Good news for the mobile phone market! Qualcomm's sales guidance for this quarter unexpectedly strengthened, with the stock rising more than 4% after hours. | Earnings Report

The struggling smartphone market may finally see a slowdown in sales decline, as the earnings report from smartphone chip giant Qualcomm brings good news.

Qualcomm's third-quarter performance and fourth-quarter guidance both exceeded Wall Street expectations. According to Qualcomm's guidance, fourth-quarter sales revenue is expected to stop declining and even increase by nearly 20%, reversing the double-digit decline in the first half of this year.

After the earnings report was released, Qualcomm's stock price rose more than 1.7% in after-hours trading, with a post-market increase of over 4% at one point, but the increase narrowed to within 4%, and the post-market increase remained above 3%.

Third-quarter revenue and EPS decline lower than expected

After the US stock market closed on November 1st, Qualcomm announced that for the fourth quarter of the company's fiscal year 2023, which ended on September 24, 2023 (referred to as the "third quarter"), the year-on-year decline in revenue and earnings per share (EPS) were lower than market expectations and better than the midpoint of the company's own guidance range. The decline in profit and net profit will also be slightly eased compared to the second quarter:

• The adjusted revenue for the third quarter, on a non-GAAP basis, was $8.665 billion, a year-on-year decrease of 24%, with the midpoint of the company's guidance range at $8.5 billion. Analysts expected a year-on-year decrease of over 25% to $8.51 billion. The decline in the second quarter was 23%.
• The adjusted EPS for the third quarter was $2.02, a year-on-year decrease of 35%, with the midpoint of the company's guidance range at $1.9. Analysts expected a year-on-year decrease of nearly 39% to $1.92. The decline in the second quarter was 37%.
• The net profit for the third quarter was $2.277 billion, a year-on-year decrease of 36%, and a 37% decrease compared to the second quarter. The pre-tax profit (EBT) for the third quarter was $2.617 billion, a year-on-year decrease of 37%, and a 38% decrease compared to the second quarter.

In terms of business segments, in the third quarter, Qualcomm's QCT revenue from the sale of chips for smartphones, automobiles, and other smart devices was $7.374 billion, a year-on-year decrease of 26%, exceeding the 24% decline in the second quarter, and still higher than analysts' expectations of $7.26 billion. Among them, the revenue from the mobile phone business was $5.456 billion, a year-on-year decrease of 27%, and a 25% decrease in the second quarter.

Qualcomm's QTL revenue from technology licensing related to intellectual property in the third quarter was $1.262 billion, a year-on-year decrease of 12%, slightly higher than analysts' expectations of $1.25 billion.

Fourth-quarter revenue guidance shows a small year-on-year increase, reversing the double-digit decline this year

In terms of performance guidance, Qualcomm expects revenue for the first quarter of its fiscal year 2024, which is the fourth quarter of calendar year 2023, to be between $9.1 billion and $9.9 billion, with a midpoint of $9.5 billion, higher than analysts' expectations of $9.2 billion. According to the median estimate, Qualcomm expects its fourth-quarter revenue to increase slightly by 0.4% YoY, completely reversing the trend of double-digit decline earlier this year. However, analysts estimate that fourth-quarter sales revenue will decrease by 2.7% YoY.

Qualcomm also expects its adjusted EPS for the fourth quarter to be between $2.25 and $2.45, with a median of $2.35, which is higher than analysts' expectations of $2.25.

According to the median estimate, Goldman Sachs' EPS for the fourth quarter is expected to increase by nearly 19% YoY, while analysts expect a growth of nearly 14% YoY.

CFO Akash Palkhiwala stated during the third-quarter earnings call that Qualcomm has seen initial signs of stabilization in global demand for 3G, 4G, and 5G smartphones. At the same time, Qualcomm expects the total shipments of smartphones using its chips to decrease by a "mid to high single-digit percentage" compared to last year, which is lower than the company's previous expectations.

Commentators have pointed out that Qualcomm faces new challenges from the rise of Huawei's chips and Samsung's resumption of using some self-developed chips. However, the overall recovery of the consumer electronics market may help Qualcomm overcome these concerns.

According to market research firm IDC, global smartphone shipments in the third quarter of this year only decreased slightly by 0.1% YoY, indicating a significant easing of the previous downward trend in multiple quarters.

IDC found that this achievement was partly due to strong demand for smartphones in emerging markets, with shipments in the Middle East and Africa, Latin America, and the Asia-Pacific region outside of Japan and China increasing by 18.1%, 8.2%, and 1.3% respectively in the third quarter. In addition, the high-end smartphone market still shows resilience. High production quality, increased storage space, superior features, and longer after-sales service cycles have prompted buyers to turn to high-end models.

Qualcomm recently announced the release of two chips capable of running artificial intelligence (AI) software, one for smartphones and one for personal computers (PCs). Earlier this week, Qualcomm also claimed that its PC chip, Snapdragon X Elite, can surpass competitors from Intel and Apple.

During the earnings call on Wednesday, Qualcomm CEO Cristiano Amon emphasized the company's leading position in the application of AI technology. He said that the recent product launch summit highlighted the company's technological leadership and its role as a leader in on-device AI and mobile computing performance.

Amon stated during the call that Qualcomm has quickly established itself as a leader in the field of on-device AI in smartphones, next-generation laptops, mixed reality, and extended reality (XR) devices. Qualcomm's Snapdragon platform is significantly different from its competitors because Qualcomm has made three major efforts.

Firstly, Qualcomm has significantly improved the AI processing performance and power consumption of its top-notch NPU, CPU, and GPU. Secondly, Qualcomm is collaborating with multiple partners and ecosystems to enable a large number of consumer and productivity-based AI models to run on Qualcomm's platform. Third, Qualcomm's generative AI models, which involve billions of parameters, can be applied to multiple use cases and run continuously and concurrently across multiple modalities.

Amon also stated that investors will see the results of Qualcomm's AI investments in flagship products released by some manufacturers next year. They will witness use cases that will revolutionize photography, messaging, scheduling, and more.