Qualcomm 4Q22 Earnings – Kitchen Sink

We do not usually do earnings notes, because we do not have to. But we read through Qualcomm release and wanted to call out a few interesting items. The Street did not like these numbers, with the stock down 8% after the call. The quarter was fine, great even, really strong numbers. The guidance…not so much. The company guided December quarter revenue to $9.5 billion, about $3 billion below where the Street was expecting. The company blamed weakening macro conditions, especially consumer demand for the miss. They are going to miss EPS as well, and think the demand for 4G and 4G smartphones will actually decline next year. The bad news just kept piling up and up. After reading, and re-reading their comments, something occurred to us. There is so much bad news here, we would almost say all the bad news in here… they kitchen sinked it.

For those not familiar with the joys of quarterly earnings reports – the kitchen sink maneuver is a tactic companies pull when everyone is expecting bad news, so the company just dumps all the worst case scenarios into the print. The Street panics, everyone downgrades and the analysts slash their numbers, which then makes the next few quarters much easier. The pressure is off.

To be clear, the macro environment is terrible right now. All that consumer demand in 2021 was just pulling forward revenue from 2022 and 2023, and now there is a recession looming. Qualcomm is going to have a bumpy few quarters, but the world is not ending. They gained share in Samsung’s 2023 line-up, which launches in March, and they still have all the Apple modems. Their RF business is sucking up share and their auto pipeline looks great. At some point next year, all this will reverse, but now Qualcomm has a lot more leeway in how they deliver next’s years numbers.

The specific problem the company faced this quarter was Android phone makers are not selling as many phones. Apple’s reported last week and their numbers looked pretty good, so conditions must be very challenging for everyone else. Xiaomi reports in November, and that will likely be a rough event. Qualcomm said that customer inventories were “elevated” by 8-10 weeks, and Qualcomm expects 50% of that overhang to be worked off during the December quarter. Historically speaking that 8-10 week figure is not huge, but their use of the word elevated blurred the whole situation a bit. The company noted that only a few months ago customers could not get enough parts but now had too many. They did not use the words “double ordering“, but when we wrote about inventory conditions six months ago we speculated that it would likely be the fabless companies who end up holding the bag during this cycle’s downturn.

That all being said, we think this very gloomy guide was a smart move. Qualcomm has done a lot to diversify its revenue from a now clearly-saturated phone market. They have said that their moves will grow their addressable market by 7x times to $700 billion. That is a smart move. The problem is all these new markets move much slower than phones. Automotive, in particular has multi-year gaps between design win and production. All the work Qualcomm is doing around ADAS and “Digital Cockpits” will not trip into significant revenue until 2024 at the earliest. The company faces a 2023 in which they will have very little news to talk about, and this guide gives them a year of breathing room. For the next three quarters, all the analysts’ questions will be about macro conditions, something which the company should start to be able speak positively about by summer. And we can say from experience that option is much better than having every question on every earnings call for the next four quarters be some version “Are we there yet? Are we there yet?” for autos.

Beyond the headline. The company also made a noteworthy change. They announced that they will stop breaking out their RF products’ results. We always hate when companies decrease disclosure, but we never thought breaking out RF made much sense. Most of that segment’s results are tied to smartphones (although not as much as we had thought). Spreading the RF numbers around to the appropriate end market is just better aligned with the realities of their business.

However, we noticed one important comment in this announcement. They noted that aligning the RF segment this way made sense because “It’s kindof an end-to-end modem-to-antenna development cycle.” Oh really? This is not news to us, and hopefully teases some interesting new products.

Finally, we want to point out that not a single analyst asked about Nuvia. This is the single most frustrating trend we have seen in the coverage of Qualcomm, and it has bothered us for years. Nuvia is not only at the heart of the Arm lawsuit, another topic no one touched on, but it is also critical to Qualcomm’s future. Are Nuvia’s products shipping on time? Are they still prioritizing PCs over mobile? Why exactly are they doing that? If anyone on the sell side reads this, we will buy you a very expensive dinner in Barcelona if you ask some pointed questions about Nuvia on Qualcomm’s next call.

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