either set of results alters the long term thesis for either company, but there definitely was a big divergence in their results.
Qualcomm reported strong numbers, with quarterly EPS especially above expectations ($3.41 vs consensus of $2.97). They attributed this basically to everything working they way it was supposed to. They gained share at Samsung, they also saw end customers from China (e.g. Oppo, Xiaomi) gaining share in China and other markets. On top of that they said consumers were shifting more towards high-end smartphones. This is a double bonus for Qualcomm – they sell higher priced chips and earn higher royalties based on phone prices. Most encouragingly they also seem to be gaining real traction in automotive with a whole raft of design wins and partnerships to announce. And they finally put some numbers around their share gains in PC. They now claim to have 10% of the market for Windows PCs priced above $800. That is not a large volume corner of the market, but given their target is 12% by 2028, it definitely indicates things are going well. Or at least better than we had expected.
By contrast Arm’s numbers were a little harder to parse. They reported good upside on the quarter and nudged up their guidance for the next quarter, but that guidance included a fairly wide range. So while the midpoint was in-line with expectations, they left open the possibility that it might not play out that way. Arm’s revenues have both a license and a royalty component. The royalty piece is fairly predictable, but the upfront license can be lumpy as it depends on the timing of signing specific contracts. So we understand the need for a wider range, but it still left open the question as to the true status of their business.
Notably, Arm reported that the share of v9 in their revenue was flat with the rate last quarter. This is fairly esoteric, but three quarters ago when they started breaking out the share of v9 revenue in their mix, they indicated that this would be a good metric for investors to track growth. The upgrade cycle to v9 is important and so the fact that it stalled this quarter merits attention. Summing all this up, these results left us with the impression that Arm was not operating as smoothly as they have in past quarters or as their valuation multiple would imply. This is especially noticeable in contrast to Qualcomm. Despite both companies moves to enter new markets, they still generate the large majority of revenue from the same smartphone market. So it is hard to see how Qualcomm could be so bullish about that market while Arm is much more muted. One big part of that disconnect is the fact that Qualcomm has not upgraded to v9, and there is a risk that others may take note. We do not think that is necessarily what is going on, but that question will now linger.
Our larger concern is that Arm still does not quite seem certain about how it wants to communicate its story. Over time, they have guided investors to look at royalties, licenses, v9 updates, CSS and ACV as the leading metrics, only to move on a few quarters down the road. There is nothing wrong with any of these metrics, nor is there anything wrong with moving to other metrics over time. That being said, we think the story could me much clearer if they could coalesce around some fixed set of recurring metrics. We think the company has a good story to tell, but unfortunately it remains hard to pull together.
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