QUALCOMM Incorporated (QCOM) Earnings Call Transcript & Summary

Good morning, everyone. I'm Stacy Rasgon. I cover the U.S. semiconductor space here at Bernstein. Before we get started, I want to just cover a little bit of housekeeping. [Operator Instructions] We will have time for Q&A like that at the end. We're also doing some live polling during the session through Bernstein's partner, Procensus, and you should have a link available on the right of your screen for that as well. Now that the housekeeping is out of the way, I can't express what an honor it is to have our guest here today, Cristiano Amon, the President of Qualcomm. So I've covered Qualcomm now for a dozen years. And Qualcomm, both, I think, as a company and a stock, has been through an awful lot over the last 5 or 10 of those years. From China to the EU to the FTC to Apple to Huawei, the company's business model has had sort of wave after wave of attacks breaking against it both from regulators and customers. It's made many investors gun-shy for a long time as it wasn't clear what was coming down the pipe next. But now sitting where we are today, it does finally appear that the company has come out the other side. Virtually, every regulatory and customer dispute has either been dismissed or settled in Qualcomm's favor. And through the entire thing, they've continued to do what they do best, namely investing and developing the world's best communication technologies, and they now appear set to reap the benefits of that as the 5G cycle kicks off. So to tell us all about it, it gives me great pleasure to welcome Cristiano. Thank you so much for joining us here today.

Very happy to be here, Stacy. Thank you for the opportunity. It's my great pleasure to talk to you all and happy to tell a little bit more about the Qualcomm story, also going into the future.

Great. Let's start this. So obviously, as I said, it's been a bit of a slog over the last several years both for you and, I think, for investors. Can you talk a little bit about that journey? You've been with the company through the entire thing. Talk to -- just talk about like how is this like, what's happened, how's the company come through that and what does the situation now look like from here -- from where we're standing today?

Happy to. One of the great things about the company is that the company, in essence, it is wireless innovator, and we never lost any of the core competencies of the company. And during the whole period that we've been to a lot, the regulatory attacks, the hostile, the dispute with Apple, dispute with Huawei, the company had -- was able to continue doing what we do best: continue to invest in fundamental technology in wireless, fundamental technology in high-performance processor for battery-powered devices, accelerated 5G by 1 year, and we always believed in what the company can do. It's kind of ironic going to this process. A lot of people ask us, and during this whole period, what have you guys done. And what we have done is we had invested in the technologies that we know Qualcomm can be a leader, and we did one of the most successful acquisitions of a large size. We bought our own stock with a $30 billion acquisition and doing the...

$64 a share? Is that what it was?

That is correct. In showing how much we believe in the company fundamentals, and so it's been quite a journey. I think we're very proud of all the company employees and our partners that's staying along with us, but we're very happy to see the strategy really playing it up right now.

Got it. So I mean, I guess for investors who have been in the stock or looking at the stock for a long time now, the story right now finally is this time it is different. You hear that a lot, right? It's -- a lot of times it's never different. But in this case, it seems like it could be. Can you talk a little bit like where like the jumping-off point for now -- from where we are now versus where we were previously? Is it -- is everything done? Like are all of the disputes finally behind us? Is the way clear? And I think to me, that's probably the biggest question -- one of the biggest questions that investors have right now. Is it safe to buy the stock? Because the secular story from here that we'll talk about in a moment does seem to be phenomenal. So like how can invest -- maybe the better way to ask about is, how can investors get confidence that the way is finally clear?

All right. No, this is a great question, Stacy, and let me answer that by -- let me talk about the big picture into the future, then I come back and relate some of the business in Qualcomm and how it had -- how it performed in the past. What is very different this time around, what is very, very different and is been consistent to what we have said all along about 5G, 5G is no longer unique to the telecommunications industry, right? And that's why if you think about what happened on 3G or 4G, still very concentrated in mobile. 4G, a little bit less, other players came to the room. But 5G is no longer unique to telecom. It's telecom, it's transportation, it's industrial. So it basically -- it's a fundamental technology that's going to basically be the fundamental ingredient for digital transformation, the digital economy connecting everything to the cloud. So the expansion of Qualcomm addressable market created by 5G is fundamentally different than what we have seen in the past. I would say we will be one of the probably most concentrated semiconductor and licensing companies in the past. But with 5G, you'll see that it is really an expansion opportunity for Qualcomm. And just looking at the product business -- and I'll come back and make a connection with the past. On the product business, some of the recent disclosures we made, it's showing that as mobile technology expands to other industries, we expand in with it and with the building new business. Going back to your question about the past. In the licensing business of the company, which is a great business, a key component of the company valuation, it -- we never had as much stability with this business as we have right now. I'll argue that we probably have all the regulatory and all the disputes are behind us. Even Huawei has been licensed, and it's very, very stable. As we look into the company into the future, we started to see the product business being the largest contributor of the earnings expansion, and that's going to be a larger component of the company going forward.

