Two years ago, Qualcomm (QCOM -2.36%) implemented what it called a "strategic realignment plan."
This was essentially a euphemism for cost-cutting, which resulted in both a reduction in the company's workforce as well as a shift of some of the company's business efforts from higher-cost regions to lower-cost regions.
Image source: Qualcomm.
That plan, at the end of the day, was designed to help Qualcomm grow the operating margins of its chip business, referred to formally as Qualcomm CDMA Technologies, or QCT.
Though undertaking that plan was likely painful for the company and its workforce, it does seem to be paying off in the form of improving operating profit margins in its chip business.
In Qualcomm's freshly announced earnings results, the company reported some solid results in its chip business, with both revenue and operating profit up year over year.
Let's take a closer look.
Revenue up, operating margin up
Qualcomm's QCT operating segment reported $4.052 billion in revenue in its most recent quarter, representing 5% growth year over year.
That's hardly close to the kind of double-digit growth rates that Qualcomm enjoyed in the early innings of the smartphone boom, but solid and steady growth isn't something to turn one's nose up at -- especially for a company like Qualcomm, which commands the lion's share of the smartphone chip market and continues to face intense competition.
Even better were the operating profit and, ultimately, margin results. Qualcomm reported QCT pre-tax earnings of $575 million, representing a whopping 58% year over year boost.
That boost ultimately translated into operating margin expansion of 500 basis points, from 9% of revenue in the same quarter last year to 14% of revenue in the most recent quarter.
And, to top it all off, Qualcomm achieved this business performance even as it saw its mobile chip shipments contract 7%, from 201 million units shipped in the year-ago quarter to 187 million units in its most recent quarter.
Qualcomm attributes the increased revenue/profit in the face of down units year over year to a "favorable mobile product mix."
Additionally, Qualcomm said that its revenue from "adjacent opportunities" (that is, chip sales into markets beyond its core smartphone chip business) was up 30% year over year. It's important to keep in mind, though, that this high growth is possible because the baseline that Qualcomm is starting from here is relatively small.
Looking ahead
Qualcomm says that for the current quarter, it's guiding to chip shipments of between 205 million and 225 million units -- a sequential increase fueled by the typical seasonal uptick in mobile device sales.
Moreover, the company says that it expects pre-tax operating margin for QCT between 17% and 19% in the coming quarter, representing an expansion of 400 basis points, no doubt driven by the expected increase in revenue.
Image source: Qualcomm.
The midpoint of Qualcomm's mobile chip shipment forecast is 215 million units. In the same period a year ago, Qualcomm shipped 211 million units. So, if Qualcomm hits or exceeds the midpoint of its target for the current quarter, its chip business should finally register year-over-year shipment growth -- something that it hasn't yet enjoyed in the current calendar year.
