Qualcomm's diversification strategy pays off as it crushes expectations on earnings

Qualcomm’s diversification strategy pays off as it crushes expectations on earnings

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Qualcomm Inc.’s stock rallied in after-hours trading today after the company managed to dodge the impact of slowing smartphone sales resulting from COVID-19 lockdowns in China and reduced demand in Europe.

In its fiscal second quarter, it posted record quarterly revenue and followed up with strong guidance for the next period too. The company reported earnings before certain costs such as stock compensation of $3.21 per share on revenue of $11.16 billion, up an impressive 41% from a year ago. That resulted in net income of $2.93 billion for the quarter.

The performance crushed expectations, with Wall Street analysts looking for earnings of just $2.91 per share on revenue of $10.6 billion. Qualcomm’s stock then made big gains, rising more than 6% in extended trading following the report. Earlier in the day, Qualcomm’s stock had ticked up by just over a percentage point.

For the third quarter, Qualcomm provided an optimistic forecast, saying it expects earnings of $2.75 to $2.95 per share on around $10.9 billion in sales. That’s better than Wall Street’s forecast of $9.98 billion in fiscal third-quarter sales.

Qualcomm President and Chief Executive Cristiano Amon (pictured) said the record quarterly revenue reflects the successful execution of the company’s growth and diversification strategy, plus strong demand across multiple industries. “We are well positioned to meet our long-term targets and enable the connected intelligent edge,” Amon said.

The majority of Qualcomm’s money comes from selling processors and modems to smartphone makers and from licensing technologies that make it easy to connect to cellular networks. Qualcomm CDMA Technologies, the company’s chip business unit, delivered sales of $9.55 billion, up 52% from a year ago and well ahead of the $8.86 billion in sales that analysts had forecast earlier.

Meanwhile, the Qualcomm Technology Licensing unit, which collects license revenue from the thousands of patents the company hold, reported sales of $1.58 billion, just ahead of the $1.55 billion forecast but down 2% from a year ago.

Qualcomm’s strong results come at a time when there has been a lot of skepticism about the wider chipmaking industry, which benefited from a strong surge in demand and limited supplies during the COVID-19 pandemic.

Faced with the prospect of a slowdown, Amon has looked to find additional markets for Qualcomm’s chips as part of a strategy to diversify away from its bread and butter business of handset processors. Amon’s efforts have clearly paid off, as the company saw strong growth in all four of its major chip markets.

Handset sales, which remains by far Qualcomm’s biggest money maker, rose 56%, to $6.33 billion. RF front-end, which relates to chips that enable 5G connectivity in mobile devices, jumped 8%, to $1.16 billion. And the IoT business, which makes inexpensive, low powered chips for “internet of things” devices, saw sales rise 61%, to $1.72 billion.

“Qualcomm surprised everybody, beating estimates on every conceivable metric,” said Patrick Moorhead, an analyst with Moor Insights & Strategy. “This demonstrates more for its competitiveness versus the market and, to me, shows that the company is delivering on its diversification strategy.”

Qualcomm’s automotive chip market remains smaller but the company is optimistic that it might one day become much bigger. Certainly, it’s growing well enough, with sales rising 41%, to $339 million, in the quarter.

Qualcomm said it paid $764 million in cash dividends and repurchased $951 million worth of stock during the quarter.

Photo: Qualcomm

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