Qualcomm: Chip "Big Shots" are hiding bombs, and the cold winter will last a little longer.

On the morning of May 4, 2023 Beijing time, Qualcomm (QCOM.O) released its second fiscal year report for 2023 (ending in March 2023) after the extended trading hours in Changqiao, America. The key points are as follows:

Revenue: while the car industry cannot support growth, phones remain a difficult problem. In the second quarter of the 2023 fiscal year, Qualcomm achieved revenue of $9.275 billion, a year-on-year decrease of 16.9%, which slightly exceeded market expectations (US $9.09 billion). Although the automotive business still has a growth of 20%, the weak performance of mobile phones and IoT ultimately led to a double-digit decline in the company.
Gross profit and gross profit margin: high inventory suppresses gross profit. In the second quarter of the 2023 fiscal year, Qualcomm achieved a gross profit of $5.122 billion, a year-on-year decrease of 21.4%. Among them, the gross profit margin was 55.2%, a year-on-year decrease of 3.2 percentage points, which was lower than market expectations (57.4%). The downstream demand slump caused the company's products to not be converted into profits but became inventory. The company's inventory is still at a high level this quarter, reaching $6.858 billion.
Expenses and profit situation: expenses increase, and profits are difficult to release. In the second quarter of the 2023 fiscal year, Qualcomm achieved a net profit of $1.704 billion, a year-on-year decrease of 41.9%, which was lower than market expectations (US $1.987 billion). In the case of a decline in revenue this quarter, the company's expenses are still increasing, which directly caused a more than 40% decline in profits. Although the company has begun to control expenses, it still appears to be rigid.
Qualcomm's performance guidance: it is expected that the revenue for the third quarter of the 2023 fiscal year will be between $8.1 billion and $8.9 billion (market expectations are $9.281 billion), and the adjusted profit for the third quarter will be between $1.7 and $1.9 per share (market expectations are $2.16 per share).

Overall, Qualcomm's financial report for this quarter is not ideal. Although Qualcomm has completed market expectations on the revenue side, the gross profit margin and profit are not satisfactory. Since the company's largest revenue comes from the mobile phone business, the global mobile phone shipments in the first quarter have fallen by double digits, which directly caused the company's performance this quarter to be unsatisfactory. Looking forward to the next quarter, the company has given revenue guidance of $8.1 billion to $8.9 billion, a year-on-year decrease of 19%-26%. From the company's guidance, the demand for next quarter is still weak, and both QoQ and YoY will experience a decline.

Dolphin believes that the market has expected the poor demand for electronic products such as mobile phones. Therefore, the market can forgive Qualcomm for delivering unsatisfactory results for these two quarters. However, the most important thing for investors is to see hope-the hope of a rebound. Based on the current Qualcomm's financial report, there are no signs of a rebound yet. ① Weak demand for smartphones: Whether it is global smartphone shipments or Qualcomm's revenue, both have declined by double digits, and the weak demand is difficult to bring a revenue rebound;

② Large inventory remains unsold: Qualcomm's inventory for this quarter continues to be at the high level of 6.9 billion US dollars. Some American companies have started inventory impairment operations since the end of last year, but Qualcomm has not yet seen a significant impairment processing. Although impairment processing will put pressure on current performance, it will have a lightened effect on future performance;

③ Large inventory continues to suppress gross profit margin: Inventories are generally reduced by sales increases or provision for impairment, but in the case of weak demand, the company's high inventory will continue to suppress the company's gross profit margin.

④ High expenses have not been reduced: In the case of poor revenue, the company has carried out certain expense controls, but the overall expense ratio is still increasing, and the company has not yet made a resolute decision on expense control.

Overall, "poor demand - high inventory - company's indecision on inventory and expense management" will affect the market's expectations for the company's rebound. Although the company has entered the bottom with the industry, the company's "inaction" may make it wait longer in the cold winter. Poor current performance is not terrible. The main thing is that hope cannot be seen yet.

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

I. Core indicators: Weak demand is still a major issue

1.1 Revenue

Qualcomm achieved revenue of 9.275 billion US dollars in the second quarter of fiscal year 2023, a year-on-year decrease of 16.9%, but slightly exceeded market expectations (9.09 billion US dollars). The company's revenue declined year-on-year mainly due to the impact of the weak global smartphone market.

