As the U.S. stock market traverses through a critical period of earnings disclosures, major technology giants such as Microsoft, Alphabet, Meta, Intel, and AMD have recently shared their financial resultsMeanwhile, more giants like Apple and Amazon are preparing to reveal their latest earnings.

On August 3, Qualcomm, a prominent chip manufacturer, disclosed its financial results for the third quarter of the 2023 fiscal year, which concluded on June 25, 2023. The performance indicators reflect a considerable decline in both revenue and net profit compared to the previous yearQualcomm reported revenue of $8.451 billion, demonstrating a significant 22.7% reduction from $10.936 billion in the same quarter last yearNet profit saw an even steeper decline, falling by 51.7% to $1.803 billion from $3.730 billion a year earlier, effectively halving its profits.

Analyzing the results for the first nine months of this fiscal year, total revenue reached $27.189 billion, marking a drop from $32.805 billion the previous yearAdditionally, the net profit fell to $5.742 billion from $10.063 billion, highlighting significant challenges ahead for the companyAs reports indicate, Qualcomm's executives mentioned during a conference call that cost-cutting measures are being implemented in response to these disappointing results.

The poor earnings performance has impacted Qualcomm's stock significantlyOn August 2, the company's stock closed down by 2.13%, ending the day at $129.27 per share, while pre-market trading on August 3 indicated a drop of over 8%.

Mobile Business as a Burden

Qualcomm's operations consist of two main segments: QCT (Qualcomm CDMA Technologies) and QTL (Qualcomm Technology Licensing). The QCT segment serves as the primary revenue source, focusing on semiconductor products and encompassing three key business areas: mobile devices, automotive, and the Internet of Things (IoT). Conversely, the QTL segment manages the licensing of Qualcomm's technology and patents.

Examining the latest quarterly figures, both of these significant segments experienced year-over-year revenue declines

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The QCT segment generated $7.174 billion, accounting for 84.9% of total revenue, compared to $9.378 billion the previous year, representing a drop of approximately 24%. Meanwhile, the QTL segment contributed $1.230 billion or 14.6% to total revenue, down from $1.519 billion, reflecting a decrease of about 19%.

Within the major revenue-generating QCT division, smartphone chip sales hold a critical positionHowever, this line of business reported revenues of $5.525 billion in the latest quarter, marking a 25.4% decline year-over-year, primarily due to a downturn in the global smartphone market.

A combination of external economic fluctuations, waning consumer demand, and a general decline in innovation within the smartphone sector has precipitated a notable drop in mobile device shipmentsAccording to third-party data from Canalys, global smartphone shipments in the second quarter of 2023 totaled 258.2 million units, reflecting a year-over-year decline of 10%.

The IoT segment, Qualcomm's second-largest source of revenue, encompasses a diverse range of products sold to various industries and applications, including consumer electronics (computing, voice, music, and XR) and industrial sectors (handheld devices, retail, logistics, and utilities). However, this segment also faced a more than ten percent revenue drop, generating $1.485 billion, a 23.7% fall year-over-year.

In contrast, the sole business area to witness revenue growth during this quarter was the automotive chip sector, achieving $434 million, a year-over-year increase of 12.7%. Qualcomm attributed this growth to rising demand for digital cockpit products.

In light of the decline in the consumer electronics market, major semiconductor manufacturers like Infineon and Texas Instruments are intensifying their focus on automotive chip production and capacity planning.

However, it's crucial to note that in the previous two quarters of this fiscal year, automotive revenue stood at $456 million and $447 million, reflecting substantial growth rates of 58% and 20%, respectively

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Comparing these figures, Qualcomm's automotive revenue exhibited a sequential decline in the recent quarter, with growth rates noticeably slowingFurthermore, automotive income currently comprises about 5% of Qualcomm’s total revenue, indicating a relatively minor contribution to overall performance as compared to the billion-dollar smartphone and IoT sectors.

Next Quarter Might Still Be Gloomy

Looking ahead, Qualcomm has projected fourth-quarter revenue to fall between $8.1 billion and $8.9 billion, reflecting a consistency with the third quarter's revenue outlookThe adjusted earnings per share for the upcoming fourth quarter are anticipated to range between $1.80 and $2.00, representing an increase of 10 cents from the expected earnings per share of the third quarter.

Regarding the key QCT operations, Qualcomm forecasts fourth-quarter revenue to range from $6.9 billion to $7.5 billion, which remains consistent with the previous quarter's estimates without notable improvements anticipated.

During the earnings conference call, Qualcomm executives expressed a cautious outlook for the near-term future, primarily influenced by smartphone market dynamics, which remain critical to their forecastQualcomm’s CFO, Akash Palkhiwala, indicated expectations for global smartphone sales in 2023 to continue declining “in the high single-digit percentage range.”

Moreover, Qualcomm's inventory levels remain elevated; as of the end of fiscal year 2022, inventories peaked at a historical high of $6.341 billion, while the latest earnings report reveals inventories at $6.628 billion at the end of the second quarter of 2023.

Looking ahead to the upcoming quarters, Qualcomm foresees the ongoing challenges posed by the current macroeconomic environment

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Clients are likely to continue to reduce their inventory levels, further contributing to negative impacts on revenue, operating performance, and cash flow, while simultaneously increasing inventory levels and introducing inherent uncertainties in projecting future customer demand.

Despite some optimistic analyses from certain industry institutions, suggesting a potential recovery in the smartphone market, reports such as those from Counterpoint indicate that the smartphone sector retains positive signalsOver the past 4 to 5 months, global smartphone inventories have remained at healthy levels without overstock issuesCanalys analysts expect a more favorable developmental environment in the second half of the year, fostering a positive market atmosphere for all industry players.

Nevertheless, the downward trend of the smartphone market in 2023 appears hard to reverse, as significant growth experienced in the past is unlikely to returnAnalyzing the performance of the Chinese smartphone market in the second quarter, IDC senior analyst Guo Tianxiang pointed out the challenges in observing any disruptive innovations from both Apple and Android manufacturers in their planning and development for new products in the second half of the year.

In light of maintaining a cautious and conservative perspective on future markets, Qualcomm's CEO, Cristiano Amon, disclosed plans for additional cost-cutting measures to guarantee maximum shareholder value amid an unpredictable environment.

This may indicate that Qualcomm is poised to proceed with further layoffs

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