Qualcomm: Without the leading brother, how far can the smartphone recovery go?

Qualcomm (QCOM.O) released its fiscal year 2024 first-quarter report (ending in December 2023) after the US stock market on the morning of February 1, 2024. The key points are as follows:

Overall performance: Revenue and profit exceeded expectations. In the first quarter of the 2024 fiscal year (23Q4), Qualcomm achieved revenue of $9.935 billion, a year-on-year increase of 5%, exceeding market expectations ($9.514 billion). The rebound in revenue was mainly driven by the recovery of the mobile phone business. The company achieved a net profit of $2.767 billion in this quarter, a year-on-year increase of 23.8%, exceeding market expectations ($2.253 billion). The recovery of business drove the increase in revenue and profitability from the bottom.

Business segments: The mobile phone business is rebounding. Mobile phones are still the largest segment of the company, accounting for over 60%. Global mobile phone shipments in this quarter saw a year-on-year growth, especially in the Android system, directly driving a 16.2% year-on-year increase in Qualcomm's mobile phone business revenue. Although the automotive business still maintained double-digit growth, it currently accounts for less than 10%.

Qualcomm's performance guidance: For the second quarter of the 2024 fiscal year (24Q1), the expected revenue is $8.9-9.7 billion (market expectation: $9.289 billion) and the adjusted profit is $2.2-2.4 per share (market expectation: $2.22).

Dolphin Research's overall view:

Qualcomm's financial report for this quarter is generally good. Both revenue and profit exceeded expectations, mainly due to the recovery of the company's mobile phone business. Global mobile phone shipments in this quarter increased by 8.6% year-on-year, driving the company's performance out of the bottom. This is also in line with Dolphin Research's judgment in the previous quarter's analysis report "Qualcomm: Is the Winter Sleep of the Android Leader Finally Ending?", where we stated that "from Qualcomm and the industry chain's situation, downstream demand is starting to recover, and the company's performance has passed the trough."

Referring to Qualcomm's guidance for the next quarter: For the second quarter of the 2024 fiscal year (24Q1), the expected revenue is $8.9-9.7 billion (market expectation: $9.289 billion) and the adjusted profit is $2.2-2.4 per share (market expectation: $2.22). Due to seasonal factors, the company's revenue and profit have declined QoQ, but overall, they are better than the previous bottom data. It also indicates that the demand for the mobile phone market has not yet seen a surge, and the current situation is more about bottom repair.

From the inventory perspective, the company's inventory in this quarter has decreased to USD 6.247 billion, continuing to decline but still at a relatively high level. With the improvement of the industry, the company's inventory continues to decrease. The relatively high inventory level also confirms that there is still no situation of supply shortage in the downstream demand.

Combining this financial report and the company's guidance, Dolphin Research believes that although Qualcomm's performance has emerged from the bottom, there is still no sign of a surge in volume. As 60% of the company's revenue comes from the mobile phone business, Qualcomm is still truly a "mobile phone stock". From the company and industry data, the current mobile phone market is in a stage of recovery, driven more by the demand for replenishing inventory after destocking. Without the drive of star or innovative products, the current state of the mobile phone market is more about bottom repair rather than supply shortage. With the previous rise, the company's current stock price has already priced in the expectation of recovery. To break through new highs, more performance exceeding expectations is still needed.

The following is Dolphin Research's specific analysis of Qualcomm's financial report:

I. Overall Performance: Revenue & Profit, both exceeding expectations

1.1 Revenue

In the first quarter of the 2024 fiscal year (i.e., 23Q4), Qualcomm achieved revenue of USD 9.935 billion, a YoY increase of 5%, exceeding market expectations (USD 9.514 billion). The company's revenue in this quarter has stopped declining and rebounded, mainly driven by the recovery of the smartphone and automotive businesses.

1.2 Gross Margin

In the first quarter of the 2024 fiscal year (i.e., 23Q4), Qualcomm achieved a gross margin of USD 5.623 billion, a YoY growth of 3.8%. The YoY growth rate of the gross margin is lower than that of the revenue, mainly due to a slight decline in the gross margin rate YoY.

