QUALCOMM Incorporated (QCOM) Earnings Call Transcript & Summary

Hi. I'm Samik Chatterjee. I'm the research analyst covering Qualcomm. And for the next fireside chat we are hosting, we have the privilege of hosting Qualcomm. Cristiano Amon, President of Qualcomm is with us to kind of go through a set of questions, have more of a discussion about the 5G opportunity. In the meantime, because we'll also be taking questions from the audience, if you have any questions, please feel free to use the Q&A feature to send us questions, and we can ask it on your behalf. Cristiano, welcome to the conference. Thanks for participating in the conference.

I guess we can just start with, we've never really seen these levels of kind of declines in the smartphone market. So kind of what are you seeing? What are your thoughts about the magnitude of the decline? What are you seeing in kind of some of the recovery in some geographies? And what does that tell you in terms of how quickly we can rebound?

Good. Samik, happy to be here. Thank you for taking the opportunity to talk to us and happy to talk to you all. Look, maybe I will start by just giving an overall view on the 5G market. So when we just finished our earnings call this past quarter, we reiterated the total number of units for the market in 5G. And while it's -- every country is going to have a different type of response while there's still a lot of uncertainty, what we have seen in signals working for our customers is, in -- with OEM customers as well as the carrier partners, 5G rollouts continue. In some cases, I can talk a little bit about that, it's accelerating. And on the handsets ecosystem, especially on premium, high and mid-tiers kind of switched to 5G already. And looking at the data that we have from China, and you can look at -- we can have a conversation about how much similarity we will see or not see in different geographies, but China indicates an interesting recovery. And just observing, in China, even as the market is smaller as a consequence of this current situation we have, the 5G units actually held. And I think a very encouraging data point we actually got this week, which is look at data on [ sell-in to ] the channel in China, 40% of our devices is 5G. And that continues to feed into the view that I think we're going to see the 5G transition continue to happen. The 5G units are holding. If you're out to buy a phone, you're likely to buy a 5G device, especially as we see now price points in the China mobile ecosystem, already capable of address 50% of all device price points in China. So that's kind of our overview, and I'm happy to also tell you what's happening on the infrastructure rollout to all the different geographies.

So let's get to that in a bit. Maybe just kind of, Cristiano, just closing the loop on that. I think one of the concerns that we're hearing from investors is, in general, yes, 5G devices span across a wide range of price points, but in general, they are at a premium to the 4G devices. And kind of weak consumer spending backdrop, particularly if the macro does remain weak, what kind of impact do you see that having on the volume resilience you're seeing on the 5G side right now? Any thoughts on that? What kind of -- can be done to mitigate some of those limitations related to consumer spending being challenged?

Okay. So just one -- this one is actually a very interesting topic. And maybe I can elaborate a little bit more on the data we saw. At this point, and I know this is going to sound like a bold statement, but we're not that concerned about 5G price points and the effect that 5G staying at premium and high tiers will impact their rollout. Now let me explain that to you. We started with 5G. We're now on our third-generation chipset. And we're still on track this year to bring 5G that we started in flagship and then high-tier devices, to also bring 5G to the mid-tier devices, 600 and 400 series chipsets. What we observed in December quarter, in the December quarter, 19% of the device activations in China was with 5G. In December quarter, some of our customers start to introduce 5G in the open market, not subsidized by the carrier, at about $285. At that point, we said 5G now has the ability to address about 40% of the total price points in China. Now as we progressed to the March quarter, we saw as more devices start to be built towards -- going towards the mid-tier, we saw that number jump to about 50%. And as we go through the year, we're going to have now chipsets coming at lower tiers for 5G. And I think we're going to see a larger percent of the addressable market. So what the net result is some of the dynamics on the 4G to 5G transition that we talk about even before the pandemic about being faster than the 3G to 4G, they're still in place. And I keep going back to that simple statement, which is if there is awareness on the consumer side about a 5G technology transition and you go out to buy a phone, even though the market is going to be smaller, as 5G becomes available at all those lower price points, I think that increases the probability of the 5G units to hold. And we feel good to be really focused as a company on this 5G transition.

Got it. That's helpful. Let me move to kind of what you mentioned, the infrastructure rollouts. And I think the -- what we want to understand from you is how critical is the infrastructure rollout to 5G smartphone adoption. One of the concerns we've seen from investors is there are these kind of, I would say, more noise in the market about delays in 5G infrastructure rollout, just given the disruption we're seeing from COVID. And does that then kind of play through eventually into smartphone adoption for 5G? So what are you seeing? How tightly related do you think it is? Help -- please share your thoughts on it.

