QCOM • 10-K • FY 2022 • Positive

Qualcomm's Auto Push Accelerates Amid Smartphone Slowdown and Apple Risk

November 02, 2022 • 1 min read

TL;DR

Qualcomm faces a pivotal transition as smartphone chip revenue growth decelerates to 5% YoY while automotive design wins surge to $30B pipeline. Core licensing business remains stable at $6.4B (+3% YoY) despite ongoing Apple risk as custom silicon development threatens future iPhone socket. Strategic pivot toward automotive and IoT shows early promise with 38% YoY growth in combined revenues. Management expects automotive to contribute $9B+ in annual revenue by 2031 as ADAS and connectivity solu

Financial Performance Overview: Revenue grew 32% YoY to $44.2B driven by 5G adoption and diversification into auto/IoT. Handset revenue up 5% YoY to $27.1B but showed sequential deceleration in H2. Gross margins compressed 150bps to 57.5% on product mix shift and higher costs. Operating margin improved 80bps to 32% through operating leverage and cost controls. Auto/IoT now 21% of revenue vs 15% last year, reducing smartphone dependency.
Strategic Initiatives and Operational Changes: Accelerated push into automotive with Arriver acquisition and BMW/Mercedes design wins. R&D spend increased 18% to $7.7B (17.4% of revenue) focused on ADAS, RF front-end, and AI. Restructured organization around mobile, auto, IoT and licensing segments. New go-to-market approach targeting Tier 1 auto suppliers showing early success with $30B pipeline. Key risk remains execution on auto roadmap amid fierce competition.
Market Position and Competitive Dynamics: Maintained 75%+ share in Android premium tier despite MediaTek competition. Apple custom silicon development threatens ~20% of licensing revenue long-term. Auto segment gained share with ADAS design wins at BMW, Mercedes, VW Group. IoT growth outpacing peers at 38% YoY as smart home and industrial use cases expand. Geographic diversification improving with China exposure down to 63% from 67%.
Operational Efficiency and Profitability: Gross margin pressure from product mix shift toward lower-margin auto/IoT partially offset by cost optimization. Operating expenses well-controlled at 25.5% of revenue despite higher R&D investment. Generated $9.5B free cash flow (21.5% of revenue) enabling $3.2B in dividends and $2.9B buybacks. Working capital efficiency improved with inventory turns increasing to 4.2x from 3.8x despite supply constraints.
Growth Catalysts and Material Risks: Near-term growth drivers include 5G penetration in mid-tier Android, auto ADAS ramp, and IoT expansion. Key risks are smartphone market saturation, Apple silicon substitution, and intense auto competition. Management expects 5-year revenue CAGR of 7-9% with auto/IoT reaching 33% of revenue by 2024. Success hinges on auto execution and defending mobile position while margins face structural pressure from mix shift.

Revenue

$44.2B ( YoY) with handsets, auto, IoT

↑ +32%

Rd Spend

$7.7B ( YoY) representing of revenue

↑ +18%

Net Income

$12.9B ( YoY) with net margin

↑ +43%

Gross Margin

(-150bps YoY) due to product mix shift

↑ 57.5%

Free Cash Flow

$9.5B ( YoY) with conversion rate

↑ +12%

Operating Margin

(+80bps YoY) through cost control

↑ 32.0%

Growth Indicators

$30B in design wins

5G Penetration ↑45% of smartphone shipments

China Exposure ↑63% of revenue (-400bps YoY)

Key Risks

Apple custom silicon development threatens ~20% of licensing revenue by 2025
Smartphone market saturation limiting core growth driver
Auto segment faces established competitors and execution risk
China concentration remains high at 63% of revenue

Key Opportunities

Auto semiconductor TAM growing to $120B by 2030 with ADAS focus
IoT expansion in industrial and edge computing markets
5G penetration in mid-tier Android smartphones
RF front-end share gains in 5G transition

Bottom Line

Qualcomm's strategic transformation shows promising early results but faces critical execution challenges over the next 24 months. The pivot toward automotive and IoT helps reduce smartphone dependency but requires sustained investment and flawless execution against established competitors. While core licensing business remains highly profitable, Apple risk creates uncertainty post-2025. Success will depend on maintaining mobile leadership while establishing credible auto/IoT franchises. Investors should monitor auto design win conversion, IoT growth sustainability, and gross margin trajectory as key indicators.