Qualcomm (QCOM.O) released its fiscal fourth-quarter 2024 earnings report (ended September 2024) on November 7, 2024, after the US market opened. The key points are as follows:

1. Overall Performance: Both revenue and profit exceeded expectations. Qualcomm achieved revenue of $10.24 billion in the fourth quarter of fiscal 2024 (24Q3), a year-on-year increase of 18.7%, surpassing market expectations ($9.96 billion). The company's revenue growth rate continued to accelerate this quarter, primarily driven by the overall recovery of businesses in mobile phones, automobiles, and IoT. The company reported a net profit of $2.92 billion in this quarter, a year-on-year increase of 96%, better than market expectations ($2.76 billion). The year-on-year growth was mainly due to the increase in both revenue and gross margin.

2. Business Segments: Core businesses are recovering. Mobile phones are still the largest segment of the company's business, accounting for over 60%. Driven by demand from Android phone customers, the mobile phone business rebounded as expected this quarter. Additionally, the growth in the automotive and IoT segments significantly exceeded expectations, primarily driven by increased demand from related customers for smart cockpits, AI PCs, and XR.

3. Qualcomm's Guidance: The company expects revenue of $10.5-11.3 billion (market expectation: $10.55 billion) and adjusted earnings per share of $2.89-3.05 (market expectation: $2.81) for the first quarter of fiscal 2025 (24Q4).

Dolphin's Overall View: Qualcomm is on the verge of finding its second growth curve!

Behind the company's revenue and profit exceeding expectations this quarter, Dolphin believes that the core driver is the recovery of the IoT segment. Especially as Qualcomm has entered the PC market, the growth in IoT performance, combined with the guidance exceeding expectations during the peak sales season for electronic products in the next quarter, naturally leads the market to wonder if Qualcomm's AI PC story is about to take off.

With mobile phone business revenue accounting for 60% of total revenue and the market ceiling already reached, and Qualcomm struggling to find a second growth curve, the gradual implementation and fulfillment of the AI PC story. Acer, ASUS, Dell, HP, Lenovo, and Samsung will launch devices powered by the Snapdragon X Plus 8-core platform, which will start selling in the third quarter. For a company that has often been valued at 10-20x PE, Dolphin is full of anticipation about whether pure incremental AI PCs will help the company achieve a Davis Double Play in both performance and valuation.

Of course, when considering the issue of a double play, existing issues are also improving marginally:

1) Mobile Phone Base: For this quarter, VIVO's mobile phone shipments rebounded by 22% year-on-year, potentially being the main contributor. Driven by new products in the next quarter, the company's revenue from Android phone-related chips is expected to increase by 40% quarter-on-quarter.

2) Gross Margin: It is also expected to continue improving. After a continuous decline in inventory, the company saw a quarter-on-quarter rebound this quarter. Dolphin believes this is mainly due to the company's preparation for stockpiling, reflecting the company's confidence in its own operations. With the elimination of inventory pressure, the company's gross margin is also expected to continue rising.

3) Key Controversy: ARM - the matter of "ARM planning to cancel Qualcomm's architectural license." Dolphin believes that ARM's current 60-day notice period to Qualcomm is mainly aimed at reconciliation, given that Qualcomm currently accounts for about 10% of ARM's revenue. The most likely outcome is a "payment for reconciliation."

4) Partnership with Apple: Although Apple has intentions to develop its own modem chips, the company also announced last year that it would extend its contract to supply chips to Apple, meaning it will continue to provide 5G chips for iPhones launched in 2024, 2025, and 2026. Driven by the stable Apple contract and the recovery of Android customers, the company's performance is expected to recover faster from the trough, and the company's current operating situation has already shown a trend of continuous improvement.

From the above, it can be seen that Qualcomm currently has fundamental marginal improvement, and there is an opportunity for a Davis Double Play as the second growth curve of the AI PC story gradually unfolds.

Moreover, the company approved a $15 billion repurchase this quarter, increasing the $10 billion repurchase plan announced in October 2021 by $5 billion. The increase in the repurchase plan can further enhance market confidence. At the same time, next year's growth is expected to be nearly 20%. If the AI PC can be successfully incubated, both performance and valuation will increase, and the current stock price will still have significant room for growth.

Below is a detailed analysis

I. Overall Performance: Both Revenue and Profit Exceeded Expectations

1.1 Revenue Side

Qualcomm achieved revenue of $10.24 billion in the fourth quarter of fiscal 2024 (24Q3), a year-on-year increase of 18.7%, surpassing market expectations ($9.96 billion). The company's revenue growth rate accelerated this quarter, mainly driven by the recovery of the three core businesses of smartphones, automobiles, and IoT.

1.2 Gross Margin Side

Qualcomm achieved a gross margin of $5.777 billion in the fourth quarter of fiscal 2024 (24Q3), a year-on-year increase of 21.6%. The gross margin growth rate was faster than that of revenue, mainly due to the year-on-year recovery of gross margin.

Qualcomm's gross margin for this quarter was 56.4%, a year-on-year increase of 1.4 percentage points, better than market expectations (55.9%). Although the company's gross margin is still relatively low, it has begun to steadily recover. With the recovery of the mobile phone and related downstream markets, the company's gross margin is also expected to continue to improve.

Qualcomm's inventory was $6.42 billion in the fourth quarter of fiscal 2024 (24Q3), flat year-on-year. Dolphin believes that the company's inventory situation has significantly improved, and the quarter-on-quarter rebound is mainly due to the company's preparation for new products in the next quarter, indicating the company's confidence in its own operations. The improvement in inventory conditions also drives the recovery of the company's gross margin.

