Dearer Memory Squeezes Qualcomm and Arm in Phones

SAN DIEGO, Nov. 4 — QualcommQualcomm and Arm reported their quarters on Wednesday after the market closed, and both named the same drag on phones: the price of memory chips. Qualcomm’s revenue from handset chips fell 26 percent from a year earlier, to $5.14 billion, in the three months to Sept. 27. Arm’s royalties, which it collects on the chips its customers ship, rose 8 percent, to $670 million, in the three months to Sept. 30.

Qualcomm’s shares, which closed Wednesday at $173.19, up 5.33 percent, before its report, were at $156.00 in trading before the open on Thursday, down 9.93 percent as of 7:52 a.m. Arm’s, which had closed at $191.80, down 5.28 percent, last traded after hours Wednesday at $188.29, just before 8 p.m. Eastern, and were at $179.00 in trading before the open at the same hour, 6.67 percent below Wednesday’s close.

By both companies’ account, dearer memory is cutting the number of phones sold, and with it the units on which Qualcomm sells chips and Arm collects royalties. Both are leaning on the data center to make up the difference. In the meantime, Qualcomm’s customers pay part of the bill: it is raising its prices.

Cristiano Amon, Qualcomm’s chief executive, listed the uncertainties he said were now behind the company: “QTL license renewals, the loss of Apple as a customer, and the negative impact of memory pricing on the size of the mobile industry,” he said on the call, according to a transcript published by MarketBeat. “Regarding the latter, the June quarter marked the low point for our China Android business, and we have seen sequential growth this quarter.”The Apple ModemQualcomm has renewed its long-term patent license agreement with Apple, its release says, even as Qualcomm’s revenue from Apple’s products ramps down. “The timing and shape of the Apple modem transition is fully incorporated in how we’re planning the business,” Mr. Amon said on the call, according to the MarketBeat transcript.

The Quarter

Qualcomm’s revenue fell 8 percent, to $10.32 billion; on its adjusted basis, which leaves out a payment to a customer under a legal settlement, it fell 7 percent, to $10.44 billion, “the high end of our guidance,” Mr. Amon said in the release. Adjusted earnings fell 28 percent, to $2.17 a share. Automotive revenue rose 89 percent, to a record $1.99 billion, and internet-of-things revenue 4 percent, to $1.89 billion.

For the December quarter, Qualcomm forecast revenue of $10.4 billion to $11.2 billion and adjusted earnings of $2.15 to $2.35 a share. It expects handset revenue to fall by a mid-single-digit percentage from September, as growth in Android is offset by “the continued ramp-down in Apple product revenue,” Akash Palkhiwala, the chief financial officer, said, according to the MarketBeat transcript. The pre-tax margin of its chip business is forecast at 20 to 22 percent, against 24 percent in September; the slides say adding the data-center business to the segment takes 3 points off it.

“The semiconductor industry is experiencing a broad-based increase in input costs across wafer fabrication, assembly, test, advanced packaging, memory and other materials,” Qualcomm said in its release. It expects the full benefit of its price increases to reach its chip business’s gross margins only in the second half of fiscal 2027, which ends next September.The StockroomQualcomm held $8.64 billion of inventories on Sept. 27, against $6.53 billion a year earlier. Its GAAP gross margin was 50.7 percent in the quarter, against 55.3 percent a year earlier, by our arithmetic from its accounts.

Arm’s revenue rose 27 percent, to $1.443 billion, above its own forecast of $1.38 billion, give or take $50 million. License and other revenue rose 50 percent, to $773 million. Royalties, Arm said, were lifted by higher royalty rates per chip and more Arm-based chips in data centers, but this “was partially offset by the impact of memory pricing on the smartphone market.”Two Kinds of FeeArm earns license fees for the use of its designs, and royalties on the products that incorporate them, booked in the quarter in which its customers ship those products, its shareholder letter says.

“In edge AI, royalty revenue was roughly flat year-on-year,” Jason Child, Arm’s chief financial officer, said on its call, according to a transcript published by MarketBeat. “Higher memory prices continue to pressure smartphone unit sales, particularly in the mid and lower-tier segments.” For the December quarter, Arm forecast revenue of $1.54 billion, give or take $50 million, and adjusted earnings of 56 cents a share, give or take 4 cents; Mr. Child said he expected royalties “to grow low teens sequentially and low single digits year-on-year.”

The Way Out

“Fiscal 2027 marks the start of our non-handset revenue inflection, including the ramp of our Data Center business,” Mr. Amon said in Qualcomm’s release, reiterating a target of $5 billion of data-center revenue for the year. Custom accelerators began shipping in October, he said on the call, according to the MarketBeat transcript. Qualcomm expects “$650M+” of data-center revenue in the December quarter, rising each quarter to a $7 billion annualized run rate by the end of fiscal 2027, its slides say.

Fiscal 2027 marks the start of our non-handset revenue inflection, including the ramp of our Data Center business.

Amazon is among the customers for both Qualcomm’s custom accelerators and its connectivity chips, the slides say. On Sept. 3 Qualcomm issued an Amazon affiliate a warrant to buy up to 25 million of its shares at $161.26 each, vesting as Amazon orders and buys Qualcomm’s server chips and related services, up to a maximum of $60 billion in payments, a filing on Sept. 8 shows.The WarrantOf the 25 million shares, 3.75 million vested when the warrant was issued, “based on initial purchase commitments,” Qualcomm’s filing says. The warrant expires on Sept. 3, 2036. Its custom-silicon revenues are “dilutive to gross margins,” the slides add, though “they remain accretive to QCT EBT margins,” the chip segment’s pre-tax margin.

Arm’s data-center royalties doubled from a year earlier, its letter says. It is also selling a chip of its own, the Arm AGI CPU, launched in March, with purchase orders from several customers running through calendar 2027 and first commercial deliveries on track for the quarter ending in March 2027. Its confidence “in achieving up to $2 billion in Arm AGI CPU revenue over FY27–28 has increased over the last 90 days,” the letter says. Supplying it means securing several parts of the supply chain, Rene Haas, Arm’s chief executive, said on the call, according to the MarketBeat transcript: “There is wafer supply, there are substrates, there are testers, there is memory, et cetera.”

The next reports to watch: Cloudflare on Thursday, with its call at 5 p.m. Eastern; CoreWeave on Tuesday, Nov. 10; Applied Materials, the maker of chip-making equipment, on Nov. 12; and Nvidia on Nov. 17.