I got it. Got it. So let's talk about it a little bit. So I thought it was interesting. You spoke about 5G as an expansion opportunity. I've always thought about 5G -- and maybe I've got this wrong. Like if you look at like the 3G and especially the 4G opportunities, those are primarily unit opportunities, and I think you tripled your chipset revenues in like 5 years on the back of that 4G RAM. And 4G was kind of the reason to go out and buy a smartphone, and those penetration curves were kind of on top of each other, and there was a ton of unit growth. I think I and many investors have thought about 5G more as a content story rather than a unit story. But it almost sounds to me like you could be -- you're talking about that it could be a unit story as well as a content story. Like is that true? I mean...

When you think of phones, when you think of phones, it's a content story. That's why we talk about the 1.5 multiplier. We're getting more digital content into the phone as we go from 4G to 5G. So that's an expansion, but also we're getting attach of RF front end. So it is a content story. For market -- we look at the phone market, it's probably going to continue to grow at single digits, but Qualcomm is growing faster than the market. It's a share story and it's also a content story. But the real picture of 5G, when you look at 5G over the 10 years horizon, every technology go through about a cycle, generation about a cycle of 10 years, the opportunity is unit expansion as we go into automotive, which is already a large business. We're just the beginning of the IoT space, it's a very beginning of connectivity of non-phones. And you'll see opportunities as the EDGE change. The data center changing with 5G moving closer to the edge of the network, the network is being transformed. All of those are new opportunities for unit expansion for Qualcomm.

Got it. So I want to talk about both of these pieces. I want to talk about the smartphone piece and then the adjacencies, and I know you guys have been giving more transparency on the adjacency sound. It's obviously an area that you want to focus on and that you want to catch more attention to be put on. But let's talk about the smartphone piece first. So you suggested within the smartphones overall that 5G could be kind of like -- I think it was a 50% content uplift on a like-for-like basis. And this includes ASP increases, it includes the RF content and everything else. Now given that 5G phones, we're still early in that cycle, it's only really just begun, would you argue that we're still early on that content uplift cycle as well?

Yes. I think that's a fair statement, especially because -- and I want to break that down. There's a lot of questions usually come along. Okay. So I'll give you a couple of data points that are important to unpack this. Number one, we talked about 1.5 or 50% tier. If you got a given tier, premium tier, high tier, mid-tier, in average, within that tier is about 1.5. And what you do have in that 1.5 equation, you have some markets that are millimeter-wave markets. Some markets are sub-6 markets. We have this very clear belief that, over time, all 5G networks are going to be alike because millimeter-wave and sub-6 is not like CDMA or WCDMA. It's just time of getting spectrum and the networking get built. All networks are going to have a layer cake. It's going to have existing spectrum get reform, you have sub-6 and you get millimeter-wave. So over time, if you have more millimeter wave penetration into the phone space, that 1.5 goes into -- it has some upside opportunity because millimeter-wave really pushes beyond the 50% giving more content. That's one, and that's why I think we're still in the early stage. The other one is we have seen in a lot of markets a mix improvement of devices. And China, for example, this has been a story, even within the fast few years of 5G or 4G, we've seen that, which is you see higher growth rates in high and premium that you have seen at the very bottom, and that also has a positive effect. So I think we're at the beginning of the ramp, and I'm just trying to give you some metrics about how to look into those expansions.

Got it. I mean the reason I ask is -- and again, I know you're not giving us the MSM numbers anymore. And that revenue per MSM number was becoming less meaningful, I get it. But kind of in the prior -- when 4G was mature, that revenue per MSM was around $20, give or take. 50% on that would be $30, you're kind of there now. And we've only just started. So I mean, is that $30 level the kind of sort of thing we ought to be thinking about long term? Or can there be upside to that number? It sort of feels like there ought to be just given that we're so early. You have these other drivers, whether it's mix or millimeter-wave or more adjacencies or anything else, and we're already running there. So like how should we think about the evolution of that kind of metric going forward given where we are today?

