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Although Qualcomm's (QCOM) core strategy revolves around diversifying its revenue streams and end markets, the chip company still derives about half of its revenue from the handset market, making it a focal point when it reports earnings. With that in mind, QCOM's more upbeat commentary regarding the handset market, including the assertion that the inventory glut is now mainly behind the company, is providing more firepower to its upside Q4 earnings report.

• Recall that during last quarter's earnings call, CFO Akash Palkhiwala warned that inventory drawdown dynamics in the handset market would likely persist through the end of the calendar year. Since then, though, conditions have improved with Mr. Palkhiwala commenting last night that he's seeing early signs of stabilization in demand for handsets, particularly for Android devices.
  • As a result, QCOM lifted its CY23 handset outlook to down mid-to-high single digits from its prior forecast of down by at least high-single digits.

This brighter handset outlook and QCOM's cost-cutting efforts, which include nearly 1,300 recent job eliminations, enabled the company to provide upside Q1 EPS and revenue guidance. While QCOM's Q4 results and outlook were better-than-expected, business is still far from booming.

• Handset revenue tumbled by 27% to $5.46 bln, after plunging by 25% last quarter. In addition to the inventory situation, demand in China has been weak as the softening economy there has caused consumers to hold off on phone upgrades.
  • That's a major problem for QCOM since China accounts for roughly 60% of its revenue.
• Furthermore, the IoT end market has yet to show any signs of recovery as revenue dove by 31% to $1.38 bln. Similar to the handset market, IoT is contending with high inventory levels at OEMs, especially on the industrial side.
• For the 12th consecutive quarter, the Automotive end market generated double-digit growth with revenue up by 15% to $535 mln. Growth has slowed, though, from earlier in QCOM's fiscal year.
  • For instance, in Q1 and Q2, Automotive revenue jumped by 58% and 20%, respectively.
  • From a longer-term perspective, QCOM remains bullish about its growth opportunities in Automotive as vehicles become increasingly connected and as advancements in ADAS are made. The company believes that its Snapdragon Digital Chassis will play a critical role as these trends continue to evolve.

QCOM also highlighted its opportunities in AI, commenting that it's establishing itself as a leader in on-device Gen AI for smartphones, laptops, and vehicles. The upcoming launch of on-device AI will create new use cases and change how users interact with their devices, which will be underpinned by more efficient and powerful chips -- such as QCOM's Snapdragon platform.

The main takeaway is that the handset market finally seems to be turning a corner after several quarters of declines. This gradual recovery, along with QCOM's cost containment measures, should help to turn its financial performance around, but a full recovery won't happen overnight as demand slowly improves.