QCOM Q2 Deep Dive: Data Center and Automotive Growth Offset Smartphone Headwinds

Wireless chipmaker Qualcomm (NASDAQ:QCOM) reported Q2 CY2026 results exceeding the market’s revenue expectations, but sales fell by 4% year on year to $9.95 billion. Guidance for next quarter’s revenue was better than expected at $10.1 billion at the midpoint, 1% above analysts’ estimates. Its non-GAAP profit of $2.21 per share was in line with analysts’ consensus estimates.

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StockStory’s Take

Qualcomm’s second quarter was met with a negative market reaction, as the company reported a year-on-year decline in sales and a significant contraction in operating margins. Management cited persistent weakness in the global smartphone market, driven by elevated memory prices and input cost pressures, as primary reasons for the decline. CEO Cristiano Amon described the environment as one of “unprecedented memory prices, higher manufacturing and input costs as well as supply chain shortages,” which not only impacted handset revenues but also weighed on QCT gross margins. Despite these headwinds, management pointed to record automotive revenues and continued progress in industrial IoT as areas of relative strength.

Looking ahead, Qualcomm’s guidance reflects optimism about a rebound in non-handset revenues, particularly from its data center and automotive segments. Management believes the ramp of new AI-focused products and the integration of the Modular acquisition will play a significant role in diversifying the business beyond smartphones. CFO Akash Palkhiwala emphasized, “We anticipate growth in non-handset revenues relative to prior year to accelerate from 24% to greater than 60%,” highlighting the company’s confidence in its diversification strategy. However, management also acknowledged continued gross margin pressures as pricing actions phase in and data center contributions initially dilute margins.

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to continued pressure in the mobile business, offset by growth in automotive and industrial IoT, and outlined strategic milestones in data center and software expansion.

• Automotive momentum accelerating: Qualcomm achieved another record quarter in automotive revenue, driven by major design wins, including a new expanded agreement with BMW to supply compute silicon for next-generation advanced driver-assistance systems (ADAS) and digital cockpits. Management raised their annualized sales outlook for the automotive segment as a result.
• Industrial IoT pipeline expanding: The company saw robust growth in industrial networking and robotics, with a reported design win pipeline exceeding $7 billion and over $3.5 billion in new design wins secured this year. Partnerships with Arduino and Edge Impulse have extended Qualcomm’s reach to more than 30 million users in this category.
• Data center initiatives advancing: Qualcomm began wafer production for custom silicon projects with two major hyperscale customers, marking the start of revenue generation in the upcoming quarter. The company also completed the tape-out of its high-bandwidth compute (HBC) Gen 1 solution, aiming to address performance and efficiency bottlenecks in AI workloads.
• Modular acquisition completed: The purchase of Modular Inc. enhances Qualcomm’s ability to deliver end-to-end, hardware-agnostic AI software solutions, simplifying deployment for developers and supporting the transition to more open AI ecosystems.
• Price increases and cost actions: In response to supply chain cost inflation, Qualcomm is implementing double-digit price increases across its portfolio. Management expects these actions to take effect gradually, with the full benefit to gross margins materializing over several product cycles.

Drivers of Future Performance

Qualcomm expects near-term growth to be driven by diversification into data center and automotive, while gross margin pressures persist due to input cost inflation and product mix shifts.

• Data center and non-handset ramp: Management anticipates that data center revenue will begin to scale meaningfully in the coming quarters, supported by custom silicon engagements and the Modular software acquisition. This expansion is expected to drive non-handset revenues to comprise more than half of QCT revenues by 2027.
• Automotive design wins and content growth: New multi-year agreements with leading automakers, including expanded roles with BMW and Stellantis, are expected to accelerate automotive revenue growth and increase Qualcomm’s silicon content per vehicle. The upcoming launch of the fifth-generation Snapdragon digital chassis is projected to further boost this segment.
• Gross margin recovery and risks: While pricing actions are underway to offset higher manufacturing costs, management acknowledged that gross margin recovery will be gradual, as contract terms and product cycles delay the impact. The initial ramp of data center products is also expected to dilute margins, presenting a near-term risk to profitability until scale efficiencies are realized.

Catalysts in Upcoming Quarters

In the next few quarters, our team will closely monitor (1) the scale and pace of data center revenue contributions from custom silicon and AI accelerators, (2) continued growth in automotive, especially as new Snapdragon digital chassis platforms ramp, and (3) execution on pricing actions to recover gross margins as supply chain costs remain elevated. The impact of the Modular acquisition on Qualcomm’s AI software strategy will also be an important area to track.

Qualcomm currently trades at $152.31, down from $159.95 just before the earnings. Is there an opportunity in the stock? See for yourself in our full research report (it’s free).

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