All right. So that metric, it's -- as you pointed out, it's not a great metric going forward. And it has a lot of swings depending, for example, on the tiers of the market. I'm just going to give an example. During the pandemic, we saw developed markets recovering faster than emerging markets. And therefore, you saw how it changes the revenue per MSM as you get more units. The revenue per MSM when you say about $30, if you think about a premium tier device plus front-end content, it's way higher than $30, and then you have entry-level devices. So it's -- as you continue to add 5G units, it's probably -- I won't think that there is a lot of upside. Most of the upside can come in and are going to be significant as you started to increase millimeter-wave penetration.

So can you give us some ballpark? Like how much more for a given phone -- how much more content or opportunity for you does millimeter wave actually add?

Well, millimeter-wave add a lot of content because for millimeter-wave to work in a mobile device, you have to have multiple antenna elements. And you have usually 2, 3, sometimes 4 different millimeter-wave antenna modules. Within that one, you have the front-end content and the antenna elements in itself. So you add a lot of silicon content to the device. And I think we have seen that it's way north of the 1.5 factor when you think about a millimeter-wave device compared to a 4G device.

Got it. We're still very early in millimeter-wave, obviously. The U.S., maybe a little in Korea and Japan, that's about it at this point, right?

It is correct but it's exciting. There's 130 operators now investing in millimeter-wave. So we're going to started to see continued expansion as we get to '21. And optimistic that China has been talking about millimeter-wave for the winter Olympics in '22. You can see, given the China scale, how that will change the millimeter-wave equation.

Got it. Okay. We'll talk about China a little later. I want to keep -- I want to dig in a little more for some of these. Let's talk about some of the adjacencies. So again, you've now started to break those out in a more meaningful fashion. I know you talked a little bit at the Analyst Day, you gave us some numbers, but now we've got a little more of a historical trajectory of that business. And obviously, you want attention to be focused. These investors will start looking a little more. I guess what drove the decision to start breaking it out now? Is it at the point where now it's just big enough to call attention? Is it the point where like you have more confidence in what the trajectory going forward is going to look like? Like what was the decision to actually like do it now? I know you've been talking about it for a while, but why now?

Yes. The reason is it's really twofold, right? One is they started to become meaningful businesses. And if you look at some of the size of the revenue and we had diversified QCT beyond handsets, just looking at the those disclosure. The second one is 5G. So if you remember, we had said 5G is the entry point for RF front end. So if you look at 2020, it's been like the first year. '19 was the launches. First year, the ramps, 5G. And we started to see that business ramping, well positioned right now for -- to be significant in size among the leaders in '21. So it was the right time to make a disclosure. Also, 5G is just what will create an expansion of the IoT business. So those were the 2 main drivers. And of course, we wanted to retire the MSM associated with that, too.

Got it. Got it. Let's talk about RF. I want to hit each of the components of the adjacency, but obviously, I get the most questions about RF. And I'll be honest, I was in the deeply skeptical camp on RF until fairly recently. It seems real. I mean what does this business grow, 60% or something like that in 2020? And that was purely organic, right? There was no M&A or anything in that? That was an organic number?

No, there is some M&A. Well, there was an M&A on the technology. The growth, I would say, primarily organic because once we did the M&A, if you remember, we did M&A for filter technology.

Yes, but when did you buy that? That was a few years ago, right?

That was a few years ago. And then because of a dispute we have with a very large company, the revenue of the company went down dramatically. So all of the growth is organically. We used M&A to complement the technology for the organic strategy. And it's a business that we basically -- we knew that we had an opportunity to be successful in this business, and we knew we needed to get all the technologies ready. We learned as we started that business way back then to understand the space and what are the technologies we needed to develop. And once we were ready was the 5G entry point and it's working very well. I think we have over 700 designs of 5G, and all the 700 has some 5G front-end content.

Got it. Exactly what types of components are in that RF number? I mean you threw out the term RF front-end. A lot of investors aren't exactly clear what that means. Specifically, what components are there?

Yes. I'll break that down for you. When we think about handset business, right, the handset, which is the core business, it's basically the Snapdragon mode or the Snapdragon MSM, plus transceiver, plus PMIC. That's kind of -- there are other things, but that's kind of, in general, that's the answer to this. In the RF front-end, we have a large number of components. It is the part amplifier, the envelope tracker or the APT tracker, then you have switches. You have filters across low, mid and high band. You have antenna tuners. And in the case of millimeter-wave, you have antenna modules. So that's all part of the -- so basically, we have every single component in-house from digital all the way to the antenna.

