QCOM • 10-Q • Q2 2022 • Positive

Qualcomm Posts Record Q2 Amid Smartphone Weakness, IoT and Auto Growth Accelerates

July 27, 2022 • 1 min read

TL;DR

Qualcomm delivered exceptional Q2 results with revenues up 35.7% YoY to $10.9B, demonstrating resilience despite smartphone market headwinds. Core licensing business remained stable at $1.67B while equipment/services surged 44.2% to $9.27B. Notable expansion in IoT and automotive segments helped offset mobile weakness. Management's strategic pivot toward diversification is gaining traction with automotive design wins reaching $19B. Forward visibility suggests continued momentum in high-growth se

Financial Performance Overview: Revenue grew 35.7% YoY to $10.9B, with equipment/services revenue surging 44.2% to $9.27B. Operating margin expanded 1270bps to 40.9% driven by product mix and operating leverage. Net income increased 84% YoY to $3.73B reflecting both top-line growth and margin expansion. QCT segment revenue grew 45% YoY to $9.38B with particular strength in IoT (+31%) and automotive (+38%). Handset revenue, while up 59% YoY, shows signs of moderating growth in coming quarters.
Strategic Initiatives and Operational Changes: Management is accelerating diversification beyond mobile through strategic acquisitions and R&D investments. The $1.4B Veoneer acquisition strengthens automotive ADAS capabilities. IoT expansion continues with new product launches in compute, edge AI, and wireless connectivity. Inventory levels increased 68% YoY to $5.42B reflecting strategic builds for automotive/IoT ramps. RF front-end strategy showing success with 28% YoY growth despite smartphone weakness.
Market Position and Competitive Dynamics: Qualcomm maintained dominant position in premium Android with ~75% market share. Automotive design win pipeline expanded to $19B, up $3B sequentially. IoT leadership strengthening in enterprise/industrial segments with 40%+ growth. Some risk from customer internal development efforts (Apple, Samsung) but competitive moat remains strong in advanced wireless technologies. Geographic diversification improving with non-China exposure increasing.
Operational Efficiency and Profitability: Gross margin improved 120bps YoY to 56% on favorable mix shift to higher-margin segments. Operating expenses well-controlled at 24.8% of revenue despite increased R&D investments. Operating leverage driving significant margin expansion with operating income up 104% YoY. Inventory management and supply chain investments position company well for continued growth. Cash flow from operations reached $3.8B demonstrating strong conversion.
Growth Catalysts and Material Risks: Key growth drivers include 5G penetration in mid/low-tier phones, automotive ADAS adoption, and IoT expansion. Primary risks are smartphone market weakness, customer vertical integration, and supply chain constraints. China exposure remains but geographic diversification progressing well. R&D investments in next-gen technologies (6G, metaverse) provide future optionality. Management expects continued growth despite macro headwinds.

Revenue

$10.94B ( YoY, QoQ)

↑ +35.7%

Gross Margin

(+120bps YoY)

↑ 56.0%

Free Cash Flow

$3.16B ( YoY)

↑ +42%

Operating Margin

(+1270bps YoY)

↑ 40.9%

Growth Indicators

$1.83B ( YoY)

↑ +31%

Handset Revenue ↑$6.15B (+59% YoY)

Automotive Pipeline $19B (+$3B QoQ)

Key Risks

Smartphone market weakness impacting core business
Customer vertical integration threats
Supply chain constraints and inventory management
China exposure and geopolitical tensions

Key Opportunities

Automotive ADAS and digital cockpit expansion ($19B pipeline)
IoT growth in industrial/enterprise segments
5G penetration in mid/low tier phones
Edge computing and AI capabilities enabling new verticals

Bottom Line

Qualcomm's Q2 results demonstrate successful execution of its diversification strategy while maintaining mobile leadership. Strong growth in automotive and IoT segments offset emerging smartphone weakness. Margin expansion and operational efficiency provide resources for continued investment in growth initiatives. While near-term smartphone headwinds bear watching, the company's technology leadership and expanding addressable markets support sustainable growth. Key metrics to watch include automotive design win conversion, IoT segment growth, and smartphone market dynamics.