Qualcomm’s Apple Setback and Arm’s AI Growth Signal a Semiconductor Market Split

Qualcomm and Arm Earnings Reveal Two Different Semiconductor Transitions

Qualcomm (QCOM) and Arm Holdings (ARM) delivered earnings reports that exposed a widening divide across the semiconductor market. Qualcomm's near-term outlook was pressured by declining handset revenue, rising manufacturing costs and a faster reduction in its Apple business, while Arm reported record first-quarter revenue as data center royalties more than doubled.

The reports also carry implications for two major technology companies tied to those transitions. Apple (AAPL) is reducing its reliance on Qualcomm modems faster than Qualcomm previously expected, while Nvidia (NVDA) has moved its Arm-based Vera CPU into full production as Arm architecture expands across AI infrastructure.

Key Points

• Qualcomm handset revenue fell 20% year over year to about $5.1 billion, while rising semiconductor input costs and a faster decline in Apple modem revenue pressured its near-term earnings outlook.
• Arm revenue increased 22% to a record $1.29 billion, with data center royalties more than doubling and demand for its new AGI CPU exceeding $2 billion across fiscal 2027 and 2028.
• Apple’s modem transition is accelerating Qualcomm's diversification challenge, while Nvidia’s Arm-based Vera CPU entering full production highlights Arm’s expanding role in AI infrastructure.

Qualcomm’s Handset Pressure Accelerates the Diversification Push

Qualcomm's fiscal third quarter showed why reducing dependence on smartphones has become increasingly important to the company.

Revenue was $9.95 billion, while adjusted earnings came in at $2.21 per share. Handset revenue, still Qualcomm's largest business, declined 20% year over year to approximately $5.1 billion.

The weakness was partly offset by growth elsewhere. Automotive revenue surged 61% to a record $1.6 billion, while Internet of Things revenue increased 9% to roughly $1.8 billion. Combined automotive and IoT revenue grew 28% year over year.

Qualcomm expects its non-handset expansion to accelerate. Management said year-over-year growth in non-handset revenue, including data centers, should increase from 24% in fiscal 2026 to more than 60% in fiscal 2027. The company has targeted $40 billion in total non-handset revenue by fiscal 2029.

Data centers are becoming a larger part of that strategy. Qualcomm expects two custom-silicon engagements to begin generating revenue in the December quarter, with wafer production already underway. The company has also completed the tape-out of its first-generation High Bandwidth Compute architecture and expects its first HBC solution in mid-2027.

Qualcomm also completed its acquisition of AI infrastructure software company Modular Inc. The approximately $3.9 billion stock transaction is intended to strengthen Qualcomm's software capabilities for AI inference and deployment.

The near-term financial picture remains more challenging. Qualcomm cited rising costs across wafer fabrication, assembly, testing, advanced packaging, memory and other materials. QCT earnings-before-tax margin contracted 400 basis points year over year to 26%, with management expecting a further decline to 23% to 25% in the fourth quarter.

Qualcomm plans to increase product prices beginning September 1 to offset those costs, although management expects the benefit to margins to emerge gradually.

For the fiscal fourth quarter, Qualcomm expects revenue of $9.7 billion to $10.5 billion and adjusted earnings of $2.05 to $2.25 per share. The earnings range fell below Wall Street expectations of roughly $2.36 to $2.38 per share.

What Does Qualcomm’s Outlook Signal About Apple?

One of the most important developments in Qualcomm's earnings report concerned Apple.

Qualcomm said its modem share in the upcoming iPhone launch is expected to be materially below its previous estimate of 20%. CFO Akash Palkhiwala said the change accelerates the exit of Apple revenue from Qualcomm's financial model.

Apple-related revenue is expected to decline by roughly 50% sequentially from Qualcomm's fiscal fourth quarter to its first quarter as the iPhone maker increases its use of internally developed modem technology.