Look, an excellent topic of conversation. So first, let me just recap what we're seeing around the world in the market, and then I want to talk about devices. So if I break down geographies, I would say in United States, across all the 3 carriers, we're seeing the plans still in place. And some carriers actually indicated to us that in the current environment, because there's not a lot of people in the streets, they accelerated their rollout being probably 1/4 ahead on their build-out plans. So it's just easy to understand, it's easier to open trenches and put new radios and antennas in the current environment. Japan launched 5G, including millimeter-wave, in the middle of the pandemic. So now we have an expansion of millimeter-wave also towards Japan market. And then Korea, one of the questions were whether Korea would or would not have millimeter-wave this year. Korea Telecom just recently announced they're going to have millimeter-wave deployed before the end of the calendar year. So United States, Japan, Korea still moving forward. I would say, in some cases, the United States rollout has been accelerated. China, unchanged, and they are on track to have 1 million base stations. The joint China Telecom and China Unicom as well as China Mobile, they're still going ahead. And I will say they're tracking to the original plan. So those markets that, I think, Qualcomm has a strong presence, they're really tracking well. We are seeing some delays in the European market. I think there's a couple of reasons. And one reason's there are some countries they have -- had not done auctions. And now governments, as you would expect, it's probably not their priority to do a frequency auction. So that is likely going to be delayed. And then there's some vendor uncertainty on the choice of infrastructure vendors because of some of the geopolitical situations. But we saw Europe likely going to move at a slower pace. It has some shining spots, but we'll see. And in emerging markets have -- probably, we're going to see they're pushing to the right. Before our 5G plan and transitions, I think the markets that Qualcomm has expectations of 5G volume, they're actually going very well. And then specifically to your conversation on phones. The phone ecosystem switch, right? The phone ecosystem, when you turned the switch on a 5G device that is the one that is selling. I know it sounds ironic, but for example, this week, Xiaomi just launched the Mi 10, 5G device in the India market, even though there is no 5G yet deployed in India. So the ecosystem, the portfolio phone switch, and I think they're just going to track the overall mobile market as the coverage and the rollout's happening in parallel.

Got it. Got it. Maybe moving to the content opportunity then for Qualcomm on 5G phones. You've guided to, I think, in generally saying a 1.5x multiplier on the content versus a 4G phone is how you've guided to it. Just help us understand more the trajectory of pricing here. The early 5G handsets will obviously have much more of a premium opportunity. And as we kind of look at more mass market introductions, the ASP start to moderate, you also start moving from a lot of the discrete solutions to integrated solutions. So how should we think about the ASP trajectory, particularly when it relates to Qualcomm's kind of modem business in these 5G handsets?

Okay. So we have said all along, I think the -- as we really focus on the 5G transition, the 5G transition will be a great opportunity for earning, expansions in Qualcomm and QCT. And we provide a metric. We talk about, if you get like-for-like, whether it's a high-tier, a mid-tier or premium-tier device, from the silicon content and the dollar content we have in 4G, as we look in the transition to 5G, we have a metric of 1.5x. As -- and that happens in 2 components. One is just more value on the baseband and the processor in itself as it's a more capable device when you just said that now a 5G modem on top of a multimode 4G. But then we also have RF front end content. It's a whole new business of Qualcomm, and it is kind of growing as for the 5G transition. So when you look at that, that drives the 1.5, and we're holding to that metric even across the tiers. Of course, if you're talking about a mid-tier device, it's a lower dollar amount, but the 1.5 metrics still applies. And I'll tell you, we're very happy to be able to demonstrate that with our quarterly results, our revenue per MSM went up. We did talk about 50% year-over-year growth on RF front end. I think our RF front end strategy is playing out a lot of the tier down devices like the Samsung Galaxy S20 showing all of our components with our modem to antenna solution. And I think that it's a good, I think, milestone to be able to demonstrate to investors how that strategy is starting to come into our financials. And we expect that to continue as we ramp the 5G units.

So let me focus on those pieces individually, first on the baseband and then move to the RF. On the baseband side, how do you see the competitive landscape in 5G vehicles? When you look at the market, obviously, there's kind of MediaTek that seems to be the primary competitor. There's Intel that has largely exited the business. You also have the win with Apple on the baseband side. So when you put all that together, how do you feel about your market share in 5G versus 4G? And how do you think of the competitive landscape here?