Got it. So there's no WiFi or connectivity or anything in that RF number. That's in the handset?

That's in the handset. WiFi is in the handset business.

Got it. Got it. Okay. And you guys gave some targets at the Analyst Day. I think the target -- I can't remember it was 2022 or 2023, I can't remember the end date. But it was about $3.6 billion. It was like 20% of an $18 billion TAM, something like that. And I know it's not entirely appropriate to like annualize a single quarterly number, especially seasonally strong, but I'm going to do it anyway, right? Your last quarter, you just did something close to $3.4 billion or $3.3 billion, $3.4 billion annualized. So you're kind of almost there, right? What is that? Is that -- is it -- are you on a stronger trajectory than what you were highlighting at the Analyst Day? Is it -- is the market growing like bigger? Like how should we be thinking about the RF business, the trajectory in the context of that target that you gave at the November Analyst Day?

Yes. So the way to think about it is we are well underway and are able to achieve our target. We feel very confident about it, both our share of TAM, I think the existing designs we have today get us there, both for share of TAM as well as a revenue target if you annualize it. So we feel pretty good about this business. And the more that you accelerate 5G -- 5G has been moving from the transition from 4G to 5G. If you do a comparison to 3G to 4G and look at that time, the value proposition of the smartphone was incredible versus a feature phone. Even with that, 5G is moving 2 years faster, especially because we have all countries at the same time versus China that was much late in the 4G era. So if 5g continues accelerating its speed of transition, I think we're going to get there faster.

Okay. And I guess the other adjacencies, if I think back to the Analyst Day again, I think it was something like $1.5 billion of incremental revenue growth in the targets over the 3-year period, right, across automotive and IoT, both cellular and noncellular. And I think compute was the 3. I know that you didn't break out compute, I guess it's maybe it's too small, and you maybe probably just throw that into the IoT, I'm guessing. But I guess the same sort of thing, like $1.5 billion of incremental growth over 3 years is good, but I mean it's still small compared to the rest of the business. Like how should we be thinking about the trajectory of the rest of these adjacencies? Is this like a 10-year kind of story we ought to be thinking? Or is there more in the near term that we could be thinking about for those adjacent opportunities?

It's a very good question. I think there's a lot in there in the IoT space. Maybe I'll just highlight a few. Look, from a company standpoint, there's no question, the fastest growth right now is really 5G handsets and RF front-end that goes along with it. We're just the beginning of the 5G ramp. But we're excited about IoT. There's a lot of -- there's short term, the mid and the long term, all there. So let's start with the short term. Our networking business, WiFi access point and also the network business on 5G that we have been in small cells, we are expanding into full 5G ran later. But we saw the WiFi access point, a lot of growth because of the enterprise transformation of the home with working from home driving a lot of WiFi upgrades to WiFi 6 and 6E. So we see that as a short-term growth. We also see a steady growth on IoT with connectivity. And many companies, because of the pandemic, had accelerated their digital transformation. They kind of connect their people, and all want to connect their assets. And we're seeing significant growth of the business as well, and we have some long-term bets in that number as well. We remain optimistic about compute. On compute, I think the PC has experienced a lot of growth because of the change in the work environment. And we have some of the technologies for the future trends: connectivity, very good camera, a symmetric of data, multimedia entertainment. So as we think about more 5G, more cloud-based gaming, more integration of the home into the enterprise, the IT moving to the cloud, I think that's going to be a good opportunity for Qualcomm. If anything, the Apple announcement kind of validates that we've been in a good trajectory, so that's kind of long-term growth. And the other one, we feel good about it is what we're doing in infrastructure with the transition to DRAM as well as the opportunity to participate in the EDGE processing of the data center as they become closer outside the big buildings and then the power becomes important.

Got it. So you mentioned Apple there in the context of compute, I want to talk about Apple in the context of something else because this is probably the biggest question that I get. Obviously, as you know, regaining Apple, the chipset socket particularly with Apple and settling all that, that's a source of massive near- to medium-term upside versus where you were. That chip agreement goes for a number of years. I think some of the core documents that we've seen suggest 2023, 2024. I don't know if there's something more to it than that. But the biggest question I get is sustainability, right? So I mean how should investors think about the potential for Apple, I guess, to once again potentially over time move away again on the chip side, especially given their purchase of Intel's base frame unit? Again, this is probably like the biggest like medium- to longer-term question, obviously, that we get. How should we be thinking about that?

