Qualcomm’s (NASDAQ: QCOM) chip segment pretax margin dropped sharply to 24% from 29% a year earlier, prompting Bernstein analyst Stacy Rasgon to warn that the “margin outlook is lousy.”

Rising costs across wafers, packaging, and memory components are squeezing profitability even as the company pursues an ambitious pivot away from smartphone dependence.

CFO Akash Palkhiwala expects the gross margin to recover to a range of 48% to 50% by the March quarter, though analysts will need evidence before treating that projection as settled.

Against that margin pressure, Qualcomm’s automotive division delivered its strongest quarter on record, with revenue climbing 89% to $1.99 billion and the business approaching its first $2 billion quarter.

The automotive and IoT segments together accounted for roughly 35% of chip revenue in fiscal 2026, up from approximately 28% the prior year, reflecting how quickly the revenue mix is shifting.

Handset revenue told a different story, falling 26% to $5.14 billion and missing analyst estimates of $5.25 billion, with Apple’s gradual move to in-house modem chips accelerating the decline.

CEO Cristiano Amon addressed the Apple transition directly, stating in an interview with Reuters: “We expect the non-handset (revenue) to replace Apple entirely,” with fiscal 2027 guidance already built around zero Apple chip sales.

A September agreement with Amazon gives that diversification narrative real weight, allowing Amazon to purchase up to $60 billion of Qualcomm’s AI data center chips, with warrants for as many as 25 million Qualcomm shares vesting as purchases accumulate.

SpaceX added further momentum on earnings day by selecting Qualcomm to supply radio equipment for its planned Starlink Mobile network, a program scheduled to launch in 2027.

Qualcomm’s data center revenue target of more than $650 million for the December quarter is well ahead of the $539 million Wall Street had anticipated, and the company reiterated a $5 billion full-year goal.

Shares fell more than 6% in extended trading after the results landed, as investors weighed the handset miss and margin deterioration against the longer-term growth pipeline.

Adjusted revenue for the quarter came in at $10.44 billion, a 7% decline but still above the $10.11 billion consensus, while adjusted EPS of $2.17 edged past estimates by a penny despite falling 28% from a year earlier.

Capital expenditure more than doubled to $2.49 billion in fiscal 2026, compressing free cash flow by roughly a third even as the company returned $11.7 billion to shareholders through buybacks and dividends.

Smartphone market conditions added to the pressure, with global handset shipments declining 20% to a 14-year low as surging memory costs pushed device prices higher across the industry.

Full-year adjusted EPS fell 12% to $10.54 in fiscal 2026, meaning any meaningful earnings recovery hinges on the data center and automotive segments delivering at the scale the company is projecting.

The next quarterly report, expected in early February, will serve as the critical test, revealing whether data center revenue clears the $650 million threshold and whether Palkhiwala’s margin recovery timeline holds.