How Qualcomm benefits from the 'restocking cycle'

Thu, Feb 1, 2024, 7:25 AM

Qualcomm (QCOM) posted its first-quarter results after the market close on Wednesday, reporting revenue of $9.94 billion and earnings of $2.75 per share, beating Wall Street estimates. The company delivered strong results for its handsets division which posted a revenue of $6.69 billion for the quarter, up 16% year-over-year.

KeyBanc Capital Markets Equity Research Analyst John Vinh joins Yahoo Finance to discuss Qualcomm's quarterly report and what it means for the company going forward.

On one of Vinh's key takeaways from Qualcomm's first-quarter earnings is the restocking cycle. "On the smartphone side, that the restocking cycle that started a couple of quarters ago is sustaining. They beat numbers in the December quarter, guided the Android business flat, said Apple (AAPL) would be down seasonally, so, one, we're still seeing strength and momentum on the Android side. That momentum is continuing to the March quarter, and you know, obviously there's a lot of concerns on the Apple side, but right now, none of the handset suppliers are seeing it, they're all guiding for a seasonal decline in the March quarter, which is typically what you see on the iPhone side."

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

- Qualcomm paring back gains in premarket trading after initially rising on a strong first quarter report. The chip maker pointing to a modest recovery in the smartphone market, seeing revenue from handsets rise 16% year over year compared with a 27% decline in the previous quarter.

We've got John Vinh, who is the KeyBanc Capital Markets equity research analyst, here. John, always a pleasure to get some of your insights. So if we look at Qualcomm and draw a through line of some of the other smartphone adjacent or even broader semiconductor space companies here, what is the kind of net takeaway as we're still waiting for some of those earnings to still come forward over the rest of this earnings season too.

JOHN VINH: Yeah. I think a couple takeaways. One on the smartphone side that the restocking cycle that started a couple quarters ago is sustaining. They beat numbers in the December quarter, guided the Android business flat, said Apple would be down seasonally. So, one, we're still seeing strength and momentum on the Android side. That momentum is continuing to the March quarter.

And obviously, there's a lot of concerns on the Apple side. But right now none of the handset suppliers are seeing it. They're all guiding for a seasonal decline in the March quarter, which is typically what you typically see on the iPhone side. And on the automotive front, automotive was up over 30% year over year basis. It is expected to be down seasonal. But they're really not seeing any sort of weakness within the automotive market at this point in time.

- John, talk to us just about those high inventory levels because that seemed to be one of the pain points here, at least in terms of what the Street was looking at from these results. Is that a Qualcomm-specific issue?

JOHN VINH: To some extent, yes. Their customers had built inventories going into the back half of the year. If you think about the inventory cycles, their customers were destocking through the first half of 2023. They got back to normalized levels. What you then saw was Huawei coming back into the market. And all of Huawei's competitors started to restock inventory. They viewed that Huawei coming back into the market would recapitalize the market. So they all built inventories into pretty strong holiday selling periods in the back half of the year.

In China, you had Golden Week, which is the first week of October. You also had Singles Day in November, which is the largest online retail holiday. So they built inventory going into that period. You also did see sell through obviously sustain itself on a positive basis over the last four months. But, yeah, I think it is a little bit of a Qualcomm-specific issues, but we think it's manageable at this point.

- As we think about the handset business and the handset revenues that we saw come in at $6.7 billion, higher than some of those previous expectations they mentioned, and primarily due to demand driven by Android flagship launches, we're going to see a wave of different artificial intelligence that goes into some of the smartphones that people sleep next to and have in their hands all the time. How much of that is direct pass through over time in that cycle to Qualcomm from your perspective?

JOHN VINH: They definitely stand to be a pretty meaningful beneficiary of that. Obviously, extremely early days. I don't think any of us can point to a compelling killer app on the generative AI side. But certainly, they're already starting to embed that capabilities into their latest Snapdragon processors. Whether or not their customers build a, quote, unquote, "AI handset" or not, they're definitely going to see a kind of an ASP uplift to that at the very least. And from our perspective, we definitely believe that they're going to see some optionality related to that once AI handsets start to take off.

- All right. John Vinh, always great to get your insight here. Thanks for joining us this morning. KeyBanc Capital Markets equity research analyst. And stay tuned to Yahoo Finance. Our very own Julie Hyman is going to be speaking with Qualcomm's chief financial officer and chief operating officer. That interview, 10:15 AM Eastern Time. So keep it right here on Yahoo Finance.

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How Qualcomm benefits from the 'restocking cycle'

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