Qualcomm’s fiscal third-quarter performance delivered revenue near the upper end of its forecast but also showed how sharply smartphone weakness and rising semiconductor costs are weighing on earnings. The San Diego-based chip designer reported revenue of $9.947 billion for the quarter ended June 28, down 4% from $10.365 billion a year earlier. GAAP net income declined 25% to $2.002 billion, while diluted earnings fell 23% to $1.87 per share.

On an adjusted basis, net income decreased 23% to $2.356 billion and earnings declined 20% to $2.21 per share. Analysts had generally expected adjusted earnings of approximately $2.23 per share and revenue near $9.7 billion, making the report a mixed result: sales modestly exceeded expectations, but profitability remained under pressure. Qualcomm shares dropped sharply in after-hours trading as investors focused on the earnings shortfall, weaker margin outlook and below-consensus fourth-quarter profit guidance.

The principal source of weakness was Qualcomm’s handset operation. Revenue from handset chips fell to $5.086 billion from $6.328 billion in the year-earlier quarter, a 20% decline. Handsets still generated about 60% of revenue within Qualcomm’s QCT semiconductor segment, leaving the company exposed to changes in smartphone production volumes, component availability and the purchasing decisions of a relatively concentrated group of manufacturers.

Management attributed much of the pressure to unusually high memory prices and supply constraints across the smartphone industry. Memory is not the only cost issue. Qualcomm said semiconductor suppliers are implementing broad increases covering wafer fabrication, assembly, testing, advanced packaging and other materials. The company’s own cost of revenue rose to $4.670 billion from $4.606 billion even though total revenue declined, illustrating the unfavorable relationship between sales and production-related expenses during the quarter.

Qualcomm has begun adjusting product prices to reflect those higher input costs. The company expects the changes to support gross margins as they gradually take effect, but the timing creates a near-term earnings gap: supplier costs are already affecting results, while the corresponding increases charged to customers will be recognized over a longer period. That lag was reflected in both the third-quarter outcome and management’s forecast for the September quarter.

The QCT segment, which includes handset, automotive and internet-of-things chips, generated revenue of $8.504 billion, down 5% from $8.993 billion. Segment earnings before taxes fell 18% to $2.192 billion. QCT’s earnings-before-tax margin narrowed to 26% from 30%, a four-percentage-point contraction that captured the combined effects of the handset decline, higher semiconductor costs and continued investment in newer product categories.

Companywide GAAP operating income fell more sharply, dropping to $1.626 billion from $2.762 billion. Research and development spending rose 17% to $2.607 billion, while selling, general and administrative expenses increased 27% to $976 million. Those increases reflect Qualcomm’s effort to expand beyond mobile devices, but they also intensified the effect of lower handset revenue on current-period operating profit.

Qualcomm expects its Android handset business to begin improving sequentially. Management estimated that QCT handset revenue from Chinese manufacturers reached a bottom in the fiscal third quarter and projected double-digit sequential growth in the fourth quarter. That outlook suggests the most severe phase of customer inventory and memory-related disruption may be passing, although the expected rebound would follow a substantially reduced fiscal-year base.

The company now expects QCT Android handset revenue for fiscal 2026 to decline by approximately 20% from the prior year. Qualcomm estimated that the contraction will reduce annual earnings by more than $1.50 per share. The magnitude of that effect demonstrates why strength in adjacent markets, while significant, has not yet been sufficient to stabilize consolidated earnings.

Another complication is Qualcomm’s changing relationship with Apple. The iPhone maker has been developing and deploying more of its own modem technology, reducing its dependence on Qualcomm components. Qualcomm previously estimated that it would retain about a 20% modem share in the forthcoming iPhone launch. It now expects that share to be materially lower, citing supply constraints and an accelerated reduction in Apple-related product revenue beginning in the fourth fiscal quarter.

The Apple transition has long been incorporated into Qualcomm’s diversification strategy, but a faster decline compresses the time available for newer businesses to replace lost modem sales. The company’s fourth-quarter forecast consequently combines three competing forces: a sequential recovery among Chinese Android manufacturers, the beginning of a steeper Apple revenue reduction and persistent pressure from semiconductor input costs.

For the fiscal fourth quarter, Qualcomm projected revenue of $9.7 billion to $10.5 billion. The midpoint of $10.1 billion would represent a modest sequential increase from the third quarter. QCT revenue is expected to range from $8.4 billion to $9.0 billion, while the QTL licensing division is forecast to contribute between $1.2 billion and $1.4 billion.

Qualcomm guided to GAAP diluted earnings of $1.22 to $1.42 per share and adjusted earnings of $2.05 to $2.25. The adjusted midpoint of $2.15 was below the approximately $2.38 per share analysts had expected before the report. The company also forecast QCT’s earnings-before-tax margin at 23% to 25%, below the 26% achieved in the third quarter, indicating that cost pressures and revenue mix will remain unfavorable in the near term.