It's really a great question. And maybe just give me a minute to elaborate because it will touch on a number of different topics. I will say, to start with, we like the competitive environment in 5G. It's probably a better environment for Qualcomm. It's normal as you have a race to a new technology and Qualcomm being the company that take pride in not only a key creator of the technology, but also one that is implementing technology faster, and we have a lead. So we see it's a better environment for us than we had in 4G. Having said that, it is a very competitive environment like it always has been. And we did make projections. Even when we talk about some long-term projections, in our Analyst Day, we said all of our assumptions for the year is based on our existing share position. Now I'd like to break that down because there's a bunch of different points. And I -- it's easier to go by going one key customer after the other. So we always competed with companies that have enough scale to have an internal development. Let's just, for example, Samsung. Samsung, we always had competed in the 4G era, even the 3G era, with Samsung's own solution. And they have demonstrated their ability to continue developing their own solution over the years. When you look at where we are versus Samsung as one of our key accounts in the 5G era, we have launched with them in all of the regions that traditionally were strong Qualcomm markets, which is United States, Japan and China. But now with the recent launch of the GS20, we expanded to Korea. So we replaced their own platform, which they launched -- already launched with 5G for 2 phones, the Galaxy and the Note prior to the GS20. They already accomplished the development of 5G platform, and they replaced their solution with Qualcomm, just because our ability to deliver higher performance. We also saw the fold, the flip, which are 2 foldable devices, in the A series, which is the high-tier launching with Qualcomm globally, including markets that are traditionally for their own solutions such as Europe, Middle East, Lat Am and Africa, which is all incremental opportunities for Qualcomm. So on that competitive front, I will say we're probably trending in the right direction. We're doing better. Especially, I'd like to point it out because it's a competitor that had already commercialized 5G. Then when you think about Apple, we did say we have a multiyear agreement with Apple, and we're fortunate and happy and excited to be working with them again. And when a lot of the investors ask me questions about other companies' ability to be able to build an internal solution, what I'll say is, of all companies, the one that has the better ability to do it in terms of assets and core competencies, is really Samsung. They have an infrastructure business in the United States, in Japan, in Korea. So the other side of the link, they're very large semiconductor company, and we have demonstrated our ability to compete and grow within Samsung. So that speaks to the strength of our road map. And when you think about then our Chinese customers, look, we have always competed with MediaTek. Where we see as a good opportunity for Qualcomm, although we're always going to have competition there is Huawei is kind of retrenching or exiting some of the international business because they don't have access to Google. And that creates an opportunity for the China ecosystem, especially companies like Xiaomi, OPPO and Vivo, to occupy that space, partner with Qualcomm. And great example of how stable our relationship is, in the middle of all of the current geopolitical trade tensions, last week, we just -- about 2 weeks ago, we just launched together with OPPO OnePlus, a millimeter-wave 5G device in Verizon wireless in the United States. And I think that's kind of a sign that Qualcomm provides a very strong channel for those companies to grow outside China and hopefully occupy some of the Huawei socket. So overall, when you break down for individual account, we really like the position that we are in the competitive landscape we have.

That's very detailed, very helpful. Maybe let me move to the RF opportunity here. I think before we talk about the RF attach or kind of the market share targets that you have, I think in general, what we've seen is there seems to be this broad investor perception that RF is a relatively new business for Qualcomm, and your products are still kind of trying to catch up with a lot of the incumbents and their capabilities. So maybe just outline for us kind of the investment horizon that you had with RF already, the capabilities that you've built and where you think you stand comparatively on the RF business?

Very good. Actually, I really appreciate that question. Look, I think this message about Qualcomm trying to catch up with our competitors, that's 2000 -- early 2019. I'm just -- I'll tell you kind of where we think we are right now and based on the feedback we're going. So I will give you 3 metrics. Metric number one, we start sampling now our third-generation 5G modem. We have now a total tracking 375 5G designs. And in the first generation, we had very high, virtually, all of our designs -- all of the snapdragon designs had an attach of 5G RF front end content. We repeated it on our second generation. As we sample our third generation modem, we've maintained that. So I think we have now a repeatable model that we've been seeing the high attach of RF content to our baseband. That's the fact number one. Fact number two, we started to create features that didn't exist in the market before. You have an individual component comparing specifications, PA by PA, tuner by tuner, filter by filter. And now because we can put a whole system together, we started to leverage different signals that go -- and sensors that go across entire design from digital to analog from the baseband to the antenna and started to create features such as smart transmit signal boost and things that actually show significant performance advantage as now you have the ability to add features in the whole system versus individual components. And then the fact number three, it's related to what the '19 versus '20 story. When we started this, we kind of strived to have a system-level advantage, but also individual component advantage. So in '19, we announced that we finally had achieved parity with the incumbents in the high-band filter performance we had with our BAW technology and achieved with the FBAR technology of the incumbent. Just last quarter, we now announced a brand-new filter technology that we call UltraSON. And now for the first time, we exceeded the incumbent. So I would argue, and I think our customer devices, as they get launched throughout the year and people will see the technology in tier downs, I'll argue that Qualcomm has the performance benchmark for filter. And that's probably part of our long-term commitment to this business and the fact that we really did our homework, I think, this time using 5G as the interval.

