Qualcomm stock rose more than 12% on Thursday, one day after it reported September quarter earnings that not only beat what Wall Street expected, but also included bullish guidance for the December quarter.
Part of the reason for the strong guidance is that Qualcomm, a leading semiconductor company, is more optimistic about the global chip shortage than many of its rivals. For example, Apple says chip shortages will cost it more than $6 billion in the December quarter.
Qualcomm CEO Cristiano Amon said on Wednesday that it expected its own supply issues to be materially better by the end of December and the company will have enough supply to meet demand by the second half of next year.
That’s sooner than predictions about the end of global chip shortage from Intel, which predicts that shortages will persist through 2023, and closer to AMD‘s forecast, which says that challenges related to chip supply will persist until the second half of 2022.
“We had been cautious on Qualcomm ahead of supply issues but those are fading into the rear view now,” Goldman Sachs analyst Rod Hall wrote in a note on Wednesday.
Amon said Qualcomm’s ability to increase chip revenue 56% during a global shortage was the result of the company’s moves from earlier this year, and that new capacity from suppliers that was planned months and years ago is starting to come online.
“Supply worked exactly as we planned,” Amon told CNBC on Thursday. “Scale helps, we addressed the issue early … we put capacity plans in place and it’s working exactly as we planned.”
Here’s why Qualcomm was able to navigate the ongoing chip shortage and why it’s optimistic about next year.
Qualcomm’s biggest individual line of business is in systems-on-a-chip, or SoCs, that combine central processing with cellular connectivity, and are the most expensive and most important component in an Android smartphone. Nearly every top-tier Android smartphone uses a Qualcomm Snapdragon chip.
Sales for handset chips grew 56% annually in the September quarter, Amon said.
These chips are made using what is called leading node processes, or the most advanced and capital intensive chip manufacturing techniques. Leading node processes create smaller transistors, which can be packed tightly together, creating faster chips that use less power and therefore more desirable smartphones.
It turns out, Qualcomm is able to manufacture its processors using two different foundries, or chip factories. Currently, Samsung and TSMC are operating the most advanced leading node, called 5-nanometer, so Qualcomm is buying from both.
“We are one of the few companies that have the ability to do multi-sourcing at the leading node, and we have done a lot of that with our roadmap,” Amon said in April.
That’s in comparison to companies like Apple, which relies on one supplier — TSMC — for its own SoCs.
On Wednesday, Amon credited double sourcing as a major reason that it was able to increase chip sales, and said that the company had three different parts on sale that were coming from two sources.
“We act early, we put a lot of things in place, multi-sourcing, capacity expansions, and we said that we expect to see material improvement in our supply towards the end of the calendar year,” Amon said Wednesday on a call with analysts.
Match issues and moving upmarket
However, other executives have said in the past month the main issue isn’t with leading node chips, but instead on the less-advanced but still essential chips, like display or power chips.
Both Intel and AMD’s CEOs have called this a “match set” issue, where PC makers “may have the CPU, but you don’t have the LCD, or you don’t have the Wi-Fi,” as Intel CEO Pat Gelsinger said in an interview last month.
Qualcomm supplies more smartphone makers than PC original equipment manufacturers, but it’s facing the same issues, said Qualcomm CFO Akash Palkhiwala.
“We’re definitely seeing some mismatch of parts in the short-term at some of our customers,” Palkhiwala said. “But you should think of those as really timing issues.”
Qualcomm officials went on to say that when smartphone makers don’t have enough parts, they prioritize more expensive models. Premium phones use Qualcomm’s most advanced processors, which cost more, and the company is able to “allocate” its supply capacity to prioritize more profitable chips.
Unit sales of premium devices with the most advanced Qualcomm chips increased 21% in the September quarter, Qualcomm said.
“We’re focusing really on the premium and high-tier units, and so when our customers have supply mismatch, they actually end up supplying the premium in high-tier devices,” Palkhiwala said, saying that match issues are not “a big factor” for Qualcomm in the short term.
Qualcomm says it still has supply constraints, and that while the company would still “ship more” if it could make more, it sees the global chip shortage going according to its plans.
“We do have constraints really across-the-board and you have to figure out how the demand would have played out if there was supply across the industry,” Palkhiwala said. “But we feel pretty comfortable that the overall supply picture is playing out exactly as we had planned.”