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Qualcomm's Phone Chip Sales Drop 26%: Rapid Earnings Reaction
Key Points
Phone chip sales fell by about a quarter, pulling Qualcomm's total revenue and chip margins lower.
Car chip revenue nearly doubled, but it isn't yet big enough to fill the hole.
The outlook for next quarter suggests growth in new markets is weighted toward later in fiscal 2027.
Qualcomm (NASDAQ:QCOM) saw handset chip revenue fall 26% in its fiscal fourth quarter, pulling total revenue down 8% to about $10.3 billion. Shares fell about 4% in after-hours trading. The company's case now rests on car and data center chips replacing phone sales, and its first-quarter outlook shows little of that handoff yet.
Key Numbers
- Handset chip revenue: about $5.1 billion, down 26% year over year.
- Automotive chip revenue: about $2.0 billion, up 89%.
- Chip segment (QCT) pre-tax margin: 24%, down from 29%.
- Diluted EPS: $1.17 GAAP and $2.17 adjusted, with adjusted down 28%.
What It Means
The margin drop is the price of a shrinking phone business. Qualcomm kept spending to build new markets, lifting research and development 13%, while its biggest product line shrank. Engineering costs don't fall when sales do, so profit fell faster than revenue. Rising costs for wafers, packaging, and memory add pressure, and Qualcomm's price increases won't fully reach margins until the second half of fiscal 2027.
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Management expects non-handset revenue to grow more than 60% in fiscal 2027, helped by a new data center business. Yet first-quarter chip revenue guidance, which includes data center sales, sits at or slightly above what Qualcomm just reported. So most of the promised growth has to land later in the year.
Cash is the other strain. Free cash flow, or operating cash flow minus capital spending, fell to about $8.7 billion as capital spending roughly doubled and inventory piled up. Buybacks and dividends ran well ahead of that, and Qualcomm now carries short-term debt it didn't have a year ago.
What to Watch Next
Watch non-handset chip revenue next quarter. It needs a clear step up to make the 60%-plus target credible, and inventory needs to start coming down.
David Kretzmann has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Qualcomm. The Motley Fool has a disclosure policy.