Happy to answer the question. And by the way, we get the question all the time. And I think it's -- my opinion, Stacy, I don't think investors should be thinking this like in binary terms, right? Like we -- when we think about our relationship with Apple, we're very happy. We have restored the relationship. We're developing great products together. And the way we think about it, we don't make any heroic assumptions on our business with Apple. We think about it, that is a business that is going to be very stable, much like our business with Samsung. Samsung has gone and developed their own platform. I will say they have more assets than Apple does to do it. They have an infrastructure business, which is growing. They have a semiconductor business in very large scale. And they have built a solution, and we have built a very stable relationship over the years as we continue to move technology forward to about a 50% share, give or take, within Samsung. That's how we think about Apple, and I'm sure they're a great company. They are going to be focused on developing the platform. And if they succeed, there's always going to be room for a company like Qualcomm driving the premium technology. I think companies that they go into the vertical transition, they look at optimizing building materials. They look at how to have a common platform they can use in a number of devices from phones to watches to different things, and Qualcomm will continue to be focused on driving the modem technology for. That's the #1 core competence of the company. That's what we do for a living. The other way for you to think about it, we also were very excited. We don't want to make any -- or speculate or making any disclosures, but I'm telling you, we're very excited about rebuilding the relationship with Apple and opportunities to expand our relationship even to other products beyond the modem, for example, to RF front-end. So I think we're just the beginning of our journey with Apple, and we're very happy with the relationship. Great products they launch, including looking at the millimeter-wave penetration of their products as well as the price points. That's great news for millimeter-wave.

Got it. What about some of the other things that you do for your customers beyond just the chip? I mean things like support, network qualification, software, that sort of thing? I mean, obviously, like if Apple was going to be doing more and more on their own over time, they'd have to take up that as well, right? I mean like how much of a lock-in, how sticky does it make Qualcomm a solution?

Yes. Look, there are so many reasons for -- to have a good relationship, I think, with Qualcomm. Not only what we do in the product side, which will -- we're being forced to have every single-modem technology, and we aspire to continue to do so. Once we develop a solution, it's been tested globally across all possible network configurations. As we go into other spaces like, for example, the automotive industry, when you're building a car and you're going to have a connected car with 5G telematics module into that car, you don't know when you're building the car, exactly where the car is going to go. You need to simply work. You can -- you don't have the ability to roll a truck and then go fix that connectivity. And that's also true for a lot of IoT devices. So you get that with Qualcomm plus the ability to optimize performance. And outside all of this, besides, I think, the stability of the licensing business, as you know, we probably have one of the largest nonessential patent portfolio in that technology, which is in the best interest of companies to have license as well. So I will not discount Qualcomm into the future in the wireless industry.

Got it. So I got one more question on Apple, and then maybe we'll move on. I know back -- it was a couple of years ago, you had sort of suggested that Apple at a full run rate would be something like $2 a share in EPS. And at the time, we ballparked it, it was probably like $1 in licensing and $1 in chips. So I guess maybe 2 sides of the question. One is, is that still a good way to think about the overall contribution of Apple to the model, number one? And number two, if you're suggesting that even if Apple was to go -- I mean it seems to seem like you were suggesting that maybe we could be looking at sort of like a 50-50 to on the chip side in 5 years or so with Apple, similar to where we are with Samsung right now, is that kind of the way to think about it? If it was $1 in chips, it's $0.50, but you've got all these other drivers that are pushing things up at the same time. Is that the right way to sort of think about the magnitude of Apple's impact at this point?

Two EPS is too good. I think it's still a good metric. And I think what I'm saying is while we can't really predict what our customers are going to do, we feel good about the road map of technology, that how we ourselves plan the Apple business going forward is there's always the opportunity for Qualcomm to be one of the suppliers, much like we are today with Samsung.

Got it. Okay. Let's talk about Huawei. So that -- this is the other big customer dispute. And obviously, the licensing settlement came through a couple of quarters ago, so -- which was great. Some of the regulatory issues have still prevented chips, although -- so this was in the news over the weekend that you guys potentially have received at least a 4G license for chip sales. Is that correct?

That is correct. We had received in the past some 4G license. We received more 4G license. We receive no 5G licenses.

Okay. Is there a line of sight to a potential 5G license? Do you think, at least the current administration's goal, is to shut down all 5G efforts?