As can be seen from Dolphin's in-depth analysis of Qualcomm in "Qualcomm (1): The Behind-the-Scenes "Big Brother" of Android Phones", the mobile phone business accounts for more than 60% of Qualcomm's revenue. According to Canalys data, Global smartphone shipments in the first quarter of 2023 decreased by 13% compared with the same period last year. This is the biggest reason for the company's revenue decline this quarter.

Looking at specific businesses: ①The mobile phone revenue for this quarter was US$6.1 billion, a year-on-year decrease of 17%; ②Automotive revenue for this quarter was US$447 million, a year-on-year increase of 20%; ③ The IoT revenue for this quarter was US$1.39 billion, a year-on-year decrease of 24%. It can also be seen that although the automotive business still brings growth to the company, the weakness of electronic products such as mobile phones and IoT directly dragged the growth of the company. 1.2 Gross Profit and Gross Margin

Qualcomm achieved a gross profit of $5.122 billion in Q2 2023, a year-on-year decrease of 21.4%. The decline in gross profit was greater than that of revenue, mainly due to a certain decline in gross margin in this quarter.

Qualcomm's gross margin for this quarter was 55.2%, a year-on-year decrease of 3.2 percentage points, which was lower than market expectations (57.4%). Although the gross margin still maintained a level of over 55%, this is already the lowest level for the company since 2019.

The Dolphin believes that the company made corresponding adjustments to the product's prices and other aspects to promote inventory turnover, given the pressure on downstream weakness in areas such as mobile IoT and high inventory levels. The adjustment of the price end directly affected the company's gross margin for this quarter.

Combined with the company's inventory situation, the company still has $6.858 billion of inventory in this quarter, which is still at a high level. This indicates that downstream demand is still weak and the company's current biggest problem is the high backlog of inventory. Therefore, the Dolphin believes that the company's gross margin for the next quarter will still not be optimistic.

If downstream demand does not show a significant recovery, the company's inventory turnover can only be achieved through price discounts or inventory impairment, both of which will directly affect the company's gross margin level.

2.2 Operating Expenses and Profit Situation: Decrease in Revenue, Increase in Expenses, and Sharp Decline in Profits

Qualcomm's operating expenses were $2.824 billion in Q2 2023, a year-on-year increase of 6.2%. The double-digit decline in revenue continued, while operating expenses continued to rise. The company's operating expense ratio exceeded 30% this quarter.

① The R&D expenses for this quarter were $2.21 billion, a year-on-year increase of 8.7%. R&D expenses are the company's largest expense component, and the R&D expense ratio for this quarter was 23.8%. In the case of a decline in revenue, R&D expenses have shown obvious rigid characteristics;

② Sales, management, and general expenses for this quarter were $614 million, a year-on-year decrease of 1.6%. The company has begun to control this expense item, but in the case of double-digit revenue decline, the expense ratio still increased to 6.6%.

In the face of operational difficulties, the company has begun to control the cost side. But compared with sales/administrative expenses, the company's R&D expenses are more rigid, which indicates that the company attaches more importance to R&D investment.

2.2 Net Profit

In Q2 of fiscal year 2023, Qualcomm achieved a net profit of $1.704 billion, down 41.9% from the same period last year, which is lower than market expectations ($1.987 billion). Compared with the 17% decline in revenue, the net profit of the company has dropped by more than 40%. This is mainly due to the rising cost while the company's revenue is declining, leading to a significant drop in profit.

Qualcomm's net profit margin for this quarter is 18.4%, down 7.9 percentage points year-on-year. The company's net profit margin was below 20%, entering the historical bottom range. However, I believed that the company's net profit margin would still be difficult to reverse in the next quarter, mainly because the downstream demand has not shown clear signs of recovery, and the company's high inventory pressure has also suppressed the release of its profit.

Dolphin's research on Qualcomm

References

December 20, 2022, Qualcomm: Annual income of billions, chip king worth only 10 times PE?

December 8, 2022, Qualcomm (1): The behind-the-scenes "tycoon" of Android phones

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