AI PCs are now showing "signs," is Qualcomm's second spring coming soon?

Qualcomm (QCOM.O) released its fourth fiscal year report for 2024 (ending September 2024) after the U.S. stock market closed on November 7, 2024, Beijing time. The key points are as follows:

1. Overall performance: Revenue & profit both exceeded expectations. Qualcomm achieved revenue of $10.24 billion in the fourth quarter of fiscal year 2024 (i.e., 24Q3), a year-on-year increase of 18.7%, better than market expectations ($9.96 billion). The company's revenue growth continued to improve this quarter, mainly benefiting from the comprehensive recovery of businesses such as mobile phones, automotive, and IoT; the company achieved a net profit of $2.92 billion this quarter, a year-on-year increase of 96%, better than market expectations ($2.76 billion), with the year-on-year growth mainly coming from improvements in both revenue and gross margin.

2. Business segmentation: Core businesses are recovering. Mobile phones currently remain the largest segment for $Qualcomm.US, accounting for over 60%. Driven by demand from Android and other mobile phone customers, the mobile phone business rebounded as expected this quarter. Additionally, growth in automotive and IoT significantly exceeded expectations, mainly driven by increased demand from customers related to smart cockpits, AI PCs, and XR.

3. Qualcomm's performance guidance: For the first quarter of fiscal year 2025 (i.e., 24Q4), expected revenue is $10.5-11.3 billion (market expectation: $10.55 billion) and adjusted profit is expected to be $2.89 to $3.05 per share (market expectation: $2.81).

Overall view from Dolphin: Qualcomm is finding its second curve!

Behind the company's revenue and profit exceeding expectations this quarter, in Dolphin's view, the core highlight is the recovery of IoT, especially as Qualcomm has already entered the PC battlefield. With the ramp-up of IoT performance and the guidance exceeding expectations in the upcoming electronic product sales peak season, the market will naturally wonder if Qualcomm's AI PC story is about to take off.

Given that the mobile phone business, which accounts for 60% of revenue, has already hit a ceiling, and Qualcomm has struggled to find a second curve, the gradual realization of the AI PC story is promising. Acer, ASUS, Dell, HP, Lenovo, and Samsung will launch devices equipped with the Snapdragon X Plus 8-core platform starting in the third quarter. For a company that previously had a long-term valuation hovering around 10-20 times PE, whether the pure incremental AI PC will help the company achieve a dual boost in performance and valuation is something Dolphin looks forward to.

Of course, when considering the dual boost issue, the existing stock problem is also marginally improving:

1) Mobile Basic Market: In this quarter, VIVO's smartphone shipments increased by 22% year-on-year, which may be a major contribution. Driven by new products next quarter, the company's revenue from related chips for Android phones is expected to grow by 40% quarter-on-quarter;

2) Gross Margin Side: It is also expected to continue to improve. After a continuous decline in inventory, the quarter saw a quarter-on-quarter rebound. Dolphin believes this is mainly due to the company's preparation for stocking, 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 to rise.

3) Key Controversy Regarding ARM: This refers to the "ARM plans to cancel Qualcomm's architecture license." Dolphin believes that the current 60-day notice period given to Qualcomm by ARM is mainly for reconciliation, after all, Qualcomm currently accounts for 10% of ARM's revenue. The final result of "paying for reconciliation" is the most likely outcome.

4) Relationship with Apple: Although Apple has the intention to develop its own modem chips, last year the company also announced an extension of the contract to supply chips to Apple, which means it will continue to provide 5G chips for iPhones launched in 2024, 2025, and 2026. With the stability of the Apple contract and the recovery of Android customers, the company's performance is expected to recover from the trough more quickly, and the current operational situation of the company has shown a trend of continued improvement.

From the above, it can be seen that Qualcomm currently has a marginal recovery in fundamentals, and there is a Davis double-click opportunity as the second curve AI PC story gradually unfolds.