For Qualcomm, that creates a more immediate need for Android handsets and non-handset businesses to offset the lost revenue. Management expects Chinese OEM handset revenue, which it said bottomed in the third quarter, to return to double-digit sequential growth in the fourth quarter. Total handset revenue, however, is expected to increase only modestly to approximately $5.2 billion because Android growth will be partly offset by the Apple decline.

The transition comes as the broader smartphone market faces additional pressure from higher memory costs. Qualcomm CEO Cristiano Amon said rising memory prices are affecting affordability, leading some consumers to select cheaper options within the premium category or continue using existing devices.

Qualcomm's earnings reaction therefore reflects several pressures arriving simultaneously: a faster Apple transition, weak handset conditions, rising semiconductor costs, lower near-term margins and continued spending ahead of the company's data center expansion.

At the same time, automotive and AI infrastructure are becoming increasingly important parts of Qualcomm's business. The company expects automotive revenue to grow roughly 60% year over year in the fourth quarter, while its data center business is moving toward initial revenue generation.

Arm’s Data Center Growth Expands Its Role in the AI Buildout

Arm delivered a different earnings picture, with growth in licensing, royalties and AI data center demand supporting record first-quarter revenue.

Revenue rose 22% year over year to $1.29 billion, above the $1.26 billion expected by analysts. Adjusted earnings reached $0.45 per share, compared with expectations of $0.40, while non-GAAP operating margin expanded roughly 200 basis points to about 41%.

Royalty revenue increased 22% to a first-quarter record of $715 million, while licensing revenue advanced 23% to a record $574 million. Free cash flow reached $665 million during the quarter.

Data centers were an important driver. Arm said data center royalty revenue more than doubled year over year as adoption of its Neoverse technology accelerated, with cumulative Neoverse shipments surpassing 1.5 billion cores.

Demand for Arm's new AGI CPU has also increased. Cumulative customer demand now exceeds $2 billion across fiscal 2027 and 2028, compared with the initial $1 billion opportunity previously discussed by management. Shipments to several customers have already begun, and Arm has secured enough manufacturing capacity to support more than $1 billion of initial deployments.

Oracle has agreed to purchase the AGI CPU, while Arm said it has added customers in North America and China. Management also identified Cerebras and OpenAI as customers for head-node applications and Meta and Cloudflare for agentic and general-purpose server workloads.

Supply remains a constraint. Arm cited tight availability across wafers, substrates, test capacity and memory, although CEO Rene Haas said the company's supply position has improved over the past 90 days.

The first generation of AGI CPUs is expected to carry gross margins in the high-30% to low-40% range, below Arm's longer-term target of 50%. Management expects margins to improve over the next several years as more ASIC work moves in-house.

Arm's smartphone business is also feeling the effects of higher memory prices. Management lowered its full-year royalty growth expectation from around 20% to the high teens, although it said continued strength in cloud AI data centers and licensing is offsetting that pressure.

For the second quarter, Arm expects revenue of approximately $1.38 billion, plus or minus $50 million, with adjusted earnings expected between $0.43 and $0.51 per share.

The relationship with Nvidia adds another dimension to Arm's AI infrastructure expansion. Nvidia's Vera CPU, which is built on Arm architecture, entered full production during the quarter. Arm also said Nvidia's NVLink Fusion platform allows Arm CPUs to be combined with custom accelerators, creating additional paths for its architecture within AI systems.

Amazon's AWS, meanwhile, announced a multi-year agreement with Meta to deploy tens of millions of Arm-based Graviton5 cores for AI workloads.

What It Means for Investors

The Qualcomm and Arm reports show how semiconductor growth is shifting across end markets while AI investment reshapes both opportunities and costs.

Qualcomm remains heavily exposed to smartphones at a time when handset demand is under pressure and semiconductor input costs are increasing. The faster decline in Apple modem revenue adds another near-term challenge, while price increases designed to offset higher manufacturing costs will take time to flow through margins.