1.3 Operating Expenses

Qualcomm's operating expenses were $3.064 billion in the fourth quarter of fiscal 2024 (24Q3), a year-on-year increase of 10.9%. Both sales and R&D expenses increased to varying degrees this quarter.

Specifically, for expenses, broken down as follows:

1) R&D Expenses: The company's R&D expenses for this quarter were $2.302 billion, a year-on-year increase of 21.3%. As a technology company, R&D expenses remain the largest item of the company's investment, with little year-on-year change.

2) Selling, General, and Administrative Expenses: The company's selling, general, and administrative expenses for this quarter were $762 million, a year-on-year increase of 10.9%. Sales and other expenses have a certain correlation with revenue.

Although the company's total workforce was slightly reduced from 50,000 to 49,000 this fiscal year, operating expenses did not decrease, especially as investments in R&D projects continued to increase.

1.4 Net Profit

Qualcomm achieved a net profit of $2.92 billion in the fourth quarter of fiscal 2024 (24Q3), a year-on-year increase of 96%, better than market expectations ($2.76 billion). The company's net profit margin for this quarter was 28.5%, indicating a recovery in profitability.

After excluding non-operating impacts such as investment income, the company's operating profit increased year-on-year and quarter-on-quarter this quarter. This was mainly due to the gradual recovery of downstream sectors, driving the recovery of the company's revenue and gross margin.

II. Business Segments: Core Businesses Are Recovering

From Qualcomm's business segments, QCT (CDMA Technologies) remained the company's largest source of revenue this quarter, accounting for 84.7%, mainly comprising chip semiconductor business; the remaining revenue mainly came from the QTL (Technology Licensing) business, accounting for about 14.8%. There was significant growth in QTL this quarter, primarily due to increased technology licensing for 3G/4G/5G and related products.

The QCT business is the most important part of the company. Specifically:

2.1 Mobile Phone Business

Qualcomm's mobile phone business achieved revenue of $6.096 billion in the fourth quarter of fiscal 2024 (24Q3), a year-on-year increase of 11.7%, surpassing market expectations ($6.044 billion). The quarterly growth was mainly driven by the recovery in demand from Chinese Android vendors (Mi, OPPO, and Vivo), although it was still relatively low.

The company's recently launched Snapdragon® 8 Elite has been successfully launched by Xiaomi, Honor, OPPO, and Vivo. The company expects to launch more products with Samsung, ASUS, and other companies in the future, further driving the recovery of the company's mobile phone business. With the support of new products, the company expects Android phones to bring a 40% quarter-on-quarter revenue increase in the next quarter.

From industry data, global smartphone shipments in the third quarter of 2024 were 316 million units, a year-on-year increase of 4.4%. Although the overall growth rate of mobile phone shipments has slowed down, the company's main customers performed well this quarter. In particular, after experiencing issues such as destocking in the supply chain, VIVO's mobile phone shipments increased by 22.7% year-on-year this quarter. The recovery of the company's related customers directly drove the growth of the company's mobile phone business.

2.2 Automotive Business

Qualcomm's automotive business achieved revenue of $899 million in the fourth quarter of fiscal 2024 (24Q3), a year-on-year increase of 68%, surpassing market expectations ($816 million). The automotive business is the fastest-growing segment of the company's main businesses, primarily driven by increased demand for new vehicles equipped with the company's Snapdragon digital cockpit and telematics products. The company expects the automotive business to continue to grow by 50% in the next quarter.

Although the company's automotive business still enjoys high growth, it currently accounts for less than 10% of the company's total revenue, having a relatively small impact on the company's overall performance.

2.3 IoT Business

Qualcomm's IoT business achieved revenue of $1.683 billion in the fourth quarter of fiscal 2024 (24Q3), a year-on-year increase of 21.7%, surpassing market expectations ($1.555 billion). After six quarters of decline, the IoT business saw significant growth again this quarter.

Qualcomm's IoT business primarily includes consumer electronics, edge networking, and industrial products. According to the company's financial report, this quarter benefited from new products in XR and AI PCs and restocking in the supply chain. The recently launched new Quest 3S device is equipped with the Snapdragon® XR2 Gen 2 chip; leading OEMs including Dell, HP, Lenovo, Samsung, Acer, and ASUS have devices supported by the company's Snapdragon® X Plus 8-core platform. With the increasing demand for AI PCs, the IoT business returned to growth this quarter.

Dolphin's Related Research on Qualcomm: December 20, 2022, "Qualcomm: Earning Billions Annually, Is the Chip King Worth Only 10x PE?" December 8, 2022, "Qualcomm (Part 1): The Behind-the-Scenes 'Boss' of Android Phones" Earnings Season August 1, 2024, Earnings Review "Qualcomm: Mobile Phones Remain Stable, AI Holds New Hope" May 2, 2024, Earnings Review "Qualcomm: 'Lukewarm' Mobile Phones Need AI to Drive Growth" February 1, 2024, Earnings Review "Qualcomm: Without a Leading Player, How Far Can Mobile Phone Recovery Go?" November 2, 2023, Earnings Review "Qualcomm: The 'Hibernation' of the Android Leader is Finally Ending" August 3, 2023, Earnings Review "Qualcomm's Cold Winter Still Needs to Be 'Endured'" May 4, 2023, Earnings Review "Qualcomm: The Chip 'Boss' Hides a Big Threat, and the Cold Winter Will Last Longer"