Qualcomm's gross margin in this quarter was 56.6%, a YoY decline of 0.7pct, better than market expectations (55.6%). With the recovery of the downstream mobile phone market, the company's overall gross margin has also rebounded from the bottom.

Qualcomm's inventory in the first quarter of the 2024 fiscal year (i.e., 23Q4) was USD 6.247 billion, a YoY decrease of 9.9%. Although the current inventory is still relatively high, it has been destocked QoQ. Inventory turnover is an indicator of business recovery, but Dolphin Research believes that the company's inventory is still relatively high. As inventory turnover improves, the overall gross profit margin of the company will also rise from the bottom.

1.3 Operating Expenses

In the first quarter of the 2024 fiscal year (23Q4), Qualcomm's operating expenses were $2.723 billion, a YoY decrease of 5.3%. During a period of relatively low performance, the company has also exercised control over operating expenses.

Specific breakdown of expenses:

1) Research and development expenses: The company's R&D expenses for this quarter were $2.096 billion, a YoY decrease of 6.9%. During the period of poor performance, the company reduced its investment in R&D expenses;

2) Selling and administrative expenses: The company's selling and administrative expenses for this quarter were $627 million, a YoY increase of 0.6%. The situation of selling expenses is somewhat correlated with revenue, showing a slight increase YoY.

1.4 Net Profit

In the first quarter of the 2024 fiscal year (23Q4), Qualcomm achieved a net profit of $2.767 billion, a YoY increase of 23.8%, exceeding market expectations ($2.253 billion). The net profit margin for this quarter was 27.9%, showing a significant improvement in profitability. As the Android smartphone market rebounds from the bottom, the company's performance is also starting to improve.

II. Business Segments: Mobile Business, Bottoming Out and Recovery

Looking at Qualcomm's business segments, QCT (CDMA business) remains the company's largest source of revenue, accounting for over 80%, mainly including chip semiconductor business; the remaining revenue mainly comes from QTL (technology licensing) business, accounting for about 15%.

The QCT business is the most important part of the company, and it can be further divided into:

2.1 Mobile Business

Qualcomm's mobile business achieved revenue of $6.687 billion in the first quarter of the 2024 fiscal year (23Q4), a YoY increase of 16.2%, mainly driven by the recovery of the Android smartphone market.

According to the data released by IDC, the global smartphone shipments in this quarter reached 326 million units, a year-on-year growth of 8.6%. Especially, company clients such as Xiaomi-W.HK achieved double-digit growth in this quarter, directly driving the recovery of the company's mobile phone business.

The mobile phone business accounts for over 70% of the QCT business, so changes in the mobile phone market will directly impact Qualcomm to a large extent. Although Qualcomm is also trying to expand new businesses to reduce the impact of business singularity, the current mobile phone business still accounts for over 60% of the company's overall impact.

Dolphin Research believes that after the destocking in the mobile phone industry, downstream customers are expected to accelerate the delivery momentum, thereby driving the company's performance to rebound from the bottom.

2.2 Automotive Business

Qualcomm's automotive business achieved revenue of $598 million in the first quarter of the 2024 fiscal year (i.e., 23Q4), a year-on-year growth of 31.1%. The automotive business is the fastest-growing segment among the company's main businesses, benefiting from the growth in demand for smart cockpits and autonomous driving in automobiles.

Although the company's automotive business still maintains a high double-digit growth rate, the current proportion of the automotive business in the company's total revenue is still less than 10%, and its impact on the company's overall performance is relatively small.

2.3 IoT Business

Qualcomm's IoT business achieved revenue of $1.138 billion in the first quarter of the 2024 fiscal year (i.e., 23Q4), a year-on-year decline of 32.3%. The IoT business continues to maintain a double-digit decline and has not yet shown signs of improvement.

Qualcomm's IoT business mainly includes consumer electronics, edge networking, and industrial products. Although there are relatively many types of businesses, Dolphin Research speculates that the sluggish demand for consumer electronics products such as XR is the main factor for the decline in the IoT business. Dolphin Research's Research on Qualcomm