Got it. Keeping on the RF opportunity and going back to kind of some of the targets that you outlined at the Investor Day. Last year, you outlined a target to get to RF market share of close to 20%. Now how much of that is kind of the insertion that you mentioned with the 5G opportunity, how much of that is kind of you think is an opportunity even as you go back to like 4G handsets?

All right. That's a good point as well. Look, consistent to the conversation we had before in overall competition, when we make that assumption on the RF front end, we did not make any heroic assumptions on share. So what I can tell you is, the existing designs we have today will get us to that 20% metric. And I think everything above that it's probably an upside. And the way we think about it, how we describe, I think, the upside opportunity for Qualcomm is, we really focus on doing the best possible solution for 5G, whether it's the mid-band or the millimeter-wave band. And that is going as part of our modem to antenna solution with our baseband. Now what's happening throughout the year and is going to propagate further into 2021, is the existing 4G spectrum, which today is mostly serving the front end by our competitors in those 5G phones. Existing 4G spectrum will start to get refarmed for 5G, when the operators will have both a 4G and a 5G base stations irradiating simultaneously what is called dynamic spectrum sharing. And then what that means to the phone is now you have to design also those legacy bands as part of your RF front end chain. That creates a possibility for Qualcomm to expand content beyond 5G as you keep adding bands to 5G. Those capabilities on dynamic spectrum sharing will also require a lot of carrier aggregation because you get chunks, narrow chunks of spectrum aggregate to have one big channel of 5G. So all of the complexity of carrying aggregation, be able to filter individual bands, in some cases, filter [ and winding ], speaks to our system-level approach and the ability to design as a system, test as a system and deliver a turnkey solution to our customer. So that could be an interesting upside opportunity for Qualcomm above the 20% assumption.

Let me take some of the questions that came in online. And the first one, kind of the way -- I'll just read it out the way it reads, which is, since Apple is now using your modems again, why wouldn't they also use your RF solutions given better performance from design integration and presumably lower cost?

Look, it's really a question, I think, that probably some of our customers need to answer. But what I can tell you is, we're very pleased with the partnership we have with Apple right now. I think since we celebrated our agreement with them last year, we engaged into a multiyear collaboration program with them. That create a lot of opportunities for even broader cooperation. So at this point, I think we do have opportunities to expand with them. It's really up to them. What I just caution people is, RF front end design cycles are longer. You have usually a 15- to 18-month period that when you actually engage in the design. And I think we just track to how our engagement with them resume. But we are optimistic that we have a great relationship for multiple generations of devices and that create opportunities for us.

The other question that we've got is more related to the industry. And the question is -- I think the crux of the question is how much of a decline are you expecting in the smartphone market? Or the way it reads is, how much smaller is the smartphone market?

All right. So we own -- I think we're kind of -- we did say about restating the 5G units for the year. We did restate that, and we feel confident about that based on the data we have today and all of the things I outlined earlier in this conversation. Of course, like everybody else, this is a situation that you continue to monitor. We did not talk about the 2020 full year on all devices. We did say, however, that the first half of 2020, we kind of projected down at about 10%. There's still uncertainty about the overall market in the second half. But I keep coming back to that point, 5G is tracking well, and the recent China data show an interesting data point. 19% of the devices was 5G in December, then 30% of the devices were 5G in the March quarter and the data we just got on [ sell-in ] for the month of May, indicating like 40% going to the channel. Those are very good metrics that give us confidence on the 5G number, even though the overall market may be down, but we have to wait and see to see how the second half of the year develops.

Cristiano, you mentioned the benefit that you might have as Huawei kind of pulls back from the international markets and some of the other Chinese brands have an opportunity there. On the other side, we've kind of seen the U.S. government kind of always more eager to kind of tighten restrictions on shipping to Huawei. I know your exposure there is -- kind of has decreased over time is modest. But if kind of the restrictions were to tighten or kind of where they are, what do you see as kind of the impact if you had to stop shipping to Huawei completely? What's the magnitude of that impact?