In addition, the company approved a $15 billion buyback this quarter, raising it by $5 billion from the $10 billion announced in October 2021. The increase in the buyback plan can further enhance market confidence. At the same time, next year's growth expectation is nearly 20%. If the AI PC can be successfully incubated, both performance and valuation will improve, and the current stock price still has significant room for growth.

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

1. Overall Performance: Revenue & Profit, Both Exceed Expectations

1.1 Revenue Side

Qualcomm achieved revenue of $10.24 billion in the fourth quarter of fiscal year 2024 (i.e., 24Q3), an increase of 18.7% year-on-year, better than market expectations ($9.96 billion). The acceleration in revenue growth this quarter is mainly due to the recovery of the three core businesses: smartphones, automotive, and IoT.

1.2 Gross Profit Side

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

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

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

1.3 Operating Expenses

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

Looking at the specific expense situation:

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

2) Sales and Management Expenses: The company's sales and management expenses this quarter were $762 million, an increase of 10.9% year-on-year, with expenses related to sales having a certain correlation with revenue.

Although the total number of employees this fiscal year has been reduced from 50,000 to 49,000, a slight decrease, the company's operating expenses have not decreased, especially the investment in R&D projects continues to increase.

1.4 Net Profit

Qualcomm achieved a net profit of $2.92 billion in the fourth quarter of fiscal year 2024 (i.e., 24Q3), a year-on-year increase of 96%, better than market expectations ($2.76 billion). This quarter's net profit margin was 28.5%, with profitability recovering again.

After excluding the impact of non-operating factors such as investment income, the company's operating profit this quarter increased both year-on-year and sequentially. This is mainly driven by the gradual recovery in downstream sectors, leading to a rebound in the company's revenue and gross margin.

2. Business Segmentation: Core Businesses are Recovering

From Qualcomm's business segmentation, this quarter QCT (CDMA business) remained the company's largest source of revenue, accounting for 84.7%, mainly including chip semiconductor business; the remaining revenue mainly came from QTL (technology licensing) business, accounting for about 14.8%Among them, QTL has seen significant growth this quarter, mainly due to an increase in technology licensing for related products such as 3G/4G/5G.

QCT business is the most important part of the company, specifically segmented as follows:

2.1 Mobile Business

Qualcomm's mobile business achieved revenue of $6.096 billion in the fourth quarter of fiscal year 2024 (i.e., 24Q3), a year-on-year increase of 11.7%, better than market expectations ($6.044 billion). The quarterly growth mainly came from the recovery in demand from Chinese Android manufacturers (Xiaomi, OPPO, Vivo), but it is still at a relatively low level.

The recently launched Snapdragon® 8 Elite has been successfully released by Xiaomi, Honor, Oppo, and Vivo, and the company expects to launch more products with Samsung, ASUS, and others, further driving the recovery of the mobile business. With the support of new products, the company expects a 40% quarter-on-quarter revenue growth from Android phones in the next quarter.

From industry data, global smartphone shipments in the third quarter of 2024 reached 316 million units, a year-on-year increase of 4.4%. Although the overall growth rate of smartphone shipments in the market has relatively declined, the performance of the company's main customers this quarter is still good. In particular, VIVO's smartphone shipments increased by 22.7% year-on-year after experiencing impacts from inventory destocking in the supply chain. The recovery performance of the company's related customers directly drives the growth of the mobile business.

2.2 Automotive Business

Qualcomm's automotive business achieved revenue of $899 million in the fourth quarter of fiscal year 2024 (i.e., 24Q3), a year-on-year increase of 68%, better than market expectations ($816 million). The automotive business is the fastest-growing segment among the company's main businesses, with growth mainly driven by increased demand for new cars equipped with the company's Snapdragon digital cockpit and vehicle networking products. The company expects a 50% growth in the automotive business in the next quarter.

Although the company's automotive business is still growing rapidly, 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 year 2024 (i.e., 24Q3), a year-on-year increase of 21.7%, exceeding market expectations ($1.555 billion). After experiencing six consecutive quarters of decline, the IoT business saw a significant rebound 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, as well as inventory replenishment in the supply chain. The recently launched 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.