By Adam Levine

When Qualcomm reports its first quarter on Wednesday afternoon, its continuing transition will be on display. Long associated with smartphone chips, CEO Cristiano Amon has made it his mission to diversify the company's income toward other end markets -- efforts that have started to show results in recent quarters.

Overall, Wall Street analysts expect Qualcomm to report earnings per share of $2.96, up 8% from the year before, on sales of $10.91 billion, up 10%.

Revenue from smartphone customers remains 75% of Qualcomm's chip revenue in fiscal 2024, which has become problematic for Qualcomm. It is a mature market, and consumers worldwide are beginning to stretch out replacement cycles from three years to four or five years. Fiscal 2024 was another year of mid-single-digit worldwide unit sales growth for smartphones, like in 2023. Smartphone sales are a cyclical business, and the current upcycle has been tepid.

Qualcomm has tried to fight this trend by moving up the value chain to high-end Android phone chips where there are higher prices and margins, and Qualcomm was able to achieve 12% annual growth in this segment in the last two quarters. But Wall Street analysts aren't convinced it can hold up. The consensus for smartphone chip sales is for 5% yearly growth to $7.0 billion.

There is a cloud over Qualcomm's smartphone segment: its looming loss of Apple's 5G chip business. Beginning this fall, Apple will begin to substitute 5G chips of its own making, and Qualcomm stands to lose most of Apple's business by the end of 2026. Qualcomm and Apple have a famously contentious relationship, Apple has worked for almost six years to end it, and the fruits of that labor will start rolling out this year.

This is a healthy portion of Qualcomm sales, very likely over 10%.

Another form of concentration risk is Qualcomm's China business, at 46% of revenue in fiscal 2024. The Chinese government would like to end the country's reliance on U.S. chips, Qualcomm's included. Homegrown smartphone chips have gotten better but still don't match the performance or efficiency of Qualcomm's top-end offerings. Still, Qualcomm is already losing business in Chinese low and mid-range Android phones.

Qualcomm's auto chip segment is a fast grower, with annual expansion averaging 45% over the past three years. These are relatively new sorts of chips for new "digital cockpit" systems, assisted driving, and self-driving. This is a wide open field with few competitors, but one of them is Nvidia, which can't be underestimated.

Analysts expect 49% growth from the previous year to $890 million. At the rate it is going, the Qualcomm segment will probably hit a billion dollars in quarterly sales before too long.

Qualcomm's IoT segment contains chips for virtual and augmented reality and "smart" devices like TVs and refrigerators. The segment flagged in 2023 into 2024, with six quarters in a row of sales shrinkage. But last quarter saw relief in the form of new PC chips that compete with offerings from Intel and AMD. Sales in the IoT segment jumped 22% from the year before, albeit against a weak 2023 comparison. Analysts are looking for the momentum to continue in the first quarter, the holiday season, with sales up 23% to $1.4 billion, also against a weak comparison.

Qualcomm's final segment is for intellectual property licensing and royalties, which tends to be a volatile line item. Part of Qualcomm's big beat on revenue last quarter was overperformance in the segment, up 21% on the year. Analysts expect that to cool off in the first quarter, with a gain of 7% to $1.6 billion. This segment also looks likely to lose revenue when Apple departs.

Write to Adam Levine at adam.levine@barrons.com

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February 05, 2025 13:25 ET (18:25 GMT)

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