Adjusted operating expenses are expected to increase to approximately $2.7 billion from $2.59 billion in the third quarter. Qualcomm is spending ahead of anticipated revenue growth in data-center processors, artificial-intelligence accelerators, automotive computing, personal computers and industrial products. That investment may expand the company’s addressable markets, but it reduces the earnings protection normally provided by cost controls during a handset downturn.

Automotive was the clearest source of growth in the reported quarter. Revenue surged 61% to $1.588 billion from $984 million, marking Qualcomm’s 23rd consecutive quarter of double-digit year-over-year automotive growth. The company supplies connectivity, digital cockpit and assisted-driving technology to vehicle manufacturers, giving it exposure to longer product cycles and contracted design pipelines that differ from the faster and more cyclical smartphone market.

Internet-of-things revenue increased 9% to $1.830 billion from $1.681 billion. Together, automotive and IoT produced $3.418 billion in quarterly revenue, an increase of 28% from a year earlier. Their combined growth offset a substantial portion of the handset decline, although the absolute size of the smartphone operation means it remains the primary driver of QCT’s near-term financial performance.

Qualcomm’s QTL licensing business was comparatively stable. Revenue declined 3% to $1.278 billion, and earnings before taxes fell 6% to $881 million. Its margin remained high at 69%, although that was two percentage points below the prior-year period. Licensing provides an important source of cash generation because Qualcomm earns royalties from devices using its cellular intellectual property, even when manufacturers obtain some components from other suppliers.

The company is positioning data centers as the next major pillar of its diversification plan. Qualcomm expects non-handset revenue, including data-center sales, to grow about 24% in fiscal 2026 and more than 60% in fiscal 2027. Management has said the absolute increase in fiscal 2027 non-handset revenue should be sufficient to replace the company’s entire fiscal 2026 Apple product revenue.

Qualcomm is targeting approximately $5 billion in data-center revenue in fiscal 2027, rising to more than $15 billion by fiscal 2029. The product roadmap includes custom silicon, connectivity products, artificial-intelligence accelerators and central processing units. Custom-silicon revenue is expected to begin in the first quarter of fiscal 2027, followed by an AI-accelerator ramp in the second half of that fiscal year and a CPU ramp in the second half of fiscal 2028.

The company recently completed its acquisition of Modular, a software company focused on generative and agentic artificial intelligence. Qualcomm views the transaction as a way to establish a more open software foundation around its AI hardware. Software support is important in data-center markets because customers evaluate processors not only on raw performance and energy efficiency but also on programming tools, model compatibility and the cost of deploying applications across multiple generations of equipment.

By fiscal 2029, Qualcomm is targeting $40 billion of annual non-handset revenue, nearly double the $22 billion objective presented at its November 2024 investor event. The updated target includes $10 billion from automotive, more than $14 billion from IoT and more than $15 billion from data centers. Qualcomm expects non-handset operations to represent about two-thirds of QCT revenue by that point, compared with a business mix that remains handset-dominated today.

Those targets provide a long-term framework, but their credibility will be judged against execution over the next several quarters. Automotive revenue is already scaling rapidly, yet data-center projections depend on new product introductions, customer qualification, manufacturing availability and competition from established processor suppliers. Qualcomm will also be investing before much of the expected revenue arrives, which could limit near-term margin expansion.

The balance sheet reflects both strategic investment and a more demanding supply environment. Inventories stood at $8.379 billion at the end of the quarter, up from $6.526 billion at the end of fiscal 2025. Accounts receivable increased to $4.668 billion from $4.315 billion. Over the first nine months of fiscal 2026, operating cash flow declined to $8.405 billion from $10.016 billion, while capital expenditures doubled to $1.578 billion.

Qualcomm nevertheless continued returning substantial capital to shareholders. It distributed $2.3 billion during the quarter, including $973 million in dividends and $1.4 billion spent repurchasing eight million shares. For the first nine months of the fiscal year, share repurchases totaled $6.806 billion and dividends reached $2.868 billion. The capital-return program provides support to shareholders, although sustained buybacks depend on cash generation remaining strong as investment requirements rise.

The earnings report ultimately highlighted a timing mismatch at the center of Qualcomm’s strategy. Its mature handset business is experiencing a pronounced cyclical decline just as memory shortages, broader component inflation and the Apple modem transition are reducing profitability. Its fastest-growing operations are expanding at strong rates, but most remain too small—or too early in their development—to neutralize the handset pressure immediately.

Near-term attention will therefore center on whether Chinese Android revenue delivers the projected double-digit sequential rebound, how quickly product price increases restore QCT margins and how severe the Apple revenue step-down becomes. Progress toward the fiscal 2027 data-center target will also become increasingly important as investors assess whether Qualcomm can convert its diversification spending into material earnings growth.

Until those offsets become larger, handset demand and semiconductor input costs are likely to remain the dominant variables in Qualcomm’s quarterly results. The fiscal third quarter demonstrated that revenue resilience alone is not enough when product mix deteriorates and costs rise faster than customer pricing. Qualcomm’s longer-term growth plan remains ambitious, but the fourth-quarter outlook indicates that the transition will continue to carry meaningful earnings volatility.