Qualcomm Slashes Apple Outlook as Data Center Ambitions Double to $40 Billion by 2029
Q3 FY2026 earnings call, July 29, 2026
Qualcomm delivered fiscal third-quarter revenue of $9.9 billion and non-GAAP EPS of $2.21, both at the high end of guidance, but the headline from Wednesday's call was not the quarter itself. It was a sharp acceleration in the company's exit from Apple's iPhone business, paired with a dramatic upward revision to its data center ambitions that management now says will help offset the loss entirely within a single fiscal year.
Apple Exit Happening Faster Than Guided
Chief Financial Officer Akash Palkhiwala told investors that Qualcomm's share on the upcoming iPhone launch will be "materially lower than our prior estimate of 20%," and that the company now expects Apple product revenue to fall roughly 50% sequentially from the September to the December quarter. Analyst Stacy Rasgon of Bernstein pressed management on whether Qualcomm was intentionally starving Apple of supply to redirect capacity elsewhere, calling it out directly on the call. Palkhiwala pushed back on the framing but confirmed the substance: supply constraints were "a part of it," and where discussions landed, Apple's fiscal 2027 product revenue will come in well below the previously guided figure of "a little over $2 billion." Rasgon estimated the total Apple revenue base being replaced at approximately $7.5 billion, which Palkhiwala called "a fair range of estimate." Qualcomm's answer to the Apple gap is now explicit: non-handset revenue growth of more than 60% year-over-year in fiscal 2027 is expected to "replace total Apple product revenues in '26" within the year, according to Palkhiwala's prepared remarks.
Data Center Target Nearly Doubled
The most consequential new data point was the size of the upward revision to Qualcomm's non-handset revenue targets, first previewed at the company's Investor Day and reaffirmed on this call. Management now expects more than $40 billion in combined automotive, IoT and data center revenue by fiscal 2029, up from a prior target of $22 billion. Data center alone is now guided to $5 billion in fiscal 2027, scaling to more than $15 billion by fiscal 2029, a business that barely existed in Qualcomm's revenue mix a year ago. CEO Cristiano Amon framed the timing as deliberate: "This is the ideal and logical time for Qualcomm to enter the market as agentic workloads are reshaping the economics of AI," he said, pointing to disaggregated inference and total cost of ownership as the forces driving demand for Qualcomm's mix of connectivity, custom silicon, AI accelerators and eventually server-class CPUs. Two custom silicon engagements with what the company described as global-scale hyperscalers will begin generating revenue in the December quarter, with wafer production already underway. Qualcomm also disclosed it has completed tape-out of its first-generation High Bandwidth Compute product, a chip designed to integrate compute directly with high-density memory, with silicon demonstrations expected in the coming quarters ahead of a mid-2027 launch. Investors should not expect this ramp to come free of cost, however. Palkhiwala flagged that data center revenue, dominated early on by lower-margin custom ASIC engagements, will act as a 1.5 to 2 percentage point drag on QCT's weighted average gross margin even after the base business recovers to its historical 48% to 50% range.
Gross Margins Under Pressure From Memory Costs, Price Hikes Coming
QCT gross margins are compressing below Qualcomm's historical range, driven by a weaker mix within the premium handset tier as OEMs shift toward older, cheaper silicon in response to rising memory costs, combined with a broad-based increase in input costs across wafer fabrication, assembly, test, advanced packaging and memory. Qualcomm is responding with what Palkhiwala described as a double-digit price increase across its portfolio, consistent with actions taken by industry peers, though the benefit will phase in gradually as existing contracts and product cycles run their course. Amon downplayed the demand risk from the price hikes, noting that "even a double-digit price increase, which is just a pass-through of the input cost increase and wafer price increases, it's actually small when you compare it to the order of magnitude of the memory bill of materials." He reiterated that the industry is now running at full capacity utilization reminiscent of pandemic-era conditions, adding that "it's good to have scale... this is actually helping us," a reference to Qualcomm's inventory position acting as a buffer against shortages that are squeezing smaller competitors harder.
Automotive Guidance Raised, BMW Win Highlighted
Automotive remains the cleanest bright spot in the print. Revenue hit a record $1.6 billion in the quarter, up 61% year-over-year, and management raised its annualized exit run rate for fiscal 2026 to approximately $7 billion, up from the $6 billion target set just last quarter. The upgrade was driven in part by a newly signed expanded agreement with BMW, which Amon called a win in "a highly competitive selection process" that makes Qualcomm the lead compute silicon provider for BMW's next-generation ADAS and digital cockpit programs extending into the next decade. A separate collaboration with Stellantis extends the automotive design-win pipeline into the 2030s. Management also noted that OEMs are increasingly engaging Qualcomm on a platform basis rather than negotiating socket by socket, a shift that is pulling forward silicon content per vehicle faster than the company had modeled.
China Handset Demand Has Bottomed
On the more troubled handset side of the business, management struck a more constructive tone on China. Palkhiwala said Chinese OEM revenue hit its low point in the June quarter and is expected to return to double-digit sequential growth in the current quarter, driven largely by channel inventory drawdowns running their course rather than any underlying demand recovery. Total handset revenue guidance for fiscal 2027 assumes the broader smartphone market will be down low teens percentage-wise versus fiscal 2026, concentrated in lower price tiers, translating to a roughly 20% year-over-year decline in QCT Android revenue and an EPS headwind greater than $1.50 that management is positioning as a future tailwind once conditions normalize.
Modular Acquisition Closes, Software Strategy Takes Shape
Qualcomm closed its acquisition of AI infrastructure software company Modular on the day of the earnings call, a deal Amon described as central to an "end-to-end software stack for data center and Edge AI deployments" that will be hardware-agnostic. He was explicit about the strategic intent beyond simply adding engineering talent: "Our vision and objective with Modular goes far beyond augmenting our AI software capabilities. We have the ambition to change the current industry approach to AI software from closed to open systems." The integration adds to Qualcomm's growing operating expense base, with non-GAAP opex guided to approximately $2.7 billion in the fiscal fourth quarter, reflecting both the Modular deal and continued investment ahead of the data center revenue ramp.