Look, I'm going to use this opportunity to probably to bring even a bigger issue. But to answer your question on Huawei, we don't have a lot of exposure to Huawei on the product side. Of course, on the license side, we have our dispute, which is still ongoing. But on the product side, I think, we kind of size and when -- pass that exposure when the band started. So for all practical purposes [ ordered ] some small legacy volumes, you should assume that we don't have any significant shipments to Huawei today. So we're -- so we don't have a lot of exposure to Huawei on the product side. Having said that, I think I want to bring a bigger issue. I -- It's -- there is often association of the issues associated with Huawei and the tensions or the bigger set of issues associated with Huawei and China. And I think those things are separate things. In -- while there are issues with Huawei in terms of the restrictions, I think what we see on the other hand, it's a very stable business with our other Chinese partners. In the middle of all of those things, in the last earnings call, we announced 2 -- renewal of 2 license agreements, 1 with Vivo, 1 with OPPO. Like, I would argue that there is no better metric of stability than renewing a QTL licensing agreement of -- with those 2 companies. And as I mentioned, we see now a number of devices from those companies going into the international markets, in Europe, including the United States, which is something that Huawei never able to do, but now OnePlus launching millimeter-wave 5G technology with Qualcomm in United States. And I think that's a good sign. We're kind of fortunate that our business model ends up being a win-win for both countries and it kind of provides a form of stability in the relationship, in the type of the customers we serve and creating growth for both sides.

Okay. Let me move to the QTL segment as we kind of are in the final kind of 5 minutes here. Just help us understand how you're thinking about the outlook for the QTL business, given that, I mean -- there's kind of the overall smartphone market, which looks a bit mature, but you have 5G premium handsets coming through and then kind of you also have the nonhandset growth that gets layered in on top of that. So just help us put all that together and what would be your outlook for that -- for the QTL business?

All right. So let me break that quantitatively and qualitatively. From a quantitative standpoint, I think we have provided our guide to the quarter, and I think we're not guiding any more than that. I think I reiterated, we just assumed the mobile market a 10% decline overall, not the 5G units, but overall in the first half, and we're monitoring the second half. So I think that's probably what I can say at this point. And we like the fact that it is a stable business right now. I keep coming back to the renewal of license agreements. And I think the only dispute we have, it's Huawei, and we're still in a dialogue. The second part, from a qualitatively standpoint, we see good opportunities for QTL in the out years. And the way I'll describe that is, unlike the other generations of wireless, 5G is actually going to other industries. And it's going to become part of how we think about the transformation of the enterprise and the 5G connected devices beyond phones and more and more connected computing devices, connected IoT devices. As a lot of the data moves to the cloud, we see opportunities in industrial manufacturing. And there is an interesting phenomenon. If you -- I try to look at the positive on things. And this current pandemic and this current lockdown that we're living in right now, if you go to a conference and people will talk about more and more use cases will show up in the future about telemedicine, e-learning, IoT, ready or not, they're happening right now. And I think we see a lot of companies thinking of accelerating their digital transformation. Many companies, as they send their employees home, they realize a lot of their machines were not connected. And those things could create opportunities for QTL beyond phones in the long run. So we actually like a lot about this 5G transition that is going to be able to drive growth for the engines of -- growth for Qualcomm. We just needed to wait a little bit for those things to get mature. It may take a few years.

Okay. Last question, just taking the question that came in again from the audience. It reads, during your Analyst Day, you mentioned several 5G technologies that Qualcomm developed, including carrier aggregation, massive MIMO, and others. Do you receive a royalty on these technologies when implemented by competitors? Is there any upside in royalty rates from 5G licensing?

All right. It's a very good question. I also want to use this opportunity to make a quick correction. I think we did say in our earnings call, a 10% decline for the full year on the market, not the first half. So I think I just wanted to clarify. I think we said the 5G units, we hold them, but then 10% decline. So that's how we size the overall market, but we keep monitoring the situation. Specifically, the question is, as price points on devices increase, we are going to see an opportunity for QTL on the licensing side. I think we do the licensing at the device level. So therefore, it's really associated with the wholesale ASP of the device. And right now, I think we have agreements for -- some agreements are at the portfolio level, but we have agreements at the SEP level. So we are going to continue as a company to have standard essential patents, but also nonstandard essential patents. But -- and I think overall, the more of -- the stronger the IP we can build and more technologies complexities that we'd like what we see in 5G, with not only carrier aggregation, but also a lot of Release 16 features, which is going to make us enable a lot of industrial cases. We're going to have a strong position there. And that speaks to, I think, the longevity of our business model.

Okay. Cristiano, unfortunately, that's all we have time for. I know there are other topics that investors are more interested -- also interested in. But thank you for taking the time to be at the conference. Thanks for making the virtual conference happen.

My pleasure, Samik. Thank you. Thank you to be with you.

Thank you.