The News: Qualcomm shares rose as much as 6% in extended trading on Wednesday after the chipmaker reported fiscal second-quarter earnings that exceeded analysts’ estimates.
Here’s how the company did:
- Earnings: $1.90 per share, adjusted, vs. $1.67 per share as expected by analysts, according to Refinitiv.
- Revenue: $7.93 billion, vs. $7.62 billion as expected by analysts, according to Refinitiv.
Revenue grew 52% on an annualized basis in the quarter, which ended on March 28, according to a statement. Lower phone demand because of the coronavirus in the year-ago quarter made for faster growth than usual. In the previous quarter, revenue grew 63%. Read the full news piece on CNBC.
Analyst Take: The market responded positively to another strong Qualcomm quarter with the stock rising ~6% AH when the company posted its strong top and bottom line growth in Q2.
There were a lot of indicators that this quarter would be particularly strong for earnings, and Qualcomm was well positioned to benefit from the increase in mobility as parts of the world are moving post-pandemic AND the overall momentum for mobile devices and 5G, which is core to Qualcomm’s value proposition.
What fewer investors and watchers of Qualcomm probably noticed, is that the company’s tailwinds aren’t only coming from 5G and re-opening, but also the company’s successful diversification that has expanded their TAM significantly in adjacent markets while also gaining strength in its licensing business.
Qualcomm Performed Particularly Well Year Over Year
Both revenue and earnings showed strong year-over-year growth as Qualcomm’s business has been reinvigorated by 5G adoption, driving demand for its chips and intellectual property. The company has also seen significant gains in its growing adjacencies, including IoT, Automotive, and RF Front End. Overall, sales were up 54% year-over-year while earnings grew 116%.
Automotive and RF Front End attracted my attention with the significant growth seen in both of these categories. Qualcomm has quickly become the leader in mobile RF Front End, and saw another 39% growth YoY. This business is quickly approaching a billion dollars, and also is a very difficult technology with limited competition. With EV, Infotainment, and Green Technology garnering so much attention, the company also realized a 40% YoY growth for its automotive business. This can be attributed to the diverse offerings that encompass everything from onboard entertainment to autonomous driving technologies.
With the three adjacent businesses’ growth, this set of non-handset offerings now accounts for more than 1/3 of Qualcomm Technologies revenues proving that the company is well-positioned beyond just handset growth and this part of the business warrants greater attention from those analyzing Qualcomm’s longer-term prospects.
Having said that, handset growth isn’t going anywhere anytime soon. On a YoY basis, the company saw its handset business grow by over 53% YoY, coming in at more than $4.06 billion in the second quarter. This growth is closely tied to the strength of 5G handsets that saw over 225 million units ship in calendar 2020, and the expectation is more than double that number in 2021 with the higher end of estimates coming in around 550 million units.
The quarter’s business is rounded out by its licensing revenue, which came in at $1.6 billion above the high-end of the guidance which was $1.45 billion. The licensing business remains healthy and profitable and the business has been able to focus on growth as many of its legal and regulatory woes have subsided over the past few quarters, leaving the business model in tact and the revenue attachments across its IP portfolio stable. Licensing saw its licensee number rise to 130 5G licensing agreements, up from around 120 last quarter. The company also notated that it has licensing agreements with every major handset maker, and it’s now in agreement with the vast majority of major licensees in the 5G technology space.
Huawei Woes Provide SAM Gains for Qualcomm
Another story that is continuing from last quarter is the distribution of the Huawei handset business. While there is some confusion about the exacts of the situation, Huawei has effectively become a non-player in the U.S. and large swaths of the European handsets, leaving those units to shift to other handset makers. This situation provides a positive opportunity for Qualcomm as the demand for handsets is growing, and now Huawei cannot fulfill them in many markets, leaving many Qualcomm licensees and technology implementers to backfill those gaps.
From a numbers perspective, this equates to about 16% of the addressable handset market that Qualcomm can compete for that Huawei will need chip support due to the lack of ability to produce chips. This opportunity is somewhat fluid, but presents a substantial opportunity for Qualcomm to embrace its recently secured licensing agreement with Huawei and expand to sell the company chips to meet its demand, which was more than 230M units last year.
Overall Impressions Qualcomm Q1 FY 21 Results
Analysts had predicted a strong YoY result, but the company actually ran well beyond what was expected which shouldn’t surprise investors, but really is an indicator of the strength of Qualcomm’s business and the growing demand for its core and adjacent businesses.
The growth of 5G shouldn’t surprise anyone, but, I must reiterate that the success in its business adjacencies is a clear reason for a more bullish sentiment around Qualcomm’s prospects. Much like Apple’s shift to services reduced the iPhone sales growth pressure, there is a similar narrative at Qualcomm with its IoT, Automotive, RFFE, and Licensing business.
Guidance Remains Strong
Going forward, the guidance looks to be on target for sustained YoY growth leaving a lot to be positive about from the overall Qualcomm results delivered during the second quarter.
Futurum Research provides industry research and analysis. These columns are for educational purposes only and should not be considered in any way investment advice.