Its diversification businesses are moving in the opposite direction. Automotive revenue grew 61%, IoT revenue increased 9%, and Qualcomm expects non-handset growth to accelerate above 60% in fiscal 2027 as its data center business begins contributing revenue.

For Apple, Qualcomm's updated modem forecast provides a direct signal of the speed of the transition toward Apple's internal technology. Qualcomm now expects its share of the upcoming iPhone modem business to be materially below the 20% it previously anticipated.

Arm is also exposed to smartphone weakness, but its results showed stronger momentum from AI data centers. Data center royalties more than doubled, Neoverse shipments passed 1.5 billion cores, and AGI CPU demand exceeded $2 billion across fiscal 2027 and 2028.

Nvidia's Vera CPU entering full production on Arm architecture further illustrates that expansion. Arm's technology is also being positioned alongside custom accelerators through Nvidia's NVLink Fusion platform.

The earnings therefore reflect two different stages of semiconductor diversification. Qualcomm is working to replace a declining portion of its established handset business with automotive, IoT and data center revenue, while Arm is seeing its existing architecture expand from mobile devices deeper into cloud and AI computing.

Conclusion

Qualcomm and Arm are both navigating a semiconductor market increasingly shaped by AI infrastructure, rising component costs and changing demand across traditional devices.

For Qualcomm, the immediate pressures are clear. Handset revenue fell 20%, Apple modem revenue is declining faster than previously expected, manufacturing costs are increasing, and fourth-quarter earnings guidance came in below Wall Street forecasts. Automotive growth and an emerging data center business provide important offsets, but those businesses are scaling while near-term handset pressures remain significant.

Arm reported record first-quarter revenue and strong royalty and licensing growth, with data center royalties more than doubling. Its AGI CPU demand pipeline has expanded beyond $2 billion, although supply constraints and lower initial silicon margins remain part of the ramp.

The read-through to Apple and Nvidia highlights the broader semiconductor transition. Apple's internal modem adoption is reducing Qualcomm's role in future iPhones, while Nvidia is bringing an Arm-based CPU into production as AI infrastructure demand expands Arm's presence in data centers.

Together, the reports show a chip market where growth is increasingly determined not only by traditional smartphone demand, but by how effectively semiconductor companies participate in automotive computing, AI data centers and the next generation of compute infrastructure.

FAQs

Why did Qualcomm stock fall after earnings?

Qualcomm faced a weaker near-term earnings outlook as higher semiconductor input costs, declining handset revenue and a faster reduction in Apple modem revenue pressured margins. Fourth-quarter adjusted EPS guidance of $2.05 to $2.25 came in below Wall Street expectations.

What is happening to Qualcomm’s Apple business?

Qualcomm expects its modem share in the upcoming iPhone launch to be materially below its previous estimate of 20%. Apple-related revenue is expected to decline by roughly 50% sequentially from Qualcomm's fiscal fourth quarter to its first quarter as Apple increases adoption of its internal modem technology.

How is Qualcomm diversifying beyond smartphones?

Qualcomm is expanding across automotive, IoT and AI data centers. Automotive revenue grew 61% year over year to $1.6 billion, while management expects total non-handset revenue growth, including data centers, to accelerate from 24% in fiscal 2026 to more than 60% in fiscal 2027.

What drove Arm’s first-quarter growth?

Arm revenue increased 22% to a record $1.29 billion as royalty revenue rose 22% and licensing revenue increased 23%. Data center royalties more than doubled, while demand for Arm's AGI CPU exceeded $2 billion across fiscal 2027 and 2028.

How are Arm’s results connected to Nvidia?

Nvidia's Vera CPU, which uses Arm architecture, entered full production during the quarter. Arm also said Nvidia's NVLink Fusion platform allows Arm CPUs to connect with custom accelerators, providing another path for Arm technology within AI infrastructure.

This article was created with AI assistance and reviewed by an editor. For details, please refer to our